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John Roane, Inc. v. Tweed

Supreme Court of Delaware

June 12, 1952


Page 549

[33 Del.Ch. 6] William Prickett, of Wilmington, for plaintiff below, appellant.

Newton White, of Wilmington, for defendant below, appellee.

Before SOUTHERLAND, Chief Justice, TUNNELL, Justice, and LAYTON, Judge, sitting.

SOUTHERLAND, Chief Justice.

The question presented is the extent of the injunctive relief, under Maryland law, to which an employer is entitled in a suit upon an employee's contract restricting competition by the employee after termination of his employment.

The essential facts in the case are not in dispute. They are as follows:

John Roane, Incorporated, plaintiff below (herein 'plaintiff'), is a Maryland corporation engaged in the independent adjustment business. Its main office is at Salisbury, Maryland, and it has thirteen branch offices in Maryland, Delaware, and West Virginia. The function of the independent adjuster is to investigate and handle, on behalf of insurance companies, claims against them in areas where the insurance companies involved do not maintain their own facilities for adjusting claims. The business is a decentralized one, depending largely for its success on the contacts of the local offices with local insurance agents, to whom the insurance companies usually confide much discretion in the referral of claims to independent adjusters. Plaintiff has and for some years has had an office in the City of Wilmington and also one in Dover. Five other adjusting agencies operate in Wilmington and share the business referred by numerous local agents and others. The local agent is the source of at least eighty per cent of the cases referred. The independent adjusters have few exclusive customers, the settled practice of the referring insurance agents being to distribute their business among all the adjusters, in order to stimulate competition and thus induce high standards of service.

Pierce E. Tweed, Jr., the defendant below (herein 'defendant'), who had previously been in plaintiff's employment for a [33 Del.Ch. 7] short time in 1941 and 1942, left the Navy in 1946, and on March 2 of that year was made manager of plaintiff's Dover office. In May 1947 he was made manager of the Baltimore office, and in July of that year was sent to Wilmington and became manager of the Wilmington office. Until January 1, 1949, there was no formal employment contract between plaintiff and defendant, and defendant's compensation consisted of a monthly salary. On or about the last-mentioned date he was called to the Baltimore office for an interview with plaintiff's president. He was offered a choice of a straight monthly salary of $350 or a formal contract providing for a monthly salary of $300 plus forty per cent of the net profits. The contract contained certain restrictive covenants, including covenants by which defendant agreed that during the life of the contract and for five years thereafter, and within specified areas, he would not solicit or take away any of his employer's customers or engage in competition with his employer. Defendant elected to take the contract, which was duly executed as of January 1, 1949. He remained in plaintiff's employment as Manager of the Wilmington office until December 7, 1950. On that date he left plaintiff's organization and opened his own office as an independent

Page 550

Shortly after defendant had established his own office plaintiff filed suit in the Court of Chancery seeking to enforce by injunction one of the restrictive covenants above mentioned (that contained in subparagraph 6(d) of the contract). These covenants read as follows:

'6. During the period of his employment under this agreement and for a period of 5 years after the termination thereof, employee specifically agrees as follows:

* * *

* * *

'(c) That he will not, directly nor indirectly, solicit, divert, take away, or otherwise interfere with any of the customers, trade, business or patronage of Employer in any area or State where it has or has had business.

'(d) That he will not, directly nor indirectly, for himself or as agent of or on behalf of or in conjunction with any other person, firm, association or corporation, engage in the insurance adjusting business within a radius of fifty miles (50) from any office of Employer where he has served as Manager under this contract.'

[33 Del.Ch. 8] Plaintiff claimed that defendant, in violation of his contract, had appropriated plaintiff's customers and injured its good will in the Wilmington area. Defendant denied any such injury, and further claimed that the covenant restricting competition (sub-paragraph d) was illegal and unenforceable under the law of Maryland. Both parties agreed that the Maryland law governed the case. The Chancellor, after hearing, determined, 80 A.2d 290, that under the Maryland law plaintiff was not entitled to an injunction enforcing in its terms the restrictive covenant sued upon. Noting that the settled practice of the insurance agents in referring business to adjusters was to distribute it to all such adjusters, and that plaintiff had few exclusive customers, he drew the conclusion that defendant's competition had inflicted upon plaintiff no more injury than would have resulted from the entry of any other competent adjuster in the field--a competition to which plaintiff was necessarily subject at any time. Consequently he limited the relief granted to an injunction against the use by defendant of his former employer's name in soliciting business, and an injunction for five years against the solicitation by defendant of business from any of the exclusive customers of plaintiff. From this judgment plaintiff appeals, urging that he is entitled to a greater measure of relief.

As above indicated, the essential question here concerns the enforceability of a contract admittedly in partial restraint of trade and competition.

Since the litigants have stipulated that this question is to be determined by the law of Maryland, our first inquiry must be directed to the decisions of the Court of Appeals of that state dealing with the subject of contracts in partial restraint of trade or competition, and particularly those between employer and employee. Eight cases are cited to us, as follows: Guerand v. Dandelet, 1870, 32 Md. 561; Rosenstein v. Zentz, 1912, 118 Md. 564, 85 A. 675, 44 L.R.A.,N.S., 63; Fulton Grand Laundry Co. v. Johnson, 1922, 140 Md. 359, 117 A. 753, 23 A.L.R. 420; Deuerling v. City Baking Co., 1928, 155 Md. 280, 141 A. 542, 67 A.L.R. 993; Tolman Laundry, Inc., v. Walker, 1936, 171 Md. 7, 187 A. 836; Griffin v. Guy, 1937, 172 Md. 510, 192 A. 359; Western Maryland Dairy, Inc., v. Chenowith, 1942, 180 Md. 236, 23 A.2d 660; and Tawney v. Mutual System of Maryland, 1946, 186 Md. 508, 47 A.2d 372.

[33 Del.Ch. 9] The Chancellor reviewed and discussed such of these decisions as are pertinent to contracts between employer and employee embodying restrictive covenants similar in some degree to the covenant before him, and said [80 A.2d 292]:

'From all of the reported Maryland decisions, the rule to be drawn is that, in Maryland, restrictive covenants in employment contracts will be enforced after termination of employment if (1) the contract was a prerequisite of the employment or was supported by consideration, (2) the purpose to be

Page 551

obtained is fair and reasonable, (3) the restriction does not injuriously affect the public, (4) the enforcement of the restriction will not do greater harm to the employee than good of the employer, and (5) the enforcement of the restriction is necessary for the protection of the employer's business. I find as a fact that such is the law of Maryland applicable in this case.'

For the Chancellor's analysis of the Maryland decisions see the opinion below, 80 A.2d 290, 291-292. Although plaintiff assails the Chancellor's interpretation of the Maryland decisions as too narrow, that is, as embodying a conclusion too favorable to the employee, we think that the latest pronouncement of the Court of Appeals in the case of Tawney v. Mutual System of Maryland, supra, justifies his finding. In that case the defendant below, an employee of a small loan company doing business in the City of Baltimore, had agreed, as a part of his employment contract, not to engage in any business competitive with his employer in the Baltimore City trading area for a period of two years from the date of the termination of his employment, in reviewing its prior decisions in employer-employee cases involving restrictive covenants, the Court of Appeals quoted (approvingly, as we read the opinion) the following language from its decision in Deuerling v. City Baking Co., supra:

"The question whether (the covenant) is reasonable depends upon circumstances, the more important of which are: Is the purpose to be obtained a fair and conscionable one; will it do greater harm to the employee than good to the employer; and, if it is reasonable as between the parties, does it so injuriously affect the public as to make it void as against public policy?" [186 Md. 508, 47 A.2d 378.]

Declining to enforce the contract restriction against competition, the Court of Appeals said that it went 'beyond what is necessary to protect the good will of the employer * * *.' 47 A.2d 379.

[33 Del.Ch. 10] As in any case where the test of reasonableness is to be applied, the decision must turn on the particular set of facts presented. We think, however, that the Chancellor's summation of the general principles of the Maryland law, above quoted, is a correct one.

The Chancellor further found, and we think correctly, that the first three conditions had been met by plaintiff. Defendant was specifically offered a choice between a straight salary on the one hand, without a restrictive contract, and a salary and bonus, with the restriction, on the other. The design to protect the good will of the employer was reasonable in the light of the decentralized nature of its business and the opportunities of a local manager to develop valuable personal relations with the plaintiff's customers. Likewise it is clear, in the light of the referral practice ...

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