Maintenance Specialties, Inc. v. Gottus

Dissenting Opinion by

Mr. Justice Manderino:

I dissent. If a restrictive covenant would be valid at the time an employee is first employed, I fail to see any logic to the prohibition against an employer requesting the same covenant subsequent to the employee’s initial employment as a condition of continuing employment. There is no claim in this case that the employee had an oral contract of employment for a specific term which was being altered or breached. In the absence of such a claim, the employee is employed orally at will and that employment can be canceled at any time, at least in the absence of a claim of illegal cause. The only claim here is the bald assertion that a restrictive covenant cannot be demanded of an employee after initial employment if all other circumstances remain unchanged. I fail to see why. The majority seriously encroaches on the legitimate freedom of an employer. Why should an employer who requests a legal restrictive covenant at the time of initial employment have any advantage over an employer who later decides he should have such a restrictive covenant and no breach of any oral or written contract or other illegality is involved.

The appellant, Maintenance Specialties, Inc., is a corporation engaged in the business of distributing a variety of parts and products used in vehicular, plant and building, and equipment maintenance. The appellee, Eonald Gottus, formerly had been employed by the appellant as a salesman. Appellant filed a complaint alleging that the appellee was in violation of a *338 covenant not to compete. The complaint requested injunctive and other general relief. No answer was filed to the complaint, but the appellee and the appellant both orally moved for judgment on the pleadings. The lower court granted the appellee’s motion and dismissed appellant’s complaint without leave to amend. This appeal followed. We should reverse and remand.

The facts alleged in the complaint must be accepted as true. Appellant alleged that on or about April 29, 1969, appellant and appellee entered into a written contract of employment. The contract contained a promise by the appellee not to compete in various specified ways with the appellant during the term of the contract or for two years following termination of the employment contract. The contract had a two-year term with a provision that either party could terminate the contract after giving fifteen days notice. The appellant could also terminate the contract immediately for breach of trust, neglect of the appellant’s interest or failure to follow appellant’s instructions. The complaint further alleged that on or about July 31, 1971, the appellee terminated his employment with the appellant and immediately engaged in activities which were in violation of the restrictive covenant.

The appellee initially was employed under an oral contract in 1968, the year prior to the execution of the written contract. There is nothing in the record to indicate that the oral contract was for a specified term. We, therefore, must assume at this time that it was terminable at will. Lubrecht v. Laurel Stripping Co., 387 Pa. 393 , 127 A. 2d 687 (1956); Cummings v. Kelling Nut Co., 368 Pa. 448 , 84 A. 2d 323 (1951).

A covenant not to compete is in effect a restraint of trade. Originally, for that reason, courts voided such covenants but later recognized that the covenant not to compete serves a legitimate interest in a free enterprise system. The covenant not to compete may *339 encourage stability in a business and give security to an employer by protecting his trade secrets and customers list, and by limiting the injurious effect of a competitor hiring an employee whose services are of a unique character. While recognizing that the covenant not to compete may be advantageous, the danger of excessive abuse must be also weighed in considering whether such a covenant should be enforceable.

In balancing the employer’s interest against the danger of a restraint of trade, the courts have concluded that a covenant not to compete shall be enforceable when the restrictive covenant (1) is contained in an otherwise valid contract, (2) is ancillary to an existing employment or contract of employment, and (3) is reasonably limited in time and scope to that “necessary for the protection of the employer . . . without imposing undue hardship on the employee . . .” Restatement of Contracts §§515(e), 516(f) (1932).

The first element, the validity of the contract in which the restrictive covenant is contained, requires that the formal requisites of contract law be met. There must be an offer, an acceptance, and consideration. The offer and acceptance in this case are established by the employment relationship. The question here is whether consideration has been given since there was a preexisting oral contract of employment which was terminable at will. In such circumstances the employee is not guaranteed continuing employment nor is the employer guaranteed the continuing services of the employee. Either party, therefore, may require any change in the terms of the employment as a condition for continuing the employment relationship. The continued employment is the consideration supporting any new term requested by either party. The result would be different if the preexisting contract, oral or written, had not been terminable at will. Where the contract sets a definite term, were one party to increase the duty *340 of the other without correspondingly giving a benefit to that party, the increased duty would not be enforceable. This is so because the consideration for the increased duty cannot be the continuing employment since both parties were already bound to continue the employment relationship for the term specified in the contract.

Concrete examples of the above distinction between terminable at will contracts and term contracts may be helpful to illustrate why continuing employment is consideration for changes in terminable at will cop-tracts and not for changes in term contracts. A and B are in an employment relationship terminable at will. A, the employer, originally hired B, the employee, to sell A’s products for $3.50 per hour. B now tells A that he will not continue working unless he receives an additional $1 an hour. A agrees. B may now require A to pay him the increased salary for work he subsequently performs under that agreement even though B is still performing the same services. B’s continuing to work for A when he could have quit with impunity is the consideration which makes the agreement to increase B’s salary enforceable for work he performs under that agreement. The reverse is also true. A tells B that B will have to conduct interviews with new employees during his off hours if he wishes to continue working for A. B agrees. A is still only required to pay B the same salary even though B is performing an additional service. The new agreement is enforceable since the consideration for B’s extra work is A’s continuing to employ him.

If A had hired B to sell A’s product for $3.50 an hour under a contract which contained a definite term of two years and B during that period requested a raise of $1 per hour for the remainder of the term and A agreed, B could not compel A to pay him that amount for work later performed during the remainder of the *341 two years. B was already under a duty to continue working for $3.50 per hour for that same period. Also, if B had agreed to A’s demand to perform the additional interviewing services at the same salary for the life of the contract, B would not be under a duty to perform that service. There would be no consideration for B’s extra promise since A was under a duty to pay B $3.50 per hour even if B only sells A’s product and does not interview.

In this case, since the preexisting oral contract was terminable at will, the appellant had no duty to continue to employ the appellee under the original employment conditions. When the appellee in the later written contract covenanted not to compete, his continued employment by the appellant was the consideration making all the terms of the written contract enforceable. Therefore, the first element necessary to enforce the covenant is met since the covenant is contained in a valid contract—there was an offer, an acceptance, and consideration.

The next inquiry is whether the covenant not to compete is ancillary to a contract of employment. The term ancillary to employment does not mean ancillary to initial employment. It simply means that a covenant not to compete will be invalid if there is no employment relationship between the parties. Thus if A and B, whose only relationship to each other is that of neighbors, enter into a contract which contains a covenant by B not to compete with A in selling goods in a given territory for a given period of time, the covenant would be considered illegal because it is an unreasonable restraint of trade. If, however, the same contract is entered into by A and B and A is B’s employer, the covenant is not considered an unreasonable restraint of trade because there is a legitimate interest in protecting the employer. It should make no difference whether a restrictive covenant is agreed to at the time of initial *342 employment or at some later date so long as the employment relationship exists. There is no reason why we should protect an employer who obtains the covenant at the time of initial employment and not protect an employer who later obtains the same covenant since the interest to be protected in both instances is the same.

In Jacobson & Co., Inc. v. International Environment Corp., 427 Pa. 439 , 235 A. 2d 612 (1967), we specifically rejected the argument that a restrictive covenant is not valid unless it is executed simultaneously with the initial establishmenti of an employer-employee relationship. We there said that the restrictive covenant did not have to be a part of any original contract of employment between the parties. In Jacobson the employee had been employed for several years before the parties entered into an employment contract containing a restrictive covenant. Likewise in Morgan’s Home Equipment Corp. v. Martucci, 390 Pa. 618 , 136 A. 2d 838 (1957), employees were employed on a provisional basis and at a later date signed a written contract containing restrictive covenants. This Court held that the written contracts containing the covenants were valid and enforceable.

Appellee relies on Capital Bakers, Inc. v. Townsend, 426 Pa. 188 , 231 A. 2d 292 (1967), for his claim that a restrictive covenant is only valid if it is ancillary to initial employment. In Jacobson, we specifically rejected such an interpretation of Capital Bakers, Inc., and held that there was no requirement that the restrictive covenant be ancillary to initial employment so long as the restrictive covenant was ancillary to an employment relationship. Additionally, in Capital Bakers, Inc., we noted with approval section 515 of the Restatement of Contracts which specifically permits a restrictive covenant which is ancillary to an existing employment or contract of employment.

*343 The third element required before a restrictive covenant will be enforced is a finding that the covenant is reasonable as to time and territory. The trial court expressed no opinion on this element and until an answer is filed we do not know if the appellee is challenging the covenant on this basis.

The decree of the trial court should be reversed and the matter remanded for further proceedings.

Mr. Justice Roberts joins in this dissenting opinion.