Little Rock Towel and Linen Supply Co. v. Independent Linen Service Co. of Ark., 237 Ark. 877

George Rose Smith, J. The principal appellant, Jack S. Bew, was formerly the president and general manager of the appellee, a corporation engaged in the linen service business. Bew’s contract with Independent Linen provided that during his employment with the company and for a period of five years thereafter he would not be connected directly or indirectly with any other linen service company or with any laundry anywhere within Independent Linen’s territory in Arkansas, which included all the state except two small areas in the northwest and southwest corners.

In April of 1963 Bew decided to go in business for himself. To this end he created the other appellants, two corporations, and in tlieir names bought from Myron Lasker a family laundry business in Little Rock and a companion linen service business that Lasker had operated in conjunction with the laundry.

A few weeks later Independent Linen brought this suit, not only to enjoin Bew from engaging in either the laundry business or the linen service business but also to compel him to transfer both his purchases to Independent Linen, on the theory that his conduct had been a violation of his fiduciary duty as an officer of the company. The chancellor entered a decree granting relief to the plaintiff on both grounds and denying Bew’s counterclaim for back salary in the sum of $17,000. All three matters are in issue upon this appeal.

First, we are of the opinion that Bew is correct in his insistence that his agreement not to engage in either the laundry business or the linen service business for five years was contrary to public policy and void. A naked contract not to compete with another is against public policy. Shapard v. Lesser, 127 Ark. 590, 193 S. W. 262, 3 A.L.R. 247. Such an agreement is permissible, however, either in connection with the sale of a going business or, as here, in connection with a contract of employment.

Yet even in those instances the restraint is unreasonable and void if it is greater than is required for the protection of the promisee or if it imposes an undue hardship upon the person who is restricted. Rest., Contracts, § 515, which we quoted with approval in Marshall v. Irby, 203 Ark. 795, 158 S. W. 2d 693. Owing to the possibility that a person may be deprived of his livelihood the courts are less disposed to uphold restraints in contracts of employment than to uphold them in contracts of sale. Williston, Contracts (Rev. Ed.), § 1643; Banks, Covenants Not to Compete, 7 Ark. L. Rev. 35.

The contract before us not only provided Independent Linen with greater protection than it required; it also imposed an undue hardship upon Bew. According to the proof there is a clear-cut distinction between a family laundry and a linen supply service. A family laundry is engaged principally in laundering clothing and household linen for residential customers. A linen service company deals principally with commercial customers. Such a company owns commercial uniforms, restaurant linen, barber supplies, and the like, which the company rents to its patrons.

Its routemen make calls at frequent intervals for the purpose of collecting soiled linen and replacing it with an equal supply of clean linen. When Independent Linen and Bew executed their agreement the company was engaged in the linen service business, but never in its history had it been engaged in the laundry business. Hence its attempt to restrain Bew from entering the latter field went decidedly farther than the company’s protection required. On this point the Restatement of Contracts, § 515, gives this pertinent illustration: “A employs B for five years as manager of a cotton mill.

As part of the bargain B promises not to become a manager of a mill of any kind in the city where he is employed by A for three years after the termination of the employment. The restraint is more extensive than is necessary to protect A, and the promise is illegal.” Moreover, the attempted restraint for a period of five years was unnecessarily long and imposed an undue hardship upon Bew. The appellee relies upon Orkin Exterminating Co. v. Murrell, 212 Ark. 449, 206 S. W. 2d 185, where we upheld an employment contract containing a restraint.

There, however, the business involved trade secrets, and the restriction was for only a year. We do not perceive that the linen service business really involves trade secrets. Hence the case at bar is controlled by McLeod v. Meyer, 237 Ark. 174, 372 S. W. 2d 220, where we held void an employment contract calling for a five-year restraint. Secondly, the chancellor found that Bew had violated his fiduciary duty toward Independent Linen in purchasing the two businesses from Lasker. The decree in effect substituted Independent Linen for Bew as the purchaser of the Lasker enterprises.

Bew was directed to transfer the assets of those businesses to Independent Linen, and the latter ivas directed to reimburse Bew for the amount of his payments to Lasker. In charging a breach of trust the appellee contends that Bew purchased the Lasker properties for himself at a time when he knew that his own employers were negotiating with Lasker for the same purpose. Bew insists that his employers had already lost interest in the Lasker properties before he took any step to acquire them.

This issue involves a question of fact upon which ive think the chancellor's decision to be contrary to the weight of the evidence. We narrate only the salient points disclosed by a large record. BeAV came to Little Rock in 1955 as executive vice-president and general manager of Independent Linen. That company was then a subsidiary of Memphis Steam Laundry, Inc. In November of 1962 Moe Pear and his associates organized All State Linen Service, Inc., and purchased- all the stock of Memphis Steam. Thus Independent Linen became a subsidiary of All State. Early in 1963 Lasker decided to sell his enterprises.

He requested a Memphis attorney, Herbert Blazer, to see if Memphis Steam might be interested in the purchase. Blazer took the matter up with J. Allen Hanover, AAdio Avas the attorney for Pear and his company, All State. Pear and his associates Avere interested and had tAvo conferences Avith Blazer. They learned that Lasker owned a building in which he operated a family laundry as his main business and a comparatively small linen supply service. We think it a fair inference from the record that the Pear group Avere interested only in the latter.

Pear or some other officer of All State instructed BeAV to inspect the Lasker plant. Bew did so and made a report Avhich, as far as the record discloses, AAras entirely accurate. The appellee argues that the report may have been inaccurate and professes to have no kmrwledge about the true condition of the Lasker property. We find it impossible to believe that the appellee filed a complaint seeking to take over Bew’s contract without having first satisfied itself that the purchase was advantageous.

Bew was next instructed to see if Lasker would sell the linen supply business to Independent Linen and the rest of his holdings to others. This proposal was completely unacceptable to Lasker, who was determined to protect his employees by selling his holdings as a unit. Bew reported this fact to his employers, and in our opinion they had no further interest in the Lasker property. Charles Pear, one of the owners of All State, admitted on the witness stand that he had told Bew that if his report was correct he and his associates did not want to buy the laundry.

There is no indication that Bew’s report was not correct. Lasker and his local attorney both testified that they talked to G-lazer by telephone and were informed that “the deal was dead.” Lasker also stated positively that Bew did not approach him about buying the property for himself until “the Memphis deal . . . was dead. ” Furthermore, when Bew went to Memphis to inform Pear and another officer of All State of his purchase their only protest was that he was under contract not to enter a competing business.

If they were really still actively negotiating for the Lasker property that fact would surely have been mentioned at once. In insisting that there was a breach of a fiduciary duty the appellee relies strongly upon Raines v. Toney, 228 Ark. 1170, 313 S. W. 2d 802. That case bears little resemblance to this one, for there the corporate officer undermined his own company by acquiring one of its general agency contracts for himself.

This language in that opinion is really applicable here: “This doctrine of ‘corporate opportunity’ is but one phase of the rule of undivided duty and loyalty on the part of corporate fiduciaries. It does not preclude a corporate fiduciary from engaging in a distinct enterprise of the same general class of business as that which his corporation is engaged [in], so long as he acts in good faith.” We are not persuaded by the weight of the testimony that Bew acted in bad faith. Furthermore, we are not at all convinced that the proper parties are before us.

Lasker, who sold his business largely on credit, may well have an objection to the substitution of a new purchaser, especially as the contract provided for Lasker’s employment as a consultant for seven years. Yet Lasker is not a party to the case. Indeed, there is reason to doubt if Independent Linen is the right plaintiff. There is almost no indication in the proof that it was ever intended that this particular subsidiary would purchase the Lasker properties. Bew mentioned only the proposal that Independent Linen buy the linen supply business.

Charles Pear testified that he asked Bew whether he thought the Lasker property should be purchased “by All State,” and whether Bew thought it would be a good purchase “for All State.” Moe Pear and his associates were officers of the parent company. Their testimony relates only in general terms to their efforts to acquire the Lasker holdings. Yet Independent Linen is the sole plaintiff. Whether Bew may have violated a duty toward All State or toward the Pear group is not an issue in the case at bar.

There is almost a complete absence of proof that he disregarded any obligation owed to Independent Linen, for that company is not shown to have been interested in the Lasker properties. Thirdly, Bew filed a counterclaim for the recovery of back salary in the sum of $17,000. Prior to the fiscal year ending May 1, 1962, Bew’s income as manager of of Independent Linen had averaged about $35,000 a year, reaching a peak of $48,400 in the last of the years mentioned. His contract of employment recited that his compensation would be fixed by mutual agreement.

At the beginning of the 1962-1963 fiscal year the directors of Memphis Steam adopted a resolution setting his salary at $12,000 a year, plus five per cent of the profits. It was expected that under this resolution Bew’s income would be about $35,000. All State bought Memphis Steam in November of that year. On or about January 1, 1963, the directors of All State notified Bew that thenceforth he would be paid a fixed salary of $20,000 a year, with no share in the profits. Bew insists that he did not agree to this arrangement, but the record simply does not support his contention.

He continued to work for the company for three more months, accepting compensation at the new rate. There is no proof whatever of the amount of profits he might have received had the first resolution not been rescinded. In the circumstances he must be regarded as having acquiesced in the directors’ decision to reduce his compensation to $20,000 annually. The decree is reversed, and both the complaint and the counterclaim are dismissed for want of equity. McFaddin, J., concurs; Ward, J., dissents.