JUSTIN BELT COMPANY, INC., et al., Petitioners, v. Joe YOST et al., Respondents, 502 S.W.2d 681

STEAKLEY, Justice. It is the recognized rule that non-competition agreements in the employer-employee relationship are enforceable when made during employment. The initial question here is the enforceability or not, subject of course to the test of reasonableness as to time and area, and to judicial reformation if need be, of such an agreement fairly made in settlement of a pending suit by an employer against former employees.

The suit here was for damages and injunctive relief for breach of confidential relations in the nature of a conspiratorial disclosure by the former employees of trade secrets to a competitor. There is the further question of whether the settlement agreement imposed unreasonable restraints of both time and area; and, if so, whether, as to both, the covenant is subject to reformation by the court in the exercise of its equitable powers. We answer each of these questions in the affirmative.

The following statement, taken primarily from Justin’s brief and not questioned by Souder, et al., recounts the background and current status of the case. Petitioners are Justin Belt Company, Inc., and H. J. Justin and Sons, Inc., collectively referred to as Justin. Respondents are Roger Souder, Joe Yost, Tony Lama Company, Inc., and Tony Lama Leather Products, Inc., referred to as Souder, Yost and Lama. In January, 1970, Justin filed suit against Yost and Souder for damages for conspiracy and breach of confidential relations and requested injunctive relief, both temporary and permanent.

Yost was employed by Justin Belt Company, Inc. from August 19, 1963, to December 12, 1969, when he resigned his position as general manager. Souder was employed by H. J. Justin & Sons, Inc. from January 1, 1940, until his resignation on December 30, 1969. Souder had served as general manager for H. J. Justin & Sons, Inc. for several years.

Justin alleged that Yost and Souder left key positions with Justin with the plan and purpose of forming a company in Fort Worth, Texas, to manufacture belts and boots in competition with Justin and had actually entered into an agreement with Justin’s principal competitor, Tony Lama Company, Inc. of El Paso while still employed by Justin.

Justin further alleged that Yost and Souder threatened to proselyte Justin’s employees to employ them in competition with Justin and to make available to Lama trade secrets, customer lists and other confidential information concerning Justin’s business ; also, it was alleged that such actions on the part of Yost and Souder constituted illegal and unlawful competition. Justin sought to restrain and enjoin Yost and Souder from using confidential information and trade secrets obtained from Justin and from manufacturing belts and boots in competition with Justin.

Under date of February 16, 1970, Justin and Yost and Souder, joined by Tony Lama Company, Inc. as a third party, settled this suit. A final judgment was thereafter entered, dismissing Justin’s suit with prejudice. The settlement agreement is set out in full in the margin. On February 22, 1972, the suit at hand was filed by Souder and Yost. They sought a declaratory judgment that the settlement agreement was unenforceable; and, in the alternative, that the agreement be reformed to prohibit Souder and Yost from engaging in the boot business or in the manufacture thereof for a period not longer than two years.

Justin filed a cross-action alleging breach of the settlement agreement and invoked the equitable powers of the trial court to issue a temporary injunction enjoining Souder, et al, from violating its terms and conditions, from jointly engaging in the boot business or in the manufacture of boots in competition with Justin, and for damages.

After hearing evidence, the trial court reformed paragraph I of the settlement agreement to provide that Respondents Yost and Souder should “not engage in the bootmaking business for a period of seven years from February 16, 1970, within the continental United States west of the Mississippi River” and granted appropriate injunctive relief to Justin. The Court of Civil Appeals reversed the judgment as to this, ruling the settlement agreement void, and not subject to reformation. 488 S.W.2d 850.

In other situations involving non-competition covenants, Texas courts have stated the rule that contracts which are in reasonable restraint of trade must be ancillary to and in support of another contract. Thus, a contract between two insurance companies to limit their agent’s compensation and not employ agents of non-complying companies was not one contract in support of another, but merely an independent agreement to limit competition; as such, it was unenforceable. Potomac Fire Insurance Co. v. State, 18 S.W.2d 929 (Tex.Civ.App.1929, writ ref’d). A step away from Potomac is Chenault v.

Otis Engineering Corporation, 423 S.W. 2d 377 (Tex.Civ.App.1967, writ ref’d. n. r. e.) In Chenault, the court upheld a non-competition agreement between an employer and employee; the employee was not only on leave of absence from the employer, but was in fact in the employ of another at the time of execution of the agreement and for several months thereafter. The court reasoned that in light of the leave of absence agreement, the restraining covenant not to compete was nonetheless ancillary to and connected with the former employment. Beyond this, and to the point here, is Novelty Bias Binding Company v.

Shevrin, 342 Mass. 714, 175 N.E.2d 374 (1961). The employment relationship had terminated because of embezzlements of large sums of money by the employee. Criminal proceedings against him were thereafter instituted, and an agreement to make restitution was later effected in which the former employee agreed not to disclose secret knowledge or confidential information gained during his employment and to refrain from competition. The suit was by the employer to enjoin violation of the agreement by the former employee.

The employee contended, as Souder and Yost claim here, that the restrictive covenant was illegal and unenforceable because it was not inserted in a contract for personal service and was not ancillary to an existing employment. The Massachusetts court enforced the covenant upon reasoning with which we agree : . . . The covenant entered into was at least ancillary to a permissible transaction (see Williston, Contracts [Rev. ed.] § 1636), namely, an agreement for restitution for the thefts committed during employment ....

The defendant doubtless desired to avoid imprisonment; the plaintiffs obviously desired that the good will of the businesses be protected from one who at liberty could do them immediate and grievous harm. In the circumstances disclosed, we think considerations of public policy, equity and fair dealing favor enforcement of the covenant if it is otherwise reasonable.

The language of Williston, referred to above, is as follows: A rule of the early decisions, still operative, that consideration must be given for a restrictive promise, even though it is under seal, accords with the broader principle that the restrictive promise must be ancillary to some permissible transaction. 14 Williston on Contracts § 1636 at 102 (3d ed. 1972) . The noncompetition covenant at issue was ancillary to an agreement that settled the dispute between Justin and his former employees and accomplished a termination of the pending litigation.

This was no doubt brought about by the desire of Souder and Yost, and Lama as well, to get out from under the pending suit; and Justin, of course, wanted protection for its trade secrets and employees. There is no claim that the agreement was not reached in good faith and in fairness to the parties. Not only was the covenant ancillary to a permissible transaction, Novelty Bias, Wil-liston supra; it was ancillary to an agreement highly favored by the courts. See, Houston and T. C. R. Co. v. McCarty, 94 Tex. 298, 60 S.W. 429 (1901); Gilliam v. Alford, 69 Tex. 267, 6 S.W. 757 (1887); Camoron v.

Thurmond, 56 Tex. 22 (1881) ; Texas Eastern Transmission Corp. v. Federal Trade Commission, 306 F.2d 345 (5th Cir. 1962). Further, the protection of Justin’s trade secrets was the purpose of its suit against Souder and Yost which was settled by the compromise agreement. The covenant in question was related to the prior employment of Souder and Yost by Justin and its purpose was to restrain Souder and Yost from disclosing trade secrets to Lama, a principal competitor of Justin, and from further depredating their former employer by luring away its employees to work in competition with Justin. In Hyde Corporation v.

Huffines, 185 Tex. 566, 314 S.W. 2d 763 (1958), we wrote at considerable length concerning breach of confidence respecting trade secrets. The words of Mr. Justice Holmes there quoted are aptly descriptive here: “The word ‘property’ as applied to trademarks and trade secrets is an unan-alyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith. Whether the plaintiffs have any valuable secret or not the defendant knows the facts, whatever they are, through a special confidence that he accepted.

The property may be denied, but the confidence cannot be. Therefore the starting point for the present matter is not property or due process of law, but that the defendant stood in confidential relations with the plaintiffs, or one of them. These have given place to hostility, and the first thing to be made sure of is that the defendant shall not fraudulently abuse the trust reposed in him. It is the usual incident of confidential relations.

If there is any disadvantage in the fact that he knew the plaintiffs’ secrets, he must take the burden with the good.” As noted, Souder and Yost covenanted in the settlement agreement that they would “not in any manner engage in the boot business or in the manufacture thereof.” The trial court found such an agreed restraint unreasonable and we agree. See Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950 (1960) and Wissman v. Boucher, 150 Tex. 326, 240 S.W.2d 278 (1951).

The trial court heard evidence and reformed the obligation to a period of seven years and to a geographical area of the continental United States west of the Mississippi River. Souder, Yost and Lama do not attack the court decreed time and area limitations as unreasonable; they say that the settlement agreement was void and unenforceable and that the reformation was beyond the equitable powers of the court, because the agreement contained no limitations as to either time or space. This Court has recognized that restraints of trade unlimited as to both time and space are generally held to be unreasonable.

Wissman, supra. In Weather-fordj we observed that the period of time during which the restraint is to last and the territory that is included are important factors to be considered in determining the reasonableness of the agreement. This is not to say that unreasonable covenants are void as to either or both, and beyond reformation in equity; it is to say that they are not enforceable beyond a time or area considered reasonable by the Court.

We further commented in Weatherford that it can no longer be said that a covenant not to compete is void and unenforceable simply because it is not reasonably limited as to either time or area, and that a court of equity will nevertheless enforce the contract by granting an injunction restraining competition for a time and within an area that are reasonable under the circumstances. We have not held that such is the case as to either time or area, but not as to both; and we perceive no sound logic for such a distinction. Indeed, this Court approved the opinion in Spinks v.

Riebold, 310 S.W.2d 668 (Tex.Civ.App.1958, writ ref’

d) wherein it was written that contracts of employment containing restrictive covenants will not be declared void because they are unreasonable as to time, or as to the extent of territory covered, or unreasonable as to both time and territory. The contract is unenforceable in either instance, whether either or both, in the absence of reformation; and the result in each instance is the enforcement of restraints found by the Court upon evidence to be reasonable. The judgment of the Court of Civil Appeals is reversed and that of the trial court is affirmed. Dissenting opinion by SAM D.

JOHNSON, J., in which GREENHILL, C. J., and McGEE, J., join. WALKER, J., not sitting. . WHEREAS, JUSTIN BELT COMPANY, INC. and H. J. JUSTIN & SONS, INC. have instituted that certain cause of action styled JUSTIN BELT COMPANY, INC., ET AL VS. JOE YOST AND ROGER E.

SOUDER, Cause No. 153-48-70, in the 153rd Judicial District Court of Tarrant County, Texas; and WHEREAS, the parties to said suit, being the same parties to this Agreement, do now wish and desire to compromise and settle such litigation by the execution of this Agreement; NOW, THEREFORE, in consideration of the premises, and the entry of a judgment of dismissal with prejudice in the above entitled and numbered cause, the parties hereby covenant and agree as follows: I. JOE YOST and ROGER E.

SOUDER, from and after the date of this Agreement, will not in any manner engage in the boot business or in the manufacture thereof. II. JOE YOST and ROGER E. SOUDER will not, from and after the date of this Agreement, use or communicate any confidential information or trade secret obtained from or by virtue of their employment with JUSTIN BELT COMPANY, INC. and H. J. JUSTIN & SONS, INC. III. JOE YOST and ROGER E.

SOUDER will not copy, or cause to be copied, or permit the copying by anyone in their employ, of any belts, or belt samples, which shall have been manufactured by the JUSTIN BELT COMPANY, INC. of Fort Worth, Texas. IV. JOE YOST and ROGER E. SOUDER will not communicate any confidential information which they obtained during he course of their employment with JUSTIN BELT COMPANY, INC. so as to be engaged in unfair trade practice with the said JUSTIN BELT COMPANY, INC. V. JOE YOST, ROGER E.

SOUDER, and TONY LAMA COMPANY, INC. will not, from and after the date of this Agreement, employ any person who shall be employed by either JUSTIN BELT COMPANY, INC. or H. J. JUSTIN & SONS, INC. VI. JOE YOST and ROGER E. SOUDER will not, from and after the date of this Agreement, criticize or impugn the JUSTIN BELT COMPANY, INC. or H. J. JUSTIN & SONS, INC., or any of their products, to any person, and will instruct their employees to avoid such similar conduct. VII. JOE YOST and ROGER E.

SOUDER will not use any special equipment and/or techniques which shall have been developed in the plants operated by JUSTIN BELT COMPANY, INC. and H. J. JUSTIN & SONS, INC., but this Agreement shall not prohibit Defendants from adopting such processes as are commonly known and used in the manufacture and making of belts. VIII. JOE YOST and ROGER E. SOUDER will not, from and after the date of this Agreement, engage in any unfair trade practice against JUSTIN BELT COMPANY, INC., and H. J. JUSTIN & SONS, INC. IX. JOE YOST and ROGER E.

SOUDER further agree to pay all court costs in the above styled and numbered cause, including cost of all depositions taken in connection therewith. . E. I. DuPont de Nemours Powder Co. v. Masland, 244 U.S. 100, 37 S.Ct. 575, 576, 61 L.Ed. 1016 (1917).