Weatherford Oil Tool Company, Incorporated v. A. G. Campbell Et Al., 161 Tex. 310

Mr. Justice Walker delivered the opinion of the Court.

This action was brought by Weatherford Oil Tool Company, Inc., petitioner, against three of its former employees, who are respondents here, to enforce the following negative covenant contained in contracts executed by the latter at the time of their employment: “I hereby contract and agree that for a period of one year from the date of the termination of my employment, for any reason, I will neither enter into a business offering like merchandise to that offered by Weatherford Oil Tool Company, Inc., nor assist either directly or indirectly any competitor of Weather-ford Oil Tool Company, Inc., or any other person, company or organization in offering like merchandise to that offered by Weatherford Oil Tool Company, Inc., in any area where Weather-ford Oil Tool Company, Inc., may be operating or carrying on business during said one year period.” Respondents excepted to the petition as a whole and to the alleged agreement set out therein on the ground that the covenant is void on its face, being an attempt to restrict their employment over the entire United States and the world.

The exception was sustained, and although the petition was thereafter amended, the exception was again susstained. No further pleadings have been filed, the case was dismissed. The Court of Civil Appeals affirmed. 327 S.W. 2d 76. Petitioner alleged that it is engaged in the business of manufacturing and selling1 oil field equipment. It operates and sells its products in every state where there is any oil or gas production. Two of the respondents were employed as salesmen.

Petitioner trained them in the methods and techniques for the use and installation of its products, furnished them the names of customers and prospective customers, and assigned to each a territory where they called upon customers to solicit orders for and give instructions as to use of equipment sold by the company. The third respondent worked in the office of petitioner’s plant at Weatherford. There are no allegations indicating that trade secrets were disclosed to respondents or that their employment was unusual in any other respect.

Shortly after termination of such employment, respondents organized a company and began selling certain items of equipment similar to those manufactured by petitioner. An agreement on the part of an employee not to compete with his employer after termination of the employment is in restraint of trade and will not be enforced in accordance with its terms unless the same are reasonable.

Where the public interest is not directly involved, the test usually stated for determining the validity of the covenant as written is whether it imposes upon the employee any greater restraint than is reasonably necessary to protect the business and good will of the employer. According to the Restatement, a restraint of trade is unreasonable, in the absence of statutory authorization or dominant social or economic justification, if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.

The period of time during which the restraint is to last and the territory that is included are important fáctors to be considered in determining the reasonableness of the agreement. See Annotations 9 A.L.R. 1456, 20 A.L. R. 861, 52 A.L.R. 1362, 67 A.L.R. 1002, 98 A.L.R. 963; Restatement of the Law of Contracts, sections 515, 516; Ofsowitz v. Askin Stores, Inc., Texas Civ. App., 306 S.W. 2d 923 (wr. ref.). It might appear from a casual reading of the present contract that the same is not unlimited as to territory.

Respondents agreed that for a period of one year they would not enter into a business selling merchandise similar to that offered by petitioner in any area where the latter might be operating during such period. The size of the included area will depend upon the extent of petitioner’s operations, and under the terms of the agreement respondents are free to engage in a similar business in any other territory they might select. There is no assurance, however, that they would be permitted to sell their products there throughout the period of restraint.

If petitioner should extend its business operations into such territory, respondents are obligated by their contract to discontinue selling competing merchandise therein for the remainder of the year. Enforcement of the agreement in accordance with its terms would thus effectively prevent respondents from competing with petitioner anywhere in the world for the stipulated period. In its practical operation, therefore, the covenant amounts to an undertaking by respondents not to compete with petitioner for one year following termination of their employment.

There is no territorial limitation that would give them the unrestricted right to engage in a similar business in any area during the period of restraint. It clearly is not necessary for the protection of petitioner’s business or g'ood will that its office employees or salesmen be prevented from engaging in a competitive business wherever petitioner may elect to sell its products. See Martin v. Hawley, Texas Civ. App., 50 S.W. 2d 1105 (no writ). As pointed out in Wisconsin Ice & Coal Co. v. Lueth, 213 Wis. 42, 250 N.W. 819, “the restrictive covenant must bear some relation to the activities of the employee.

It must not restrain his activities in a territory into which his former work has not taken him or given him the opportunity to enjoy undue advantages in later competition with his employer.” In our opinion the covenant is unreasonable as written and cannot be enforced in accordance with its terms, but this does not mean that the exception was properly sustained by the trial court. Since the decisions in Lewis v. Krueger, Hutchinson and Overton Clinic, 153 Texas 363, 269 S.W. 2d 798, and Spinks v. Riebold, Texas Civ.

App., 310 S.W. 2d 668 (wr. ref.), 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. These cases hold that although the territory or period stipulated by the parties may be unreasonable, a court of equity will nevertheless enforce the contract by granting an injunction restraining the defendant from competing for a time and within an area that are reasonable under the circumstances.

While this should have been done in the present case if petitioner was otherwise entitled to equitable relief, the suit for an injunction became moot before -the cause could be submitted to the Supreme Court. Petitioner also alleged and prayed for the recovery of damages in the amount of $10,000.00, and it is necessary to determine whether such cause of action may be predicated upon breach of a promise to refrain from competition which cannot be enforced in accordance with its terms.

If the agreement is not reasonably limited as to either time or space, the parties are not definitely apprised of their respective rights and duties until a court of equity has carved out an area or a period that is reasonable under the circumstances. It is one thing for the court to do this as an incident to the granting of injunctive relief which operates prospectively and an entirely different matter to reform the contract for the purpose of giving the employer a cause of action for damages.

In the latter situation the defendant would be. required to respond in damages for what he had done at a time when there was no way of determining, except possibly by an action for declaratory judgment, where or for how long he was legally obligated to refrain from competing. If this were the rule, there would be no reason for the employer even to attempt to make a reasonable contract in the first instance.

The agreement could simply obligate the employee never to compete anywhere in the world, and the latter would then be required to choose between engaging in a similar business at his peril or asking a court to do what the parties were quite capable of doing when they prepared the agreement, i.e. write reasonable and enforceable provisions as to both time and area. We hold that an action for damages resulting from competition occurring before a reasonable territory and period have been prescribed by a court of competent jurisdiction must stand or fall on the contract as written.

If the agreement is not enforceable in accordance with its terms because either the time or the area stipulated therein is unreasonable, the employer may obtain injunctive relief but will not be awarded a money recovery for anything the employee may have done prior to a judicial declaration of the rights and obligations arising from the contract. No such determination has been made in this case, and the period during which the restraint was to exist has now expired. Since the contract does not contain a reasonable territorial limitation, there is no legal basis for an award of damages for breach of the same.

The Court of Civil Appeals has affirmed the judgment of the trial court dismissing the cause. Since the injunction feature of the case is now moot and the trial court did not err in sustaining the exception in so far as the action for damages is concerned, the judgment of the Court of Civil Appeals must be affirmed. It is so ordered. Opinion delivered December 7,1960.