McCall Co. Wright (198 N.Y. 143, 1910)

Hiscock, J.

At the outset of the inquiry which has been certified to us whether plaintiff’s complaint states a cause of action it will he well to rid that inquiry of some confusion in which it has become involved and to understand clearly the precise question which is presented by the allegations of the complaint as admitted in fact and challenged in law by the demurrer. That question is whether the proprietor of a large business, on hiring for a fixed period subject to sooner termination on notice an employee to occupy a superior and managerial position wherein he will be possessed of all of his employer’s trade secrets, may lawfully provide that during the term of said employment said employee shall not enter the service of a competing concern; and further, whether such employer when said employee has flagrantly violated such an agreement while still in force and entered the employ of a rival concern intending to use his knowledge of his former employer’s business secrets for the purpose of aiding the competing business, may restrain such conduct by injunction.

There has been considerable discussion of this case from the standpoint that plaintiff was indirectly seeking to secure specific performance of a contract for services by enjoining defendant from entering the employ of any other person. Whether or not plaintiff originally entertained the idea that it could establish that defendant’s proposed services to it were of such a special and unique character that it could indirectly by in junction hold him to specific performance of liis contract, that is distinctly not the present theory of the action and may be dismissed from consideration. There is no attempt generally to restrain him from taking employment elsewhere than with plaintiff. While there is in plaintiff’s contract with defendant a clause prohibiting the latter from entering the employ of any one else during the term of the contract, it is conceded for the .purposes of this appeal that plaintiff is not entitled to any such broad relief as that. But under the general clause referred to as modified both by another clause against defendant’s entering the employment of a rival concern and by general principles of law, plaintiff simply insists upon the right to restrain defendant during the term of his contract from becoming associated with a competing concern where he may use to special disadvantage of the former the business information which he has acquired while in its employ.

The inquiry to which we thus come, in my opinion, must be determined in favor of the plaintiff on the facts presented in this case, and which have been quite fully recited in the appended statement of facts. The principle has been established in this state, and I think remains unimpaired up to the present time, that security from and limitation of competition in a given business is a valuable right in connection with said business, and that there are some contracts which, although they curtail competition to a limited extent, are valid and may be enforced. /"This question perhaps has most frequently come up in connection with the sale of a business under an agreement not to start a competing one, and amongst the leading cases is that of Diamond Match Co. v. Roeber (106 N. Y. 473), where it was held that an agreement by the vendor on the sale of a business that he would not at any time within ninety-nine years engage in the manufacture or sale of competitive goods, except in two states, was valid and enforceable. Still later it was held that a similar contract against competition by a vendor was valid although unlimited as to time and territory. (Tode v. Gross, 127 N. Y. 480; Wood v. Whitehead Bros. Co., 165 N. Y. 545.)

It would seem that there is no fundamental principle in favor of the validity and enforceability of such an agreement in the case of the sale of a business which would not sustain a contract on a ..good consideration prohibiting for a limited period an employee who has entered the employment and learned the business of one employer from carrying the benefit of the information and trade secrets thus acquired into the employment and maintenance of a competing business, and, as I read them, the authorities hold that a contract to prevent an employee from so doing may be enforced. , (Davies v. Racer, 72 Hun, 43; Magnolia Metal Co. v. Price, 65 App. Div. 276; Mutual Milk & Cream Co. v. Heldt, 120 App. Div. 759; Robinson & Co., Ltd., v. Heuer, 67 L. J. Ch. 644; Carter v. Alling, 43 Fed. Rep. 208; Rousillon v. Rousillon, L. R. [14 Ch. Div.] 351.)

In the first case it appeared that plaintiffs, a firm of forwarding agents and custom house brokers in New York city,had entered into an agreement with defendant whereby the firm employed the latter as a clerk to receive, influence and procure orders of goods from shippers and to perform other duties in consideration of the salary therein expressed, and that the defendant thereby agreed not to engage in the city of New York or within fifty miles thereof either directly or indirectly in a similar business to that carried on by the plaintiffs or to interfere with any of the plaintiffs’ customers directly or indirectly for twelve months after the expiration of the agreement. ' The agreement does not seem to have provided for any fixed term of employment and after a while defendant voluntarily left the plaintiffs’ employment and engaged as a clerk for a firm in New York doing business similar to that of the plaintiffs and as alleged soliciting plaintiffs’ customers. An injunction was sustained restraining defendant during the pendency of the action “ from interfering with the customers of the plaintiff * * * by soliciting business from them directly or indirectly,” and in connection with such decision the contract in question was considered generally and held to be valid and enforceable.

In Magnolia Metal Co. v. Price it appeared that a corporation engaged in the manufacture and sale of a patented metal employed a traveling salesman whose position was a confidential one, enabling him to obtain a completo knowledge of the business and business sales, and that in his contract of employment a provision was inserted that “in the event of his connection with the party of the first part being severed under this agreement he will not either directly or indirectly connect himself with any company or firm engaged in business similar to that of the party of the first' part nor will he himself engage in any business that would compete with the business of the party of the first part for a period of five years from the date of his connection being so severed.” (p. 277.) After a while the defendant tendered his resignation which was accepted and thereafter he became the president of a corporation which was organized to and did enter into direct competition with the plaintiff. It was held that the accepted resignation of the defendant did not abrogate the contract and that the provision therein restraining him from entering into a competing business wherein the information which he had acquired while in plaintiff’s employment could be used in his business was legal and its violation would be prevented by injunction. It was said of this provision, “ It was a covenant essential for the protection of the plaintiff, under the well recognized rules of law and it was entirely proper for the plaintiff to require its employees to agree to it. The defendant voluntarily agreed to it, but has persistently and knowingly violated it, and I can see no reason why he should not be required to fairly and honestly perform it.” (p. 282.)

And, without reviewing them at length, the other decisions cited in my opinion are fully in accord with those quoted from as sustaining plaintiff’s right to maintain this action.

I do not understand that the appellant claims that a provision in a contract of employment restraining the employee from entering a rival business is generally or inherently invalid or unenforceable. But it is asserted that this particular one is so because of special circumstances of which the most important is the provision in the contract of employment that plaintiff should have the right at any time to terminate the contract and discharge defendant upon thirty days’ notice, wherefrom results, it is said, a lack of mutuality of obligation which is a bar to this action. It seems to me that this argument fails properly to distinguish between actions brought to compel performance of an affirmative undertaking to do something and. those brought to restrain violation of a negative covenant to refrain from doing something. It is familiar that equity will utilize various circumstances as a sufficient reason for not exercising its power, resting more or less in discretion, to adjudge specific performance. Amongst these reasons are the ones that the contract is indefinite, uncertain or lacking in mutuality, and in employment cases is the one that the employer may at any time terminate the contract and thus nullify a judgment, either directly or indirectly by injunction against other employment, requiring the employee to perform. (Met. Ex. Co. v. Ward, 9 N. Y. Supp. 779; Lawrence v. Dixey, 119 App. Div. 295; Dockstader v. Reed, 121 App. Div. 846; Levin v. Deitz, 194 N. Y. 376, 381.)

As was said in the Dockstader case, “ While equity will often restrain an actor under contract to perform for one and not to perform for another, from performing for another during the period of the contract, an application for equitable relief is addressed to the sound discretion of the court, and will not be granted where the party seeking relief is not specifically bound by the contract, so that the obligations are reciprocal and enforcible.” (p. 848.)

But so far as I am aware,]a court of equity does not refuse under otherwise proper circumstances to restrain a continuing violation of a valid subsisting obligation not to injure another, simply because that other has the option to cancel the obligation by terminating the agreement which creates it. It seems to me that no element of mutual obligation is involved. One party has furnished a good consideration for which the other has agreed to refrain from doing certain things, and it is no excuse for a violation of the agreement while it lasts that the beneficiary may at some time terminate it. A perfectly familiar illustration of this class of actions is the one brought by a vendor of real estate to restrain a violation by the vendee of a restrictive covenant in the deed. There is at the time no mutual obligation resting on the vendor. But the vendee for a good consideration has agreed not to do certain things and I apprehend it would not be a defense to an action to