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Southwest Forest Industries Inc. v. Sharfstein

February 23, 1972

SOUTHWEST FOREST INDUSTRIES, INC., PLAINTIFF-APPELLEE,
v.
ROBERT SHARFSTEIN ET AL., DEFENDANTS-APPELLANTS



Kerner,*fn* Pell and Sprecher, Circuit Judges. Pell, Circuit Judge (concurring).

Author: Sprecher

SPRECHER, Circuit Judge.

This diversity case*fn1 involves the interpretation of the language in a non-competition covenant of an employment contract ancillary to the sale of the capital stock of a corporation.

In June of 1961, Southwest Forest Industries, Inc. ("Southwest") was engaged in the manufacturing and selling of lumber and paper products, including paperboard and corrugated containers, on a national basis. Premier Container Corporation ("Premier") was engaged in the manufacturing and selling of paperboard and corrugated containers within a radius of about 150 miles of its Franklin Park plant in the Chicago metropolitan area.

Because Chicago is "the largest box market in the world," Southwest was then seeking to obtain an established container plant in that area. Premier had been operating since 1954; Robert Sharfstein, his son Richard Sharfstein, Joseph Sislow and Marshall Stein ("Premier shareholders") each owned 25 percent of the capital stock.

Representatives of Southwest visited the Premier plant in July and began negotiations to purchase the Premier stock. A stock purchase agreement was executed on September 28, 1961 between Southwest and the Premier shareholders.

Under the stock agreement, the Premier shareholders agreed to sell all their capital stock for $800,000, subject to adjustment for the net profit or loss of Premier for the period from July 1, 1961 to December 31, 1962. The "closing date" for the transaction was to be March 13, 1963. At any time after September 28, 1961, the Premier shareholders, or at any time after March 13, 1962, Southwest, could upon 90 days' written notice establish an earlier closing date and an earlier date for determining the adjustment to be made in the price of the stock.

The man who was president of Southwest in 1963 testified that "we had many problems in attempting to start our paper mill up, which drained us of cash; and we did not have the cash available to close." Instead of accelerating the closing date, Southwest sought to postpone it. Consequently a supplemental agreement was executed by the parties on February 13, 1963.

Under the stock agreement as supplemented, the purchase price for the capital stock of Premier was $816,000, subject to adjustment for the net profit or loss of Premier for the period from July 1, 1962 to January 31, 1963, the latter date being established as the "Determination Date." The "Closing Date" was established as April 3, 1963.

As an integral part of (and constituting a portion of the consideration by both Southwest and the Premier shareholders for) the stock agreement, each of the four shareholders was to be employed under a written contract for a period of five years at a basic salary of $400 per week plus an annual bonus of 5 percent of the net earnings of Premier up to $100,000 and 7 1/2 percent of the net earnings in excess of $100,000. The term of employment was to be "a period of five (5) years commencing on the Determination Date as such date is defined" in the stock agreement. On February 13, 1963, the parties supplemented each of the four written employment contracts to agree "that the 'Determination Date' occurred on January 31, 1963, and that the term of employment of Employee with Premier under the Employment Agreement commenced on February 1, 1963."

Subsequent events occurred as scheduled in the stock and employment agreements as supplemented: Southwest began operating Premier as of January 31, 1963; the sale of the capital stock of Premier to Southwest was closed on April 3, 1963 for $924,150, divided equally among Robert and Richard Sharfstein, Joseph Sislow and Marshall Stein. The adjustment of the $816,000 basic price to the $924,150 final price was determined by an audit of Premier as of January 31, 1963.

For about four and a half years everything went smoothly; both the Southwest representatives and the Sharfsteins testified as to the pleasant and profitable relationship.

In May 1967, Southwest appointed a man named Dunavin as vice president in charge of container operations and sent him to Chicago, where he asserted aimless and highly abrasive authority over the Premier operation. He was replaced in four months, but in that short time he succeeded in destroying a great part of the valuable employee relations which the Sharfsteins had developed since 1954 and which Southwest had purchased in the form of employee good will in 1963. There is no need to relate in detail the multitude of pointless and ridiculous events in which Dunavin figured.

The testimony adduced on both sides indicated very clearly that, absent the Dunavin episode, there would have been no reason why the fine relationship between Southwest and the Sharfsteins would not have continued indefinitely. Instead, the association retrogressed into an arms' length situation with the Sharfsteins, whose security had been seriously threatened, understandably wary about their future. As of January 31, 1968, Southwest had not notified them whether their employment contracts would be renewed.

The four employment contracts contained the following non-competition covenant:

"Employee covenants and agrees in connection with this Employment Agreement (and without regard to any termination thereof for any cause), and in connection with the contract for the sale of his Premier stock to Southwest, that for a period of five (5) years after conclusion of the sale of such stock to Southwest under and pursuant to the terms of the Stock Agreement (or, if upon the expiration of this Employment Agreement, Southwest is willing to extend the same upon terms not less favorable to Employee than those provided herein, and Employee shall be unwilling to do so, then for a period of five (5) years following the termination of this Employment Agreement) he will not, either directly or indirectly, own, manage, operate, control, be employed by, or be connected in any manner with any type of business in which Premier is now engaged, or in which it may be engaged upon expiration of such period at any point in Cook County, Illinois or within a radius of one hundred fifty miles of Premier's plant at Franklin Park, Illinois, or in any such business which is making sales and distributions in any county in Illinois and adjoining states in which Premier has had sales and distributions, which is Premier's agreed trade territory, and that he will not own any interest or stock in, or provide any financing for, any business which is so engaged within said radius, or in any such county."

The Sharfsteins construed the covenant as terminating their employment and also their duty not to compete on January 31, 1968. On February 3, 1968, they tendered their resignations; on February 16, the resignations became effective. They then formed Pride Container Corporation ("Pride"), which engaged in the production of corrugated and other paper products and had its principal place of business in Chicago.

Southwest brought suit against Pride and Robert and Richard Sharfstein to enjoin the defendants from competing with Southwest in violation of the terms of the restrictive covenant and to recover actual and punitive damages.

The case was tried on the issue of liability only before the court sitting without a jury. The district court found that the non-competition covenant was effective through April 3, 1968, and that the defendants "committed a legal wrong" in connection with hiring Southwest personnel during the period February 3 through June 7, 1968.

The district court stated his opinion under 28 U.S.C. ยง 1292(b) that his order involved a controlling question of law as to which there is a substantial ground for difference of opinion "on the construction of a written agreement, under all of the facts and circumstances, and concerning the non-competitive terms thereof, both as to length and area."

This court subsequently accepted the interlocutory appeal.

I

The crucial issue in this appeal is the determination of the expiration date of the original five-year period of non-competition. The language appearing in each of Robert and Richard Sharfstein's employment contracts is that he will not compete "for a period of five (5) years after conclusion of the sale of such stock to Southwest." Southwest contends that since the "closing date" for the sale of the stock was April 3, 1963, the termination date of the original five-year period was April 3, 1968. The Sharfsteins contend that, because the "Determination Date" under the stock agreement and employment agreements was January 31, 1963, the expiration date of the non-competition covenant was January 31, 1968. Disposition of the other issues hinges upon the determination of the first termination date.

The district court found as follows in his judgment order:

"1. The non-competition agreement contained in Paragraph 10 of the employment agreement is effective for the five year period February 1, 1968 through January 31, 1973, and is reasonable and enforceable.

"2. The alternate non-competition agreement contained in Paragraph 10 of the employment agreement was effective for the period February 1, 1968 through April 3, 1968, and it was violated by the defendants."

The stock agreement provided that it "shall be construed in accordance with and governed by the laws of the State of Illinois;" the parties' intention should be honored. Lauritzen v. Larsen, 345 U.S. 571, 588-589, 73 S. Ct. 921, 97 L. Ed. 1254 (1953); Tele-Controls, Inc. v. Ford Industries, Inc., 388 F.2d 48, 51 (7th Cir. 1967). The employment contracts did not contain a similar choice-of-law clause but, as shown hereafter, the stock agreement and employment contracts are inseparably related. In any event, the employment contracts were to be performed in Illinois and, under Illinois law, the place of performance would provide the governing law. Ryan v. Napier, 252 F. Supp. 730, 732 (N.D.Ill.1966). We therefore determine this appeal in accordance with Illinois law.

The evidence indicates that the various agreements between the parties were fully negotiated and bilaterally drawn by the parties and their attorneys. Hence, there is no occasion to apply the rule construing contracts against the party who drew them or whose attorney drew them. Cf. Marshall Field & Co. v. J. B. Noelle Co., 81 Ill.App.2d 409, 414, 226 N.E.2d 454, 457 (1967); Hansen v. Johnston, 111 Ill.App.2d 88, 94, 249 N.E.2d 133, 136 (1969).

On the other hand, in Illinois restrictive covenants are strictly construed. All doubts must be resolved in favor of natural rights and against restriction. Cockerill v. Wilson, 130 Ill. App. 2d 679, 265 N.E.2d 514, 517 (Ill.App.1971); Staley v. Mears, 13 Ill.App.2d 451, 456, 142 N.E.2d 835, 837 (1957); Crest Commercial, Inc. v. Union-Hall, Inc., 104 Ill.App.2d 110, 117, 243 N.E.2d 652, 656 (1968).

It is elementary, of course, that the keystone of contract interpretation is to ascertain the intention of the parties from the language they used. The meaning of the words which the parties employed is found by focusing on the words themselves and then drawing back and testing that meaning in the context of the entire contract or, as here, in the combined context of the stock agreement and employment contracts. This test must finally be read against the background of the circumstances and situation with which the parties were dealing.

The bare words "for a period of five (5) years after conclusion of the sale of such stock to Southwest" are ambiguous until the meaning of "conclusion of the sale" is determined.*fn2

Because the sale of stock refers to that sale described in the stock agreement and because the restrictive covenant in the employment contracts specifically refers to it ("Employee covenants and agrees in connection with this Employment Agreement . . . and in connection with the contract for the sale of his Premier stock to Southwest. . . ."), the terms of the stock agreement executed on September 28, 1961, as supplemented by the agreement of February 13, 1963, are of vital importance.

The Premier shareholders on September 28, 1961, deposited all the capital stock certificates "properly endorsed in blank, with signatures guaranteed" in escrow with a Chicago bank. None of the certificates deposited with the escrow agency were to be returned or redelivered except as provided in the agreement (Par. 3). At the same time, the four employment ...


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