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Morrison Metalweld Process Corp. v. Valent

OPINION FILED JUNE 12, 1981.

MORRISON METALWELD PROCESS CORPORATION, PLAINTIFF-APPELLANT,

v.

FRANK J. VALENT, DEFENDANT-APPELLEE.



APPEAL from the Circuit Court of Cook County; the Hon. GEORGE SCHALLER, Judge, presiding.

MR. JUSTICE WILSON DELIVERED THE OPINION OF THE COURT:

Rehearing denied July 8, 1981.

Plaintiff, Morrison Metalweld Process Corporation, appeals from the order denying its petition for a preliminary injunction to enforce a restrictive covenant in a licensing agreement. Morrison contends that the trial court erred in holding that, because there was no trade secret or secret processes involved, Illinois public policy bars enforcement of the restrictive covenant. Because we agree that the trial court misconstrued the applicable law, we reverse the order and remand the cause. The following facts were presented at the hearing on the petition for a preliminary injunction.

Morrison provides welding services to a group of large industrial concerns that use railroad tracks, crane rails and similar heavy equipment. It employs sales personnel to visit its customers and to ascertain what rail repair work they need. Based on the resulting reports plaintiff prices the particular job and sends the estimate or "bid" to the customer for approval. The customer then issues a purchase order to plaintiff, who forwards it to one of its licensee subcontractors. These licensees may accept or reject the work and are not held to any minimum or maximum output for Morrison. Moreover, while under contract, they remain free to accept other welding work. Morrison collects payment from its customers and then divides it, according to the contractual formula, with the licensee who performs the work.

On April 1, 1967, defendant, Frank Valent, signed a licensee agreement with plaintiff's predecessor. *fn1 The agreement contained the following clause:

"Upon termination of this agreement for any cause whatsoever, licensee covenants and agrees, that, for a period of (2) years subsequent to the termination thereof that he will not directly or indirectly engage in, solicit or perform any contractor work of the kind contemplated by this Agreement or competitive with the business of Licensor, whether under the "Morrison Metalweld process" or otherwise, for any railroads or industries within the following area: The states of Pennsylvania, New York, Michigan, Illinois, New Jersey and Maryland."

Plaintiff trained defendant, who had several years of welding experience, in its business and provided him with an instruction manual. *fn2 During the period he accepted work from plaintiff, he serviced plaintiff's customers in New York, Connecticut, Delaware, Pennsylvania, and, since 1972, Illinois.

A few days after Morrison underwent a change in management (pursuant to the creation of the successor corporation) defendant terminated his relationship with plaintiff and began working, for his own account, at one of plaintiff's major, long-standing customers, U.S. Steel South Works. Subsequently, plaintiff brought this action to enjoin defendant from breaching his agreement not to compete. Gary Smith, plaintiff's president, testified that U.S. Steel South Works had been a continuous customer of plaintiff's for at least 30 years and accounted for 15-20% of its total billings. Smith also testified that Morrison had received no business from U.S. Steel South Works since July 1, 1979, about the time defendant began working there for his own account.

Following the hearing on plaintiff's petition for a preliminary injunction, the court stated that there was no question that defendant had breached his contract with plaintiff and that the covenant was valid and enforceable when entered. Nevertheless, the court declined to issue the preliminary injunction, holding that the covenant not to compete was unenforceable under current Illinois law.

OPINION

The central concern of this appeal is whether plaintiff has a business interest in its customers which justifies enforcement of the restrictive covenant. This business interest is germane to its plea for preliminary injunctive relief because one of the elements of an injunction is a clear right or interest needing protection. (E.g., Image Supplies, Inc. v. Hilmert (1979), 71 Ill. App.3d 710, 390 N.E.2d 68; S & F Corp. v. American Express Co. (1978), 60 Ill. App.3d 824, 377 N.E.2d 73.) Morrison must also establish that it has no legal remedy, that it will suffer irreparable injury if the injunction does not issue, and that it will likely prevail on the merits. (Image; S & F.) All that is required of the petitioning party at the preliminary injunction stage is that he raise a fair question as to the existence of the right claimed and that he will probably be entitled to injunctive relief if he proves his allegations. (See Frank B. Hall & Co. v. Payseur (1979), 78 Ill. App.3d 230, 396 N.E.2d 1246.) In the pending case, the propriety of injunctive relief depends upon the enforceability of the restrictive covenant.

Because agreements not to compete are, to at least some extent, restraints of trade, courts> scrutinize such agreements carefully to ensure that they do not injure the public by impeding competition. (See Wessel Co. v. Busa (1975), 28 Ill. App.3d 686, 329 N.E.2d 414.) Courts> also consider the promisor's right to pursue his livelihood without undue constraints. (Wessel.) Where the limitation as to time and territory is not unreasonable, however, injunctive relief is customary and proper. (Canfield v. Spear (1969), 44 Ill.2d 49, 254 N.E.2d 433.) Therefore, when a party to an employment contract agrees, in exchange for certain benefits, to refrain from competing with his or her employer, that agreement should be enforced where equitable. (Shorr Paper Products, Inc. v. Frary (1979), 74 Ill. App.3d 498, 392 N.E.2d 1148.) The basic test for enforcing such a covenant is whether it is "reasonably necessary to protect the employer from improper or unfair competition." (Iroquois Industries Corp. v. Popik (1980), 91 Ill. App.3d 505, 507, 415 N.E.2d 4, 6.) Implicit in this standard are two separate inquiries: (1) Does the employer have a legitimate business interest needing protection? (2) Is the restrictive covenant reasonable in scope?

• 1 Not every alleged business interest will be deemed protectable through a covenant not to compete. (Nationwide Advertising Service, Inc. v. Kolar (1975), 28 Ill. App.3d 671, 329 N.E.2d 300.) In Nationwide we recognized two general situations in which an employer's interest in its customers is "proprietary," that is, legally protectable. First, we noted that "[a] covenant not to compete will be enforced if the employee acquired confidential information through his employment and subsequently attempted to use it for his own benefit." (Nationwide, 28 Ill. App.3d 671, 673, 329 N.E.2d 300, 302.) Second, we stated that "[a]n employer's interest in its customers also is deemed proprietary if, by the nature of the business, the customer relationship is near-permanent and but for his association with plaintiff, defendant would never have had contact with the clients in question. [Citations.]" (Emphasis added.) 28 Ill. App.3d 671, 673, 329 N.E.2d 300, 302.

In the pending case plaintiff concedes that there is no actual trade secret involved because the patents covering its special welding process had expired before defendant began working for plaintiff. Therefore, Morrison bases its claim to relief on its long-standing relationship with its customers, with whom defendant would not have come in contact except for his licensing arrangement with Morrison. As plaintiff correctly points out, the Illinois Supreme Court has recognized that protecting such a customer relationship is a legitimate interest of an employer. Cockerill v. Wilson (1972), 51 Ill.2d 179, 281 N.E.2d 648 (veterinarian's interest in preventing his former employee from taking over his established clientele is subject to protection through a reasonable restrictive covenant); Canfield v. Spear (1969), 44 Ill.2d 49, 254 N.E.2d 433 (defendant doctor's ...


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