United States District Court, Central District of Illinois, Springfield Division
June 8, 1988
MARATHON PETROLEUM CO., FORMERLY KNOWN AS MARATHON OIL COMPANY, AN OHIO CORPORATION, PLAINTIFF,
CHRONISTER OIL COMPANY, AN ILLINOIS CORPORATION, GRADY M. CHRONISTER, AND LINDA K. CHRONISTER, DEFENDANTS.
The opinion of the court was delivered by: Richard Mills, District Judge:
Ex turpi contractu actio non oritur.
A contract founded upon an illegal consideration cannot be
Marathon Petroleum Company filed this diversity action under
28 U.S.C. § 1332 seeking monetary and injunctive relief against
Chronister Oil Company and its proprietors, Grady and Linda
Chronister, as a result of their retail sale of gasoline
allegedly prohibited by a noncompetition agreement.
In accordance with Fed.R.Civ.P. 52, the Court on July 9, 1987,
denied Marathon's application for a preliminary injunction for
failure to establish a reasonable likelihood of success on the
merits. Because the contract appeared to be an illegal covenant
in restraint of trade under Illinois law, the Court directed
Marathon to show cause why its complaint should not be dismissed.
Now before the Court is Plaintiff's motion for reconsideration
of the July 9 order and discharge of the rule to show cause.
For the following reasons, the motion is denied and the case
Defendants in September 1981 agreed to sell Russell Stewart Oil
Company certain real and personal properties situated throughout
Illinois in exchange for payment of $9,639,072.93. Of that
amount, the assets purchase agreement allocated $1,623,000 to
land, $3,113,772.93 to buildings, and $4,902,300 to equipment and
other tangible property. Included in the sale were two
Springfield self-service gas stations consisting mainly of fuel
pumps, cashiers booths, and restrooms.
At the closing of the deal on October 1, Stewart Oil notified
Defendants that as the buyer it had assigned all rights and
duties arising under the contract to Marathon, 50% owner of the
assignor. The same day, Marathon and Chronister entered into a
noncompetition agreement pursuant to ¶ 14 of the sales accord.
For $300,000 consideration payable over ten years, Defendants
assented to the following:
Sellers will not compete with Marathon Oil Company,
or any subsidiary or affiliate of Marathon, or the
successors or assigns of any of them, directly or
indirectly, as principal, agent, employee, officer,
director, shareholder, partner or otherwise, in the
operation of retail sales outlets of gasoline or
other motor fuel at any place within the State of
Illinois, Rock County, Wisconsin, and the City of St.
Louis, Missouri, for a period of 10 years from date
of execution hereof. . . .
Shortly thereafter, Plaintiff deeded the Springfield concerns
to Stewart Oil, its affiliate and successor under the restrictive
covenant. Today these establishments continue to operate at 1100
West Jefferson Street and 1801 North Grand Avenue East under
their original trade name of "Super Gas," which Defendants
assigned to Plaintiff per the agreement. Following the
transaction, Stewart Oil opened a third station with the same
name and features at 1901 West Jefferson Street.
Marathon to date has remitted $280,000 consistent with the
restrictive covenant. But despite their unflinching acceptance of
the petroleum company's remuneration, Defendants, with over 90%
of the payments in tow, have now reentered the retail gasoline
market in Springfield and sought to undercut their competitor's
prices. Currently, Defendants are managing two "QIK-N-EZ"
stations located on the corners of Chatham Road and Monroe
Street, and Stevenson Drive and 11th Street respectively. These
operations are characterized by self-serve gas pumps and
Covenants not to compete must arise in one of two ways to be
enforceable. The agreement may be ancillary to an employment
contract or collateral to a sale of property. See generally Note,
Validity of Covenants Not to Compete: Common Law Rules and
Illinois Law, 1978 U.Ill. L.F. 249. A promise to refrain from
competition resting alone is considered an attempt to restrain
trade per se and unenforceable.
Restatement 2d of Contracts § 187 (1981).
Illinois decisions, which the parties agree govern this
controversy, view restrictive covenants accompanying the purchase
of assets more favorably than those connected with the
employer-employee arrangement. See In re Talmage, 758 F.2d 162,
165-66 (6th Cir. 1985) (applying Illinois law); O'Sullivan v.
Conrad, 44 Ill.App.3d 752, 755, 3 Ill.Dec. 383, 386,
358 N.E.2d 926, 929 (5th Dist. 1976). This is so because business entities
are presumed better able to reach an accord voluntarily after
arms length negotiations. In contrast, the hired individual is
more likely the subject of overreaching. Note, supra at 261.
Still, "[w]hatever may be said for freedom of contract in
general, restrictive covenants impair the availability of
services and interfere with competition; therefore, such
covenants `are carefully scrutinized by the courts.'" Rao v. Rao,
718 F.2d 219, 223 (7th Cir. 1983), quoting Boyar-Schultz Corp. v.
Tomasek, 94 Ill.App.3d 320, 323, 49 Ill.Dec. 891, 893,
418 N.E.2d 911, 913 (1st Dist. 1981) (considering restriction ancillary to
sale of business).
A restraint ancillary to a sale of property in Illinois must be
reasonable. Whether the contract is reasonable or contrary to
public policy is ultimately a question of law. Talmage, 758 F.2d
at 165; Boyar-Schultz, 94 Ill.App.3d at 323, 49 Ill.Dec. at 894,
418 N.E.2d at 914. The decision as to the covenant's
enforceability, however, turns on the circumstances of each case.
Tarr v. Stearman, 264 Ill. 110, 118-19, 105 N.E. 957, 960-61
(1914); Lanzit v. J.W. Sefton Mfg. Co., 184 Ill. 326, 330,
56 N.E. 393, 394 (1900); O'Sullivan, 44 Ill.App.3d at 758, 3
Ill.Dec. at 387, 358 N.E.2d at 930. While the starting point for
any discussion must be the terms of the agreement itself, the
intent of the parties cannot alone determine the restriction's
compliance with the state's public policy. That issue is for the
Court to decide. See Newby v. Wal-Mart Stores, Inc., 659 F. Supp. 879,
880-81 (C.D.Ill. 1987).
Caselaw separates the appropriate analysis into three parts.
Illinois courts require the restrictive covenant to be (1)
necessary in its full extent for the protection of the buyer; (2)
unoppressive to the seller; and (3) not harmful to the public.
Bauer v. Sawyer, 8 Ill.2d 351, 355, 134 N.E.2d 329, 331 (1956);
Restatement, supra § 188. Consequently, the mere breach of a
restrictive covenant is insufficient to warrant relief. Aside
from justifying the durational and territorial extent of the
restraint, see generally Annotation, Enforceability of Covenant
Against Competition, Ancillary to Sale or Other Transfer of
Business, Practice, or Property, as Effected by Territorial
Extent of Restriction, 46 A.L.R.2d 119 (1956); Annotation,
Enforceability of Covenant Against Competition, Ancillary to Sale
or Other Transfer of Business, Practice, or Property, as Effected
by Duration of Restriction, 45 A.L.R.2d 77 (1956), plaintiff's
first task is to illustrate injury to its legitimate business
interest apart from defendant's violation of the agreement.
American Hardware Mut. Ins. Co. v. Moran, 545 F. Supp. 192, 195
(N.D.Ill. 1982), aff'd, 705 F.2d 219 (7th Cir. 1983); Behn v.
Shapiro, 8 Ill.App.2d 25, 35, 130 N.E.2d 295, 299 (1st Dist.
The protectible interest which a buyer procures through a
restrictive covenant ancillary to a sale of assets originates
either in the good will of the business sold or the confidential
information used in its operation:
When a business is sold, restraints may be imposed
to protect the value of the good will transferred,
and where specialized knowledge, such as secret
processes or the like are involved, restraints may
protect against the competition resulting from
disclosure or appropriation.
House of Vision v. Hiyane, 37 Ill.2d 32, 37-38, 225 N.E.2d 21, 24
(1967) (per Schaefer, J.) (treating prerequisites as exhaustive).
See also SSA Foods, Inc. v. Giannotti, 105 Ill.App.3d 424, 429,
61 Ill.Dec. 307, 312, 434 N.E.2d 460, 465 (1st Dist. 1982)
(interest which purchaser attempts to protect is possession and
enjoyment of good will in property transferred). Consistent with
Illinois decisions, federal courts have recognized that covenants
to compete in Illinois are enforceable "only to protect either
the good will of a firm's business or the confidentiality of
information valuable to the firm's business." American Hardware,
705 F.2d at 221 (employment contract) (emphasis added). See also
Talmage, 758 F.2d at 166 (business licensing agreement).
Accordingly, the applicable cases consistently reason that a
promisee's desire to retain an establishment's customers is by
itself inadequate. See e.g., American Hardware, 545 F. Supp. at
196. Something more is required such as a permanent loyal
clientele which gives rise to a presumption of good will.
American Hardware, 705 F.2d at 222; House of Vision, 37 Ill.2d at
38-39, 225 N.E.2d at 24-25; H.B.G. Corp. v. Houbolt,
51 Ill. App.3d 955, 961, 10 Ill.Dec. 44, 48, 367 N.E.2d 432, 436 (3d
Dist. 1977); Nationwide Advertising Serv., Inc. v. Kolar,
14 Ill. App.3d 522, 526-29, 302 N.E.2d 734, 736-38 (1st Dist. 1973).
The explanation for this rationale is that a restrictive covenant
must safeguard one or both of the aforementioned interests;
otherwise, the injury caused to the public as well as the
promisor in restraining competition and restricting services
necessarily outweighs any benefit to the promisee. American
Hardware, 705 F.2d at 221.
Marathon neither alleges nor argues the existence of any
specialized knowledge conveyed under the sales agreement which
Defendants might utilize to harm it. Thus, the initial issue for
consideration is whether Marathon acquired the protectible asset
of good will as an incident to its purchase of the Super Gas'.
The Court denied Plaintiff's request for preliminary injunctive
relief because it had not shown that the restrictive covenant was
arguably related to the protection of good will in the property
transferred. Nothing has changed.
Since Lord Eldon first defined good will in Cruttwell v. Lye,
17 Vesey 335, 346 (1810), as "nothing more than the probability
that the old customers will resort to the old place," a multitude
of courts have struggled to refine the elusive concept. See 18A
Words & Phrases, Good Will 210 (1956). Although its definition
may depend on the context in which the term is used, good will in
the legal sense has come to mean the advantages a business has
over competitors as a result of its name, location, and owner's
The good will of a business has been defined to be
the benefit which arises from it having been carried
on for some time in a particular place, or by a
particular person or from the use of a particular
trade-mark, and its value consists in the probability
that the customers of the old firm will continue to
be customers to the new.
United Romanian Mkt. v. Abramson, 218 Ill.App. 577, 582 (2d Dist.
1920). Accord In re McCubbin, 125 Ill.App.3d 74, 77, 80 Ill.Dec.
560, 562, 465 N.E.2d 672, 674 (1st Dist. 1984) (good will of
business is characterized by personal relationships and customer
contacts which owner has developed); SSA Foods, 105 Ill.App.3d at
429, 61 Ill.Dec. at 311, 434 N.E.2d at 464 (where party sells
established business including its name, he cannot thereafter
resume label in carrying on competing enterprise).
Marathon, however, describes good will differently. According
to its expert, finance professor George Overstreet from the
University of Virginia, the good will which Plaintiff seeks to
protect in this instance is represented by the difference between
the $9.9 million purchase price and the $4.8 million appraised
value of the tangible assets. In other words, since Marathon paid
in excess of what it believed the assets were worth, the
intangible asset of good will is necessarily present.
While the Court was certainly entertained by the expert's free
wheeling presentation at the January 26 show cause hearing, it
remains unpersuaded. Marathon's definition of good will in a
financial sense is no doubt accurate. But the conclusion that a
restrictive covenant is designed to protect a legally recognized
interest based only upon Plaintiff's self-serving appraisal is
untenable. Too many other factors point to the inevitable finding
that the noncompetition agreement is nothing
more than an attempt to eliminate a competitor from the market.
The assets purchase agreement specifically allocated values to
each of Defendants' tangible assets which totalled the purchase
price. Although ¶ 5.09 contained an offhand reference to the
seller's duty to preserve the good will of its customers pending
the closing, the contract does not purport to transfer the asset.
Nor does the restrictive covenant lend Marathon support. The
document expressly states that its purpose is to assure the
"Sellers and their principals will not compete in business with
Stewart for a prescribed period of time within a defined area."
Perhaps this is why Plaintiff never assigned any part of the
consideration paid for Defendants' assets to good will on its
books, records, or tax returns.
In its original complaint, Marathon claimed that eleven
Springfield stations with which it is associated were suffering
irreparable harm from Defendants' sale of motor fuel. But
Plaintiff held an interest in nine of the concerns prior to the
transaction with Chronister. Marathon could not possibly have
received any legitimate interest, good will or otherwise, worthy
of protection in those establishments by way of the assets
purchase agreement. While Marathon recently amended the complaint
to omit the widespread allegation of harm, the initial pleading
as an evidentiary admission strongly suggests that the
noncompetition agreement was undertaken for the improper purpose
of preventing competition per se. Contractor Utility Sales Co. v.
Certain-Teed Products Corp., 638 F.2d 1061, 1084 (7th Cir. 1981),
cert. denied, 470 U.S. 1029, 105 S.Ct. 1397, 84 L.Ed.2d 785
(1985) (prior pleadings are admissible in civil actions as
evidentiary admissions). Plaintiff's counsel explained the
covenant's purpose at the preliminary injunction hearing:
This was Marathon purchasing the State of Illinois
and all operations within the State of Illinois. It
was the whole state that was being acquired by
Marathon. . . . Marathon . . . as part of that
purchase agreement is saying, we want to have the
whole territory in which you are located for not only
the assets that we're purchasing, but for ourselves.
All this is not to say that Marathon obtained nothing from
Defendants which might give rise to protectible good will. The
asset may impliedly be part of any contract for the sale of a
business, and may figure in its valuation. Board of Trade v. Dow
Jones & Co., 108 Ill.App.3d 681, 693 n. 2, 64 Ill.Dec. 275, 284
n. 2, 439 N.E.2d 526, 535 n. 2 (1982), aff'd, 98 Ill.2d 109, 74
Ill.Dec. 582, 456 N.E.2d 84 (1983). See generally S. Williston,
Williston on Contracts § 1640 (3d ed. 1972). For instance, a
certain amount of good will surely exists in the trademark "Super
Gas." Similarly, the location of the stations could create some
But a noncompetition agreement prohibiting Defendants from
selling fuel anywhere in the State of Illinois for ten years was
not designed to protect these elements of good will. The
Chronisters have not erected their new stations across the street
from the old. See Appendix. Nor are they utilizing their former
trade name. Instead, Marathon's grievance centers largely around
Defendants' price cutting. The affidavit of Stewart Oil's
vice-president confirms as much:
Based upon my examination of our sales for May 1987
as compared with previous months and years, it is
clear that the competition of the QIK-N-EZ station at
Chatham Road and Monroe Street is having a harmful
effect on Stewart. The volume of gasoline which our
stations are selling is reduced due to the
competition of QIK-N-EZ and the price at which we can
sell those gallons is also less due to price
competition from QIK-N-EZ. If this trend continues,
Stewart will continue to lose sales, customers, and
revenues due to the competition of QIK-N-EZ.
Customer loyalty in the sale of gasoline today is primarily a
function of price and convenience. Plaintiff would suffer no more
injury if a stranger began to compete in the manner that
Defendants have. See McCook Window Co. v. Hardwood Door
Corp., 52 Ill.App.2d 278, 289, 202 N.E.2d 36
, 42 (1st Dist.
1964). It is not the Chronisters' ownership of the competing
enterprises which is harming Plaintiff, but rather competition
per se. Any attempt, however, to purchase away competitors in
Illinois must fail as violative of the state's public policy. A
noncompetition agreement ancillary to the sale of a business is
generally appropriate only where competition by the former owner
would impair the operation of the purchaser beyond that which
would arise from the competition of an unrelated third party with
similar marketing skills. Compare American Hardware, 705 F.2d at
222 (insurance business selling packaged plans has no good will).
Nationwide Advertising, 14 Ill.App.3d at 526, 302 N.E.2d at 736
(advertising agency's relationship with its customers was
transitory rather than permanent). This is not such a case.
In dismissing this action, the Court shall leave the parties
where it found them. It is a well established rule in Illinois
that when the parties to an illegal bargain are in pari delicto,
"the law will not stoop to inquire whether one has gained an
advantage over the other." Arter v. Byington, 44 Ill. 468, 469
(1867). Accord Stamatiou v. United States Gypsum Co., 400 F. Supp. 431,
439 (N.D.Ill. 1975), aff'd 534 F.2d 330 (1976); Wiegand v.
Wiegand, 410 Ill. 533, 542-43, 103 N.E.2d 137 (1951).
Admittedly, Defendants' conduct is suspect. But Marathon is a
large international corporation engaged in the production and
sale of petroleum products throughout the world. It should have
known better than to attempt to buy competitors out of the
Because Marathon has made no showing that the noncompetition
agreement is reasonably related to the protection of its
affiliate's possession and enjoyment of the good will in the
property transferred, the complaint is DISMISSED as based upon an
illegal contract in restraint of trade under Illinois law.
Judgment for Defendants.
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