OPINION BY MR. JUSTICE COHEN, November 22, 1957:
The Central Home Furnishing Co. was engaged in the installment selling of household articles through door-to-door salesmen-collectors. Each salesman was given a confidential route of cutomers to whom he sold and from whom he collected weekly payments. The contacts between salesmen and customers were on a regular and reoccurring basis.
In February, 1955, Morgan's Home Equipment Corporation purchased the assets of the Central Company. Of the $150,000 purchase price, only $25,000 was paid
One salesman, Morris Spiller, voluntarily left Morgan's employ on April 15, without signing the contract, and immediately thereafter began a competing business under the name of Variety Sales Corporation. Two other salesmen, John Martucci and Dan Spiller, signed the restrictive agreement and continued as employes of Morgan. On May 22, Martucci left Morgan to go with Variety, and on July 30, 1955, Dan Spiller did likewise. They then began to solicit and serve the customers of Morgan on their former routes on behalf of Variety. Other collector-salesmen, all of whom had been former employes of Morgan, were hired by Variety and actively solicited the patronage of Morgan's customers.
The chancellor found that the restrictive covenants lacked consideration and, hence, were unenforcible. The chancellor also concluded that a conspiracy had not been proven, and that the defendants had neither misled customers, misused confidential information, nor enticed away any of Morgan's employes. Exceptions to this adjudication and to the decree nisi which followed it were filed. The court en banc, (including the chancellor), reversed unanimously, and entered a decree enjoining defendants Martucci and Dan Spiller for one year from the termination of their employment with the plaintiff from divulging the names and soliciting the patronage of customers who became known to them by reason of their former employment. The decree further enjoined the two defendants from attempting to divert any of plaintiff's business and from persuading plaintiff's customers to refrain from continuing their patronage. All of the defendants individually and trading as Variety Sales Corporation were prohibited from using customer lists, soliciting customers, persuading customers not to patronize, attempting to divert business, enticing employes, and using deceptively similar cards and records to the detriment of Morgan. Finally, all defendants were directed to account for profits obtained as a result of the
The Disclosure Of Confidential Customer Information
In many businesses, permanent and exclusive relationships are established between customers and salesmen. The customer lists and customer information which have been compiled by such firms represent a material investment of employers' time and money. This information is highly confidential and constitutes a valuable asset. Such data has been held to be property in the nature of a "trade secret" for which an employer is entitled to protection, independent of a nondisclosure contract, either under the law of agency or under the law of unfair trade practices.
. . .
"Where confidence is reposed, and the employe by reason of the confidential relation has acquired knowledge of trade secrets, he will not be permitted to make disclosure of those secrets to others to the prejudice of his employer." (emphasis supplied)
We agree that confidential customer data are entitled to protection as a trade secret within the meaning of the Macbeth-Evans rule.
In the present case there is no dispute that the customer data of the plaintiff company was both confidential and highly valuable, and the court en banc so found. Whether this information was embodied in
All the defendants were given customer data in the course of their employment with Morgan and its predecessor,
The Solicitation Of Morgan's Customers
The vice of an employe's divulgence of confidential information is that the rival businessman who receives the data is enabled thereby to compete unfairly with the former employer. But it is immaterial to the employer whether unfair competition comes at the hands of a third party or directly through an employe. For this reason the law will also prevent an employe from using customer contacts as well as confidential customer information to his own advantage by soliciting the customers of his former employer.
The General Covenants Not To Compete For The Patronage Of The Public At Large
In the absence of an agreement between employer and employe to the contrary, the law does not prevent an employe from competing in business with his former employer after his service has terminated. However,
Such general covenants not to compete present centuries old legal problems. The earliest cases were decided against the economic background of a chronic shortage of skilled workers in England, the result of the virulent epidemics of the Black Death during the fourteenth century. It was not surprising, then, that all covenants to refrain from practicing a trade were held to be void as against public policy.
The defendants urge that there is yet another requirement in Pennsylvania for the validity of general covenants not to compete. They rely upon the case of Cleaver v. Lenhart, 182 Pa. 285, 37 Atl. 811 (1897) for the proposition that such covenants are not enforcible unless they are supported by a real and valuable consideration, and contend that real consideration is lacking in the present case.
In the Cleaver case a contract for the sale of creameries was entered into and fully performed. Subsequently, a second agreement was made under seal in which the seller agreed not to compete with the purchaser within a radius of five miles from the site of the creameries for a period of three years from the date of the contract. The contract recited the purchase of the creameries as being the consideration for the agreement. This Court held that when the second agreement was made, the contract of sale had been completely executed,
While the opinion in the Cleaver case was couched in terms of consideration, it is apparent that the Court was referring to the fact that the general covenant not to compete was not ancillary to any principal transaction. It has long been the rule at common law, that contracts in restraint of trade made independently of a sale of a business or contract of employment are void as against public policy regardless of the valuableness of the consideration exchanged therein. United States v. Addyston Pipe & Steel Co., 85 Fed. 271, 281-82 (6th Cir. 1898), aff'd, 175 U.S. 211 (1899); Mitchel v. Reynolds, 1 P. Wms. 181 (K.B. 1711); Restatement, Contracts, § 515(e) (1932).
Since in the case at bar the allegedly lacking consideration for the covenants was the employment relationship itself, we must inspect the instant agreement to see whether in fact it was related to the taking of employment.
General covenants not to compete which are ancillary to the sale of a business serve a useful economic function; they protect the asset known as "good will" which the purchaser has bought. Indeed, in many businesses it is the name, reputation for service, reliability, and the trade secrets of the seller rather than the physical assets which constitute the inducements for a sale. Were the seller free to re-enter the market, the buyer would be left holding the proverbial empty poke. When restrictive covenants are limited to the area of potential competition with the purchaser and limited in time to the period required for the purchaser to establish his own customer following, then they are enforcible although a partial restraint upon the free exercise of trade.
Quite different reasons motivate the upholding of general covenants not to compete which are ancillary to employment. An employe may receive specialized training and skills, and learn the carefully guarded methods of doing business which are the trade secrets of a particular enterprise. To prevent an employe from utilizing such training and information in competition with his former employer, for the patronage of the public at large, restrictive covenants are entered into. They are enforced by the courts as reasonably necessary for the protection of the employer. See Arthur Murray Dance Studios, Inc. v. Witter, 62 Ohio L. Abs. 17, 105 N.E.2d 685, 694-99, 708-711 (1952); 3 Pomeroy, Equity Jurisprudence, § 934c (5th ed. 1941). A general covenant
The record in the present case discloses no evidence that the employes received any special training or insight into methods of doing business of the plaintiff company which would make it inequitable to have them compete with the plaintiff for the patronage of the public at large. Although the defendants obtained confidential customer information, Morgan was adequately protected by the decree which enjoined disclosure and solicitation, and so prevented the former employes from benefiting from their customer contacts and knowledge. Consequently, under these facts we find that the general covenants not to compete are not reasonably necessary for the protection of Morgan and constitute an
Inducing Breach Of Contract
Defendant Morris Spiller admits that he offered employment and ultimately hired the other defendants with knowledge that they had signed restrictive agreements, and that they would be acting inconsistently with the covenants contained therein in the course of their employment. One who intentionally interferes with an existing contractual relation is subject to liability for the breach of the contract. See Caskie v. Philadelphia Rapid Transit Co., 321 Pa. 157, 184 Atl. 17 (1936); 2 Callmann, Unfair Competition & Trade Marks, § 33.4(d) (2nd ed. 1950); Prosser, Torts, § 106 (2nd ed. 1955). Spiller asserts no privilege for inducing the breach of the covenants not to divulge confidential information, not to solicit or compete for the patronage of Morgan's customers, not to attempt to persuade customers to withhold their patronage, and not to divert Morgan's business, and he will be enjoined from continuing his unlawful conduct.
The Enticement Of Morgan's Employes
The systematic inducing of employes to leave their present employment and take work with another is unlawful
The defendants argue that there is no evidence to justify the finding of the court en banc, in the present case, of the enticement of Morgan's employes by the defendant Morris Spiller. The chancellor had concluded that there had been no illegal enticement of plaintiff's employes, although he found as a fact that all the employes of the defendant Variety Corporation were former employes of plaintiff. In Belmont Laboratories Inc. v. Heist, 300 Pa. 542, 151 Atl. 15 (1930), we said that in those cases which depend in large degree upon the credibility of witnesses whom the chancellor saw and heard, and whose testimony for that reason he is best able to weigh, the court en banc can properly disregard his findings only in a clear case, and then by putting upon the record its reasons for so doing. In the Belmont case, however, the chancellor who made the original finding did not sit on the court en banc when it made its determination. In the present case the court en banc which reversed the finding as to illegal enticement included the chancellor. "It is the final conclusion of the chancellor which is to be considered. Frequently he modifies the facts as first declared, where mistake is called to his attention, and the last statement made is to be treated as his deliberate conclusion." Piacentino v. Young, 272 Pa. 556, 560, 116
The Deceptively Similar Cards, Order Books And Forms
The trading on another's business reputation by use of deceptive selling practices or other means is enjoinable on the grounds of unfair competition. If the particular use in question is reasonably likely to produce confusion in the public mind, equity will restrain the unfair practice and compel an accounting of the profits gained thereby. Thomson-Porcelite Co. v. Harad, 356 Pa. 121, 51 A.2d 605 (1947); Stroehmann Bros. Co. v. Manbeck Baking Co., 331 Pa. 96, 200 Atl. 97 (1938); 87 C.J.S. 325-333 (1954).
The defendants admit that the customer cards of Variety Corporation were similar in general arrangement, color and form to those used by Morgan. The court en banc, who had the opportunity of viewing the documents in question, found that the cards were misleading. Nothing in the record moves us to upset their finding. We note that no great hardship is imposed upon the defendants to change their documents so that they are less similar to those employed by the plaintiff.
The Relief Granted
The defendants complain that the court below abused its discretion in permanently enjoining them from soliciting and diverting customers of Morgan, and persuading Morgan's customers not to continue their patronage. We agree with their contention that the injunction, being based upon principles of general equitable relief available for unfair competition,
The decree of the Court of Common Pleas No. 5 of Philadelphia County is modified in accordance with this opinion, and as modified affirmed. Costs to be paid by the appellants.