MULLIGAN, Circuit Judge:
This is an appeal from a judgment dismissing the plaintiff's complaint after a non-jury trial before Hon. Morris E. Lasker, United States District Judge, Southern District of New York, which was conducted in October, 1972. Judge Lasker's opinion, not yet reported, was filed on July 17 and the judgment appealed from was entered on July 18, 1973. Affirmed.
In 1959, the Times adopted an Incentive Compensation Plan (Plan), and Bradford participated in its drafting and, as a director, voted for its approval. The purpose of the Plan was "to retain and attract executives and employees who enhance [the Times'] tradition and contribute to its success." The Plan provided for "retirement units" for selected executives and other personnel. The units were based upon the value of the participant's service to the Times. The units were credited to the account of each participant and, upon his death, retirement or severance, he would receive in 10 equal annual installments shares of stock in the Times equal in sum to the number of his units.
Paragraph 14 of the Plan provided:
Paragraph 27 of the Plan provided:
After the Plan had been adopted, Bradford was designated as a participant and was awarded 50 units for each of the years 1959, 1960, 1961 and 1962. On December 22, 1959, he entered into an agreement pursuant to Paragraph 14 of the Plan. It provided:
At the time of his resignation in June, 1963, Bradford had accumulated 205 units (including a dividend credit). In July, 1963, Bradford received his first annual installment under the Plan, consisting of 21 shares of stock (then worth about $7000), leaving a balance due of 184 units (then worth about $60,000). The Times further voluntarily paid him six months salary amounting to $40,000.
On October 21, 1963, Bradford advised Harding Bancroft, a senior executive of the Times, that he was taking a position as an assistant to Mark Ferree, General
Bradford's employment at Scripps-Howard terminated on December 31, 1964. In April, 1966, he wrote to the Times requesting a resumption of payments. Due to stock splits and market changes, Bradford's 184 units had risen in value from $60,000 to about $230,000. On May 2, 1966, the Times advised Bradford that since he had breached his agreement, his rights had terminated and were not resurrected by his subsequent separation from Scripps-Howard. On October 2, 1967, this diversity suit was commenced for breach of contract, seeking delivery of 12,300 shares of Class A common stock of the Times plus cash for dividend credits. The complaint was later amended to include a count alleging a violation of section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, for which Bradford sought treble damages and costs, including reasonable attorneys' fees, pursuant to section 4 of the Clayton Act, 15 U.S.C. § 15.
On appeal, Bradford principally urges that the noncompetition agreement which he executed pursuant to the Plan constituted a restraint of trade which is void and unenforceable under New York law. The court below found that there was no restrictive covenant in restraint of trade because the agreement did not absolutely prohibit Bradford from working for a competitor, but rather offered him an "attractive option," the retention of substantial retirement benefits. The court concluded that this was an "employee choice" case under New York law and therefore not to be tested by common law restraint doctrines.
Since the Plan and the agreement executed pursuant to its terms did limit Bradford's employment opportunities after he severed his relationship with the Times, we are dealing with a restraint which is valid only if it is found to be reasonable. The New York Court of Appeals has announced that there are powerful considerations of public policy which militate against the sanctioning of the loss of a man's livelihood. The covenant not to compete with a former employer is subject to an "overriding limitation of reasonableness." Karpinski v. Ingrasci, 28 N.Y.2d 45, 49, 320 N.Y.S.2d 1, 4, 268 N.E.2d 751, 753 (1971); Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267, 272, 246 N.Y.S.2d 600, 603-604, 196 N.E.2d 245, 247-248 (1963). In view of the strong public policy of the state, we cannot accept the theory that New York has adopted the so-called "employee choice" doctrine, which is alleged to make judicial determination of reasonableness unnecessary. Kristt v. Whelan, 4 A.D.2d 195,
In any event, we cannot characterize the contract before us as one which afforded Bradford a choice of alternative performances. Bradford's agreement executed pursuant to Paragraph 14 of the Plan provided: "I agree that . . . I will not engage in any business or practice . . . ." The Plan itself (Paragraph 14) does not provide simply for the conditional forfeiture of benefits, but refers to an "agreement" not to compete and for discontinuance of unpaid installments in the event of a "breach." New York recognizes that on occasion a contract may truly provide one of the parties the alternative of one performance or another. Hasbrouck v. Van Winkle, 261 App.Div. 679, 27 N.Y.S.2d 72 (3d Dep't 1941), aff'd without opinion, 289 N.Y. 595, 43 N.E.2d 723 (1942). We do not construe this contract to be of this category. Bradford promised only to avoid competing and to hold himself ready for consulting service. The contract gave him no options with respect to his performance. In the event that the contract was breached, the Times reserved the right to withhold stock payments. In our view, this was provision for liquidated damages, which is a normal provision in contracts of this nature and which New York has consistently held to be, not an alternative contract affording the employee an option, but rather one specifically performable at the option of the employer. Karpinski v. Ingrasci, supra, 28 N.Y.2d at 52, 320 N.Y.S.2d at 7, 268 N.E.2d at 755; Diamond Match Co. v. Roeber, 106 N.Y. 473, 486, 13 N.E. 419, 423-424 (1887); Restatement of Contracts, § 325 & comment b at 492-93 (1932).
The court below indicated that the forfeiture of stock here did not constitute
At the time Bradford commenced this suit, the value of his "retirement units" had escalated to $500,000, and the argument is made that this disparity between the amount forfeited and the damages to be reasonably anticipated renders the provision an unlawful penalty. However, it is well settled that the reasonableness of the sum selected as liquidated damages will depend upon the estimate of the parties at the time the agreement was made, not at the time of breach or at the time suit was commenced. United States v. Bethlehem Steel Co., 205 U.S. 105, 27 S.Ct. 450, 51 L.Ed. 731 (1907); Curtis v. Van Bergh, 161 N.Y. 47, 55 N.E. 398 (1899); Restatement of Contracts § 339 (1932); C. McCormick, Damages § 150 (1935); 5 S. Williston, Contracts § 777, at 683-85 (3d ed. W. Jaeger 1961).
In sum, we are persuaded that we are presented with a restraint upon a former employee with a provision for liquidated damages in the event of a breach. The reasonableness of the restraint must be tested by the facts in the case before the court. Karpinski v. Ingrasci, supra, 28 N.Y.2d at 49, 320 N.Y.S.2d at 4, 268 N.E.2d at 753. We do not agree that Kristt represents the law of the state if it be construed to eliminate any inquiry into reasonableness because of some purported doctrine of "employee choice." The inquiry remains whether or not the restraint was reasonable and the contract was breached.
In determining whether or not the restraint was reasonable, we are faced in this case with a question which thus far has not been discussed in any of the New York cases but which we think is pertinent and logically would be considered by the courts of that state. Common law courts in general and the courts of New York in particular have distinguished between, on the one hand, a covenant barring an employee or partner from competing while he is employed or engaged in the business of the partnership (e. g., Lynch v. Bailey, 275 App.Div. 527, 90 N.Y.S.2d 359 (1st Dep't), aff'd without opinion, 300 N.Y. 615, 90 N.E.2d 484 (1949)) and covenants by the seller of a business and its
Appellant argues that New York law prohibits the enforcement of an agreement which restricts the competition of a former employee unless he threatens to disclose trade secrets or solicits business directly from former customers. However, in Purchasing Associates, Chief Judge Fuld stated:
13 N.Y.2d at 272, 246 N.Y.S.2d at 604, 196 N.E.2d at 248.
The earlier description of Bradford's duties should leave no real doubt that he, if anyone at the Times, was in the category "special, unique or extraordinary." He was the No. 2 executive of the publication directly responsible for its business operation, which involved circulation, advertising, production and promotion. He was privy to confidential discussions regarding possible mergers and joint printing arrangements with other New York papers. He reported directly to the publisher.
We see no other elements of unreasonableness in the agreement. The time fixed, ten years, is commensurate with the payment of benefits. There is no geographical limitation set forth, but, by
While not mentioned in the complaint, the appellant urges that the agreement violates the Donnelly Act, N.Y.Gen.Bus.Law § 340(1), which renders illegal contracts which restrain competition or the free exercise of any activity in the conduct of any business, trade or commerce. However, it is well understood that the New York statutory prohibition is no broader than the common law and that it adds no further strictures on otherwise reasonable restraints. See In re Davies, 168 N.Y. 89, 61 N.E. 118 (1901); In re Jackson, 57 Misc. 1, 107 N.Y.S. 799 (1908). Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 42 Cal.Rptr. 107, 398 P.2d 147 (1965). relied upon by the appellant, did apply state law to void an employee restriction comparable to the one before us. However, that decision rested upon section 16,600 of the California Business and Professions Code providing that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." That section had been interpreted by California courts as an absolute bar to any employee restraints. Chamberlain v. Augustine, 172 Cal. 285, 288, 156 P. 479, 480 (1916). In 1949, Justice Dore in his opinion in Lynch v. Bailey, supra, had already noted the strict construction given to the California statute by the courts of that state. 275 App.Div. at 5, 90 N.Y.S.2d at 365. New York, on the other hand, has consistently followed the rule of reason approach, whether the action is based on common law or Donnelly Act grounds. See Paramount Pad Co. v. Baumrind, 4 N.Y.2d 393, 175 N.Y.S.2d 809, 151 N.E.2d 609 (1958). In sum, we find the agreement fair and reasonable under the law of New York.
The appellant argues that the agreement before us is so flagrantly unreasonable that it violates section 1 of the Sherman Act, and even urges this court to find that the employee non-competition covenant constitutes a per se violation of the Act. Having found the agreement before us to be reasonable, we of course must decline without reluctance to find that it constitutes a per se violation. Not only has the appellant failed to supply us with any case holding an employee restrictive covenant to be a per se violation, but no court applying the rule of reason has ever held such a contract violative of section 1 of the Sherman Act.
Judge Taft's classic opinion in United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff'd, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136 (1899), relied upon by both sides here, did presage the rule of reason and the subsequent decisions of Standard Oil Co. v. United States, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (1911), and United States v. American Tobacco Co., 221 U.S. 106, 31 S.Ct. 632, 55 L.Ed. 663 (1911), which limited the Sherman Act's application to undue or unreasonable restraints of trade in light of their common law antecedents.
It is true that certain agreements because of their "pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable . . . ." Northern Pacific Ry. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958). However, the litany of per se restraints, which includes horizontal price-fixing or division of markets, group boycotts and tying provisions, involves arrangements which have a major trade regulatory impact which is not at all discernible here. As Mr. Justice Marshall noted in United States v. Topco Associates, Inc., 405 U.S. 596, 607-608, 92 S.Ct. 1126, 1133, 31 L.Ed.2d 515 (1972): "It is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act." See also White Motor Co. v. United States, 372 U.S. 253, 261-263, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963). Although employee restraints have been known to the common law since the 15th century, their evolving history illustrates that rule of reason considerations continue to apply; and a state court or, in a diversity case, a federal court applying state law, provides the usual forum for protecting the employee and whatever interest the public may have. There is certainly a total absence of federal Sherman Act experience. There is therefore not enough here to justify our acceptance of the invitation to classify such a restraint as a per se violation of the Sherman Act.
The appellants further urge that, in any event, Bradford did not breach the agreement. The pertinent language of the agreement is: "I will not engage in any business or practice or become employed in any position in competition with The Times or which is otherwise prejudicial to the interests of The Times . . . ." Appellant construes this language to mean that it precludes Bradford either from going into business on his own in competition with the Times or from taking a position which involves him personally in prejudicial competition with the Times. The court below, properly in our view, construed the agreement to prevent Bradford from going to work for a competitor in a position in which his work would assist his employer to better compete with the Times. That would certainly be detrimental or prejudicial to the Times. To construe the clause as urged by the appellant would make the first part of the prohibition precluding him from setting up his own business in competition with the Times mere surplusage.
The court below found that Scripps-Howard was in competition with the Times:
We do not find it necessary to discuss the district judge's first finding. The substantial competition for readership
Paragraph 27 of the Plan provided that decisions or actions taken by the Times or its Board, arising out of or in connection with the construction, administration, interpretation and effect of the Plan, "shall be conclusive and binding." Appellant urges that this clause gave the Times no power to determine that a breach had occurred, and that, if it did, it would be contrary to public policy since it would constitute an ouster of the courts from their nondelegable role of enforcing state policies. Gitelson v. Dupont, 17 N.Y.2d 46, 268 N.Y.S.2d 11, 215 N.E.2d 336 (1966), is in point and is precisely contrary to the contention of the appellant. There it was held that the rights of an employee under a comparable retirement plan were purely contractual and that a determination by a pension board that a claimant was ineligible, was, as provided in the agreement, final and conclusive absent a showing by the claimant that the board's ruling was motivated by bad faith or fraud or was arbitrary. See also Menke v. Thompson, 140 F.2d 786, 791-792 (8th Cir. 1944). The lower court in the case before us not only found that a breach did occur, but further commented that it was difficult to find that the Times could have come to any other conclusion. There is no charge of fraud or bad faith here, and the contention that the action was arbitrary finds no support in the record.
Appellant argues that Gitelson, supra, is distinguishable since that case did not involve a restrictive covenant. Appellant relies on Aimcee Wholesale Corp. v. Tomar Products, 21 N.Y.2d 621, 289 N.Y.S.2d 968, 237 N.E.2d 223 (1968), and American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821 (2d Cir. 1968), for the proposition that it is beyond the power of the parties to provide in an arbitration clause, which is asserted to be final and binding upon the parties, a determination as to whether or not a violation of state or federal antitrust laws has taken place. The proposition is unassailable but just as clearly inapplicable here. The Times made a determination that the contract was breached and that Bradford forfeited his rights under the Plan. No determination was made as to whether or not the agreement violated the state or federal trade regulatory laws, and, if it had been made, it would of course not bind this court. This court and not the Times has made the determination that no common law or statutory violation occurred.
Finally, appellant urges that, if a breach occurred, section 14(b), which provided that the Times may "discontinue" payments, should be interpreted to mean "suspend" payments until Bradford completed his service with Scripps-Howard (one year), at which point they should be resumed. In view of the power vested in the Times to interpret the agreement, we agree with the court below that the construction employed by the Times was not arbitrary. It is conceded that the word "discontinue" can mean either "suspend" or "terminate." Allowing an executive of the calibre of Bradford to bring his expertise to a competitor even for a limited time would be injurious to the Times. The construction given by the Times to "discontinue" was to "terminate," and we do not disagree.