Kroeger v. Stop & Shop Companies, Inc.
Kroeger v. Stop & Shop Companies, Inc.
Opinion of the Court
For a decade the plaintiff, Robert H. Kroeger (Kroeger), scaled the corporate ladder at The Stop & Shop Companies, Inc. (Stop & Shop). His annual bonuses, added to his salary, were such as to stimulate Kroeger in 1961 to ask for a deferred compensation arrangement. In response Stop & Shop proffered a written agreement which, in the argot of the trade, applied “golden handcuffs.” That is, should Kroeger “so long as he lives,” go to work for a competing business east of the Mississippi, he would lose all.
In Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. 141 (1979), the court reconsidered whether forfeiture for competition clauses in deferred compensation agreements should receive unconditional enforcement. That had been the accepted view as manifested by Flynn v. Murphy, 350 Mass. 352, 353 (1966), in which a forfeiture provision was enforced without discussion. See also Chase v. New York Life Ins. Co., 188 Mass. 271, 273-274 (1905); Union Central Life Ins. Co. v. Coolidge, 357 Mass. 457, 459 (1970).
Reluctance to give full effect to post-employment restraints has a long history in the law. For example, in 1587, a blacksmith was jailed by local justices of the peace when he had the temerity to bring an action on another blacksmith’s (thought to have been an apprentice) bond not to
As to a provision requiring forfeiture of financial benefits, we look first to whether the new employment would be subject to a covenant not to compete. If not, the forfeiture is likewise unenforceable. Should the covenant not to compete, however, be enforceable, the amount and nature of the forfeiture come into play and are subject to modification. Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. at 148.
It is time to turn to the facts found by the trial judge. These we accept unless clearly erroneous. Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974). New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 674 (1977). C.C. & T. Constr. Co. v. Coleman Bros., 8 Mass. App. Ct. 133, 135 (1979). We have added facts which are apparent in the record before us and are not disputed. Kroeger joined Stop & Shop in 1952 as controller and, as we have indicated, he was doing sufficiently well as to annual income in 1961 so that he asked for deferred compensation. Stop & Shop concurred
By 1971, Kroeger was vice president of the “Food Division,” Stop & Shop’s largest component, with responsibility for its profits and losses. As the judge put it, “Kroeger was concerned with all overall company financing, planning, expansion concepts and competition concerns. Kroeger was therefore privy to the operations of the other divisions [of Stop & Shop] .... He participated in all real estate acquisitions and the financial arrangements regarding the same.” That same year, however, there was a falling out between Kroeger and Stop & Shop. A new president had taken the reins. He was younger than Kroeger and had once reported to him. Their personalities were dissimilar, as were their marketing philosophies. Kroeger was asked to go. The golden handcuffs were unlocked; the departing handshake was leaden. Indeed, Stop & Shop by letter sought “confirmation of our understanding that you do not plan to compete . . . within the meaning of your employment agreement; that if you should ... all benefits . . . will be waived and forfeited.” Asked to “indicate” on a copy “that the above summary accurately reflects the benefits . . . and competition agreement,” Kroeger did so by signing a copy of the letter.
Kroeger within six months found employment as vice president-retail foods, of Pneumo Dynamics Corporation (Pneumo), an Ohio company which owned a subsidiary, P & C Supermarkets, Inc. (P & C). In that capacity, he had responsibility for some 300 stores in the P & C net
Had Kroeger remained with Stop & Shop until his retirement, as the deferred compensation agreement contemplated, the provision which restrained him from competing would have been quite reasonable. The agreement provided for the payment of an annuity on a formula basis
After making his subsidiary findings the judge concluded that, although Stop & Shop had a legitimate protectible interest, the restrictive provision was overbroad and required cutting back. As to time, the judge determined that a prohibition from competition of one year was reasonable. As to geographical limitations, the restraint was to be given effect only in the New England States, New Jersey and New
1. Is the restraint greater than necessary to protect legitimate interests of the employer? Those interests of an employer which are entitled to protection are trade secrets, confidential data and good will. New England Canteen Serv., Inc. v. Ashley, 372 Mass. at 674. Wells v. Wells, 9 Mass. App. Ct. 321, 323 (1980). Stop & Shop has conceded that no trade secrets are involved. Good will generally applies to customer relationships. Angier v. Webber, 14 Allen 211, 215 (1867) (good will described as benefit derived from reputation for promptness, fidelity and integrity with customers) . Thus, salesmen or sales managers have the capacity to injure the good will of their former employers. See e.g., New England Tree Expert Co. v. Russell, 306 Mass. 504 (1940); All Stainless, Inc. v. Colby, 364 Mass. at 777; Restatement (Second) of Contracts § 188, Comment g, Illustration 7 (1981). See generally Blake, Employment Agreements Not to Compete, 73 Harv.L.Rev. 625, 653-667 (1960). Given the nature of Kroeger’s duties — financial planning, site acquisitions, merchandising strategy, advertising — it is highly improbable that he meant a thing to Stop & Shop’s customers. To the degree that Stop & Shop had something to restrain, it would have been the disclosure of confidential data to a competitor.
Sources of supply and product lines are in the area of generally available information in the supermarket business. Not widely known, the judge found, are the expansion plans and merchandising strategy of a particular chain and that
Restraints upon the competitive activity of a key executive may range beyond the precise geographical area of activity at the time of the employee’s departure. See Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. at 679. A business enterprise may, after all, have new worlds to conquer. See Wells v. Wells, 9 Mass. App. Ct. 321, 326 (1980), which was, however, decided in a different business context. Compare New England Tree Expert Co. v. Russell, 306 Mass. at 510. Contrast All Stainless, Inc. v. Colby, 364 Mass. at 779-780; Marine Contractors Co. v. Hurley, 365 Mass. 280, 289 (1974); Middlesex Neurological Associates v. Cohen, 3 Mass. App. Ct. 126, 130 (1975). However, Stop & Shop had never operated stores other than in New England, New Jersey and New York and nothing in so much of the record as was reproduced on appeal suggests plans for westerly and southerly expansion. We agree with the judge’s conclusion that the clause in the employment agreement which attempted to keep Kroeger away from a
Similarly the clause isolating Kroeger from a competitor for “so long as he lives” reached well beyond Stop & Shop’s legitimate interests. Consumer trends and the marketing strategies which retailers devise to exploit them are of limited duration, as the judge found, and the confidential information which Kroeger possessed would soon go stale. There was nothing unreasonable in the judge’s cutting the period of restriction to one year. See Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. at 680; Mertz, Recent Developments Concerning Employee Covenants Not to Compete: A Quiet “Corbinization” of Massachusetts Law, 12 New England L. Rev. 647, 688 (1977).
2. Is the restraint unduly harsh or oppressive? Commonly it is a fault of postemployment restraints that they have aspects of a contract of adhesion: the employee, anxious for the job, is ready to mortgage the future and, in any event, is in a poor position to argue about the terms of the employment contract. Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. at 147. But the restrictive clause may be more reasonable in the case of a key employee, id. at 148, and this is such a case. Kroeger was well ensconced in the executive structure of Stop & Shop and, indeed, took the initiative in asking for deferred compensation. It could hardly be said that he was powerless to negotiate the terms of the agreement he entered into in 1961, the amendment to that agreement in 1969, and the written acknowledgment of the restrictions in the agreement when Kroeger departed from Stop & Shop in 1971. There is a temptation to hold Kroeger to the bargain which he so obviously understood. “If I make a promise to you, I should do as I promise; and if I fail to keep my promise, it is fair that I should be made to hand over the equivalent of the promised performance.” Fried,
Possible forfeitures of deferred compensation present a different problem from the usual postemployment restraint cases in that the question is not whether the employee may follow the occupation he knows, but what price in dollars he shall pay for so doing. And shall the employee be made to forfeit money which he has in fact earned? In this regard it is of consequence that Kroeger did not leave Stop & Shop voluntarily.
In the case at bar, the employment agreement contemplated retirement at age sixty-five, unless retirement occurred earlier because of total and permanent disability. Kroeger was forty-eight in 1961 when the agreement was entered into, thus the agreement envisioned seventeen years of service by him. He had worked ten years when Stop & Shop terminated his employment. Kroeger had, therefore, earned ten seventeenths of his retirement benefits.
He, thus, loses $29,235 without Stop & Shop having established specific pecuniary damages by reason of Kroeger’s activity as an employee of Pneumo. It is, however, not necessary to establish the precise monetary damages which flow from the breach of a covenant not to compete; a promise to pay a specific amount as damages, i.e., liquidated damages, will be given effect. Restatement (Second) of Contracts § 356, Comment b, Illustration 2 (1981). Cf. National Hearing Aid Centers, Inc. v. Avers, 2 Mass. App. Ct.
3. The determination of the cost of the annuity. The trial judge in his memorandum of findings and rulings wrote, “If however this court has erred and the plaintiff is entitled to damages measured upon a theory of cost of annuity basis, the damages sustained would be in the amount of seventy-one thousand dollars ($71,000).” We read this as an expression that the court had determined that a cost of annuity basis was an appropriate manner in which to compute damages if any damages were owing at all. From so much of the record as was included in the appendix it does not appear that alternative theories of damages were brought to the judge’s attention.
Stop & Shop also attacks the qualifications of the expert who testified on Kroeger’s behalf concerning the cost of the annuity. The expert was a life insurance salesman. He demonstrated sufficient understanding of the methods by which the cost of an annuity is calculated so that we cannot say that the judge abused the broad discretion which was his “to determine whether an expert witness has a proper basis, in terms of adequate information and preparation, to render an opinion on the matter in dispute.” Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp., 362 Mass. 306, 309 (1972).
4. The consequence of the retirement benefits Kroeger received from Pneumo. Mindful that his deferred compensation from Stop & Shop would very likely be contested, Kroeger negotiated a retirement allowance with his new employer, Pneumo, of $15,000 per year for his life and for the life of his wife, should she survive him. Those benefits were to be reduced by an amount equal to any benefits he received under his deferred compensation agreement from Stop & Shop. The trial judge concluded that, in consequence, Kroeger had suffered no damage and that “the first employer should not be forced to pay for the real benefit of the second employer.” In this respect the judge was in error. Kroeger in effect made an assignment of whatever he might recover from Stop & Shop in return for the benefits Pneumo agreed to grant to him. We know no reason why he could not do so and none has been called to attention.
The judgment is reversed and a new judgment shall be entered in accordance with this opinion.
So ordered.
More specifically, the deferred compensation agreement provided that following termination of the Period of Active Employment (a defined term), Kroeger, for so long as he lived, was not to have an interest in excess of $100,000 in a competing business and would not serve a competing business as an officer, director, partner, trustee, proprietor, or employee. “Competing business” was defined as a business located east of the Mississippi except for Florida, Georgia, Alabama, Mississippi and Louisiana
The Cheney opinion may be viewed as consistent with the diminished potency of classic ideas of contract, a subject discussed in Gilmore, The Death of Contract (1974). Compare Fried, Contract as Promise (1981).
The unfortunate suitor was released by the Court of Common Pleas, but that court decided that the bond was “void, because it was against the law.” Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. at 635.
These 300 stores included: company owned supermarkets; Big “M” stores, which were run on a franchise basis; and independent stores.
If he retired at age 65, Kroeger would receive $9,240 per year; if he retired earlier, the annual payment would be less. If he should die before age 65 or during the payout period, death benefits would be paid to designated beneficiaries.
Several decades ago that view was the unquestioned working assumption. See Becker College of Business Admn. & Secretarial Science v. Gross, 281 Mass. 355, 356 (1933), which began: “The defendant, a man of full age, married and a father, contends that he is not bound by his agreement under seal . . . .”
“[Procedural niceties aside,” the judge found, “the termination was at the election of Stop & Shop.”
The Wrentham Co. case involved an agreement to sever the relationship because “[differences between Cann [the employee] and the management developed.” That is a rational and fair reason to end a private employment relationship (assuming nothing to the contrary in an employment agreement or a governing collective bargaining agreement) even though the employee has performed faithfully and is not “at fault.” Similarly, in the instant case, the personality and policy differences between Kroeger and Stop & Shop take his discharge out of the category of an arbitrary one.
Although it does not appear that Kroeger*s base compensation was reduced by any specific amount to adjust for the deferred compensation, the latter was a component in his entire compensation package and in that sense the retirement benefits were more than a gratuity. Cf. Rochester Corp. v. Rochester, 450 F.2d 118, 120-121 (4th Cir. 1971). From section II of the agreement between Kroeger and Stop & Shop it may be inferred
Indeed the written agreement between Kroeger and Stop & Shop contemplated “A retirement allowance for Employee, with vested rights thereto.”
Both parties have repeatedly referred in their briefs to exhibits and portions of transcript which were not included in the appendix. We need not look at parts of a record which have not been reproduced in an appendix. Kunen v. First Agricultural Natl. Bank, 6 Mass. App. Ct. 684, 689 (1978).
Dissenting Opinion
(dissenting). I cannot agree that Kroeger must forfeit over $29,000 because he worked for no more
1. This record does not show that Kroeger, during these last five or six months in 1971, was “working in circumstances in which a covenant not to compete would be enforceable . . . [and in these circumstances] the burden of justification . . . becomes particularly onerous on the former employer. In such a case, the former employee’s loss may assume the character of a forfeiture in the classical sense.” Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. 141, 148 (1979). It is significant that the plaintiff in Cheney (at 149) is given an opportunity to show “that the forfeiture is an unenforceable penalty clause . . . supported by a reference to facts which warrant the legal consequences asserted.”
Cheney (at 146), cites Food Fair Stores, Inc. v. Greeley, 264 Md. 105, 116-119 (1972), for the proposition that “for
These cases, consistent with Cheney, hold that the reasonableness required is some reasonable relationship between the forfeiture provision and the damages sustained. Here there is none.
2. I find nothing in the findings to indicate that “confidential data” are involved. The general findings describe no more than the duties of a high level executive in the chain
Reed, Roberts Associates v. Strauman, 40 N.Y.2d 303, 309 (1976) (although not using the phraseology of our cases) is an apt summary of our case. “Apparently, the employer
*327 “In a case such as ours, information which is so ‘closely tied to the intrinsic knowledge of the inventor . . . [that it is not] possible to sort the process from the inner workings of a man’s knowledge’ is not protectible. Amoco Prod. Co. v. Lindley, 609 P.2d [733, 745 (Okla. 1980) ]. We do not require an employee ‘upon terminating his employment [to] search his mind for all thoughts relating to the business of his employer and set these down for the employer’s reference ... [so that] thereafter, he is forever precluded from employing such thoughts in a competitive enterprise.’ Koehring Co. v. E.D. Etnyre & Co., 254 F. Supp. [334, 355 (N.D. Ill. 1966)]. To do this would be to give insufficient weight to the employee’s right to use ‘the product of his knowledge acquired previous to [his] employment, and of the use of his faculties, skill and experience in the ordinary course of his employment . . . .’ New Method Die & Cut-Out Co. v. Milton Bradley Co., 289 Mass. at 282-283.”
I agree with the result reached in part 3 of the majority opinion and with part 4 of the opinion; I would therefore award Kroeger the entire $71,000 in retirement benefits.
The noncompetition agreement was cut to one year from “so long as [Kroeger] lives.” The court found that “about six months later the plaintiff secured employment with Pneumo . . . . As of June 1,1971, the plaintiff became Vice President-Retail Foods [for Pneumo].” The letter dated August 16,1971, at the end of the appellant’s brief, indicates that the employment may not have started before July 23, 1971.
In just what States the Ohio company was operating in 1971 is not clear. The court found in 1980 that “the outlets are in New York, New Hampshire, Vermont and Massachusetts.” (Emphasis supplied.)
“To the extent Clarke’s less than 1 % of professional psychological services (i.e. for feedbacks and assessments) fit the literal language of the contract, we decline to enforce the 15% clause because of the obvious lack of correspondence between any proven damage to Nordli and the liquidated sum.” Wilson v. Clarke, 470 F.2d at 1224 n.4.
“Although particular business data of a company are in one sense unique to the company and are typically not widely publicized, it is submitted that information representing the normal accretion of day-to-day routines, as contrasted with the valuable product of special creative endeavors, should seldom, of itself, be sufficient to support an employee restraint.” Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. at 673.
We note that no distinction is here made between confidential information and trade secrets. See Chomerics, Inc. v. Ehrreich, 12 Mass. App. Ct. 1, 10 n.17 (1981).
In Chomerics, Inc. v. Ehrreich, 9 Mass. App. Ct. at 9 n.16, we said:
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