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(lowa, -, 169 N. W. 670.)
480, 72 N. W. 157; Haugen v. Sundseth, 106 Minn. 129, 118 N. W. 666, 16 Ann. Cas. 259; Webster v. Buss, 61 N. H. 40, 60 Am. Rep. 317; American Ice Co. v. Meckel, 109 App. Div. 93, 95 N. Y. Supp. 1060; Palmer v. Toms, 96 Wis. 367, 71 N. W. 654.
Sporadic instances are not wanting in which a contrary view is announced or suggested, but they are not generally recognized as authoritative precedents. The one most directly in point to that effect is Hillman v. Shannahan, 4 Or. 163, 18 Am. Rep. 281. It is there held that the contract, having made no reference to "the heirs and assigns" of the purchaser, must be construed as personal only, and not enforceable in the hands of his assignee. The reasoning employed is by no means persuasive, and the citation of authorities wholly omits reference to or consideration of the numerous precedents to the contrary. The presence or absence of express mention of the words "heirs and assigns" is discussed in several of the cases first above cited, and in each instance it is held to be immaterial. Indeed, in our own leading case of Hedge v. Lowe, supra, the agreement was with the purchaser by name, without any express mention of heirs or assigns, and it was held to be assignable. This decision has been cited and followed in nearly all the other states when the question has come up for adjudication. In many cases the courts go much beyond what we have had occasion to hold, and say that, even if there is no express transfer of the contract, the good will assigned by the first seller follows the business into the hands of the second purchaser, without any express mention, as an incident to the business,-a rule for which many good reasons may be found. Public Opinion Pub. Co. v. Ransom, 34 S. D. 381, 148 N. W. 842, Ann. Cas. 1917A, 1010; Parnell v. Doan, 31 Ont. Rep. 517; Palmer v. Toms, 96 Wis. 367, 71 N. W. 654; Gompers v. Rochester, 56 Pa. 194; Didlake v. Roden Grocery Co. 160 Ala. 484, 22 L.R.A. (N.S.) 907, 49
So. 384, 18 Ann. Cas. 430; Fairfield v. Lowry, 207 Mass. 352, 93 N. E. 598.
In the Gompers Case the court touches upon a distinction which those who deny the rule in Hedge v. Lowe usually overlook. It is there said that the fallacy of the argument denying the assignability of the contract is in regarding it as merely personal in character, "whereas, it was alone an incident to the property which they had parted with and the business also. It would not have been binding, for want of a consideration, unless as incident to the property." In the Palmer Case, 96 Wis. 367, 71 N. W. 654, the Wisconsin court on the same subject says: "To determine the question, the nature of the contract must be understood. It does not constitute a distinct property right, independent of the business it was designed to protect, any more than the good will itself. The purpose of the contract being to protect the property or business to which it related, it was an incident of, and adherent to, such property and business. It could not otherwise exist."
To construe such contracts as personal only where the design to so narrow or restrict their effect is not clearly expressed is to deprive them of much, if not most, of their value. The seller expects a better price, and the buyer is willing to pay a better price, than the business would command without it. But the business, when once purchased, is worth on the market only what the owner can reasonably hope to sell it for, and if he cannot sell it without destroying its protection against competition by the man who created and built it up, he is quite sure to suffer loss. To hold that the parties to a contract of sale intend such inequitable and absurd results, the language should reveal it so clearly as to place it beyond all reasonable doubt. What the defendant sold in the first instance was not only the physical property, but the established business, together with its
protection for five years against competition by him. It was this property and this business, so protected, which Wright bought and owned, and as such owner had the right to sell, and did sell, to the plaintiffs. Though the protection existed as incident to the property and business, it was nevertheless a property right, which the plaintiffs acquired with the property and business, and as such the courts will recognize it and enjoin its wrongful invasion. The defendant undertook to refrain from competition with the business sold by him for five years, and is presumed to have received a sufficient consideration therefor, and it is but equitable that he be required to perform his agreement in good faith.
In discussion courts sometimes indulge in the loose generality that the law does not favor contracts in restraint of trade, and therefore an agreement by which a party undertakes not to enter a specific business in a specified city or town. will be strictly construed. What the
law does disfavor are contracts which unreasonably restrict the individual in his liberty of occupation and employment. But there is no public policy or rule of law which condemns or holds in disfavor a fair and reasonable agreement of this character, and such a contract is entitled to the same reasonable construction and the same effective enforcement that are accorded to business obligations in general. For an illuminating discussion of this subject, see Diamond Match Co. v. Roeber, 106 N. Y. 473, 60 Am. Rep. 464, 13 N. E. 419.
In our opinion, the plaintiff's petition stated a good cause of action, and the demurrer thereto should have been overruled. The ruling and judgment below are therefore reversed, and the cause remanded, with instructions to the trial court to overrule the demurrer, and for further proceedings not inconsistent with the views hereinbefore expressed.
Preston, Ch. J., and Gaynor and Stevens, JJ., concur.
Enforceability by the purchaser of a business, of a covenant of a third person with his vendor not to engage in a similar business.
I. General rule, 1078.
II. Necessity that covenant run to purchaser and assigns, 1080.
III. Necessity that covenant be expressly assigned, 1080.
IV. Transfer to a corporation, 1081.
1. General rule.
The rule is well settled that a covenant reasonable as to territory and time, entered into by the seller of a business, not to engage in a similar business, is valid and enforceable. The question here raised is as to whether or not such a covenant is assignable with a subsequent sale of the business, or passes to a subsequent purchaser of the business, even if not expressly assigned. On this question the cases are generally in harmony in holding that such a covenant is assignable with a
VI. Where sale of property and business not contemporaneous, 1084.
VII. As affeced by limitations in scope of covenant, 1084. VIII. Effect of retransfer of covenant to original covenantee or covenantor, 1085.
subsequent sale of the business by the original purchaser, and that it will pass to the subsequent purchaser as an incident of such sale.
Alabama.-Knowles v. Jones (1913) 182 Ala. 187, 62 So. 514.
California.-California Steam Nav. Co. v. Wright (1856) 6 Cal. 258, 65 Am. Dec. 511.
Illinois. Bauwens v. Goethals (1914) 187 Ill. App. 563. Indiana.-Beard v. Dennis (1855) 6 Ind. 200, 63 Am. Dec. 380. Iowa.-Hedge v. Lowe (1877) 47) Iowa, 137.
Michigan.-Up River Ice Co. v. Denler (1897) 114 Mich. 296, 68 Am. St. Rep. 480, 72 N. W. 157.
Minnesota.-Haugen Sundseth (1908) 106 Minn. 129, 118 N. W. 666, 16 Ann. Cas. 259.
Mississippi.-Klein v. Luck (1895) 73 Miss. 133, 18 So. 891.
V. Brinkley (1911) 88 Neb. 356, 129 N. W. 553. New Hampshire.-Webster v. Buss (1881) 61 N. H. 40, 60 Am. Rep. 317. New Jersey.-Fleckenstein Bros. Co. v. Fleckenstein (1903) — N. J. 53 Atl. 1043, decree settled in (1904) 66 N. J. Eq. 252, 57 Atl. 1025.
New York.-Diamond Match Co. v. Roeber (1887) 106 N. Y. 473, 60 Am. Rep. 464, 13 N. E. 419; Francisco v. Smith (1894) 143 N. Y. 488, 38 N. E. 980; Greite v. Henricks (1893) 71 Hun, 7, 24 N. Y. Supp. 545; A. Booth & Co. v. Seibold (1902) 37 Misc. 101, 74 N. Y. Supp. 776; American Ice Co. v. Meckel (1905) 109 App. Div. 93, 95 N. Y. Supp. 1060.
(1857) 4 Jur. N. S. 1011; Jacoby v. Whitmore (1883) 49 L. T. N. S. 335, 32 Week. Rep. 18; Showell v. Winkup (1889) 60 L. T. N. S. 389; Smith v. Hawthorne (1897) 76 L. T. N. S. 716; Welsted v. Hadley (1904) 21 Times L. R. 165.
Canada.-Parnell v. Dean (1900) 31 Ont. Rep. 517; Berry v. Days (1903) 23 Can. L. T. Occ. N. 221, 5 Ont. L. Rep. 629.
The general rule is also recognized in Palmer v. Toms (1897) 96 Wis. 367, 71 N. W. 654, which holds that after the purchaser of the business had disposed of it to another he was no longer interested in the enforcement of a covenant of this character entered into by his vendor, and hence could not enforce it. The court remarked that such a covenant passed as an incident of the business to the subsequent purchasers.
In Haugen v. Sundseth (Minn.) supra, the court said that "the good will of a business is the favor won from the public and the probability that old customers will continue their patronage. It is an advantage and benefit that is acquired by business
establishments beyond the value of the money or property invested therein, and is property in the legal sense of the term, and subject to sale and transfer in conjunction with a sale of the business, precisely as other personalty."
But in Anderson V. Faulconer (1855) 30 Miss. 145, it is held that a covenant by the seller of a newspaper plant not to set up a newspaper in opposition to the purchasers is not broken by the act of the seller in subsequently setting up a newspaper plant after the personal representative of the covenantee had sold the original plant.
In Barber Asphalt Paving Co. v. Brand (1889) 55 Hun, 606, 7 N. Y. Supp. 744, a contract was held assignable where it was based upon a good consideration, and by its terms one of the parties thereto covenanted not to sell asphalt except to certain persons in specified cities. The violation of this covenant was restrained in behalf of the subsequent assignee of the covenantee.
In Baines v. Geary (1887) L. R. 35 Ch. Div. (Eng.) 154, 56 L. J. Ch. N. S. 935, 56 L. T. N. S. 567, 36 Week. Rep. 98, 51 J. P. 628, a covenant by an employee of a milk carrier not to serve or interfere with the customers of his employer after the termination of his employment was held to be assignable and enforceable by the subsequent purchaser of the business from the original employer. To the same effect is Benwell v. Inns (1857) 24 Beav. 306, 53 Eng. Reprint, 376; Showell v. Winkup (1889) 60 L. T. N. S. (Eng.) 389.
But in Berlitz School of Languages v. Duchene (1904; Sc. Ct. Sess.) 6 F. 181, it is held that a covenant by the teacher of a school not to teach in competition with the schools of his employer within two years after leaving his employment is not subject to assignment to a purchaser of the schools.
In Pemberton v. Vaughan (1847) 10 Q. B. 87, 116 Eng. Reprint, 35, in considering the validity of an agreement by the seller of a business not to engage in a competing business within a given territory, unlimited as to time,
Lord Denman, Ch. J., said that "an agreement in restraint of trade is illegal because it is for life. It does not follow that the plaintiff will not require the protection of the agreement because he may not himself continue the business. He may sell the business and sell it on better terms on account of the protection secured to it by such an agreement."
II. Necessity that covenant run to purchaser and assigns.
While in a few of the foregoing cases, notably California Steam Nav. Co. v. Wright (1856) 6 Cal. 258, 65 Am. Dec. 511 and Diamond Match Co. v. Roeber (1887) 106 N. Y. 473, 60 Am. Rep. 464, 13 N. E. 419, the covenant ran to the purchaser and his assigns, in a majority of the cases, however, it did not, and it was nevertheless enforced in behalf of the subsequent purchaser, although the point was apparently not raised or discussed. In a few of the cases where the point was expressly raised, it was held that it was immaterial whether or not the covenant ran to the purchaser alone or to the purchaser and his assigns.
This is the holding in Webster v. Buss (1881) 61 N. H. 40, 60 Am. Rep. 317, wherein the court said that the agreement to relinquish the business formed a material part of the purchase, and constituted in part the inducement for such purchase, and entered into the value of the property purchased. Hence there was no reason why the purchaser should not avail himself of the agreement in effecting a subsequent sale of the busi
in the abstract, but whether it may be transferred with the business to which the original pertained.
Upon this question in Haugen v. Sunseth (1908) 106 Minn. 129, 118 N. W. 666, 16 Ann. Cas. 259, the court said that the fact that the contract did not run to the purchasers and their successors and assigns did not affect the question of its subsequent transfer in the least; that "while perhaps the use of those words or their equivalent may in instances be essential to confer the right of alienation in the grantee, their use is wholly unnecessary in a case like that at bar. But specific property or substantial property rights which survive to an executor or administrator-in which classification good will, trademarks, and tradenames must be included-may be transferred from person to person where an indefeasible title passes from the original owner without reference to the language of the different transfers."
In Hedge v. Lowe (1877) 47 Iowa, 137, the court said if the agreement not to engage in a competing business was of sufficient value to constitute in part an inducement to purchase the business, it must be admitted that it might be equally of value to the purchaser upon subsequently selling the business, and no good reason could be given why the original purchaser should not avail himself of this agreement as a means of effecting a subsequent sale. And it is pointed out that the question is not whether such a covenant may be subject of a transfer
III. Necessity that covenant be expressly assigned.
In a majority of the foregoing cases, the original covenant was not expressly assigned to the subsequent purchaser of the business. Apparently such an assignment is unnecessary, the theory being that the covenant passes as an incident of the sale of the business. In the following cases, however, the instrument of sale contained an express assignment of the covenant: Klein v. Lusk (1895) 73 Miss. 133, 18 So. 891; Hickey v. Brinkley (1911) 88 Neb. 356, 129 N. W. 553; American Ice Co. v. Meckel (1905) 109 App. Div. 93, 95 N. Y. Supp. 1060. None of these cases, however, hold that an express assignment was essential.
In American Ice Co. v. Meckel (N. Y.) supra, a covenant incident to the sale of a business and the good will thereof, and running to the covenantee, his heirs and assigns, is held enforceable by a subsequent purchaser of the business, although the covenant was not expressly assigned to him, the court holding in this regard that the covenant passed as an incident to
the sale of the business and the good will.
In Greite v. Henricks (1893) 71 Hun, 7, 24 N. Y. Supp. 545, a covenant incorporated in the bill of sale of premises used for a hotel and saloon, by which the seller agreed not to engage in a similar business within a designated distance from this hotel, was held to pass to a subsequent purchaser of the business, it being incorporated in the later bill of sale by a provision thereof that the same was subject to all the terms, conditions, and covenants of the previous bill of sale, which was declared to form a part and parcel of the present bill.
In Jacoby v. Whitmore (1883) 49 L. T. N. S. (Eng.) 335, it was held that the benefit of a covenant of this character passed to the purchaser of the business, and the good will to which the covenant related, although the covenant was not expressly mentioned. Upon this point, Cotton, L. J., said: When the agreement was entered into, Whitmore was to become an assistant in the shop, and the object was to prevent the customers being at some future time carried off elsewhere by the assistant when he should leave the service of his employer, and such a covenant was, I think, part of the good will of the business, and certainly part of the beneficial interest of Cheek in the business. Therefore, in my opinion, this covenant was assignable, and was in fact assigned.
IV. Transfer to a corporation.
It has been held that the good will and the covenant by the seller of a business not to engage in a competing business pass to a corporation organized by the purchaser of the business for the purpose of operating the business and to which the business is transferred, hence, the covenant may be enforced by the corporation.
Knowles v. Jones (1913) 182 Ala. 187, 62 So. 514; Bradford v. Montgomery Furniture Co. (1906) 115 Tenn. 610, 9 L.R.A. (N.S.) 979, 92 S. W. 1104.
In Ragsdale v. Nagle (1895) 106 Cal. 332, 39 Pac. 628, it is held that the fact that a covenantee in a covenant of this character organized a cor
poration to secure funds to carry on the business, and that he turned over to the corporation the property purchased, did not show that he was not engaged in the business so as to relieve the covenantor from the obligation of the covenant. In this case the covenantee was the manager of the business of the corporation.
In Up River Ice Co. v. Denler (1897) 114 Mich. 296, 68 Am. St. Rep. 480, 72 N. W. 157, an agreement collateral to the sale of stock in a corporation, that the seller will not engage in the same business in which the corporation was engaged, and which was assigned to the corporation, was held enforceable in its behalf. To the same effect, see Jacoby v. Whitmore (Eng.) supra.
Upon this point, in Bradford v. Montgomery Furniture Co. (Tenn.) supra, the court said: "We think, to hold that the defendants lost the benefit of their contract by virtue of the vestiture of the title of their business in an artificial person, in order, as they thought, to carry it on more advantageously, would be to allow the complainants, while recovering full consideration, to defeat the object of their contract, and do the defendants great injustice. great injustice. Complainants contracted not to engage in the furniture business for the time mentioned, in opposition to the defendants. The agreement was absolute and without qualification. The change made by the defendants in the manner of conducting their business in no way affected complainants. It did not in any way increase or lessen the obligation and burdens of their contract; and we cannot see upon what principle, consistent with reason and justice, it should release them from its performance. The good will which defendants had purchased from complainants, and the contract they had made with them for its protection, were property rights, valuable and assignable, and were not affected by the changes made by the defendants in the manner in which they conducted their business. The contract remained in full force and effect until it expired by its own limitations."