Philip G. Johnson & Co. v. Salmen - 211 Neb. 123, 317 N.W.2d 900 (1982)

Rule:

Over the years the court has developed a balancing test and has held that contracts in restraint of trade, if reasonable, are enforceable. The considerations to be balanced are the degree of inequality in bargaining power; the risk of the covenantee losing customers; the extent of respective participation by the parties in securing and retaining customers; the good faith of the covenantee; the existence of sources or general knowledge pertaining to the identity of customers; the nature and extent of the business position held by the covenantor; the covenantor's training, health, education, and needs of his family; the current conditions of employment; the necessity of the covenantor changing his calling or residence; and the correspondence of the restraint with the need for protecting the legitimate interests of the covenantee.

Facts:

Prior to becoming associated with Johnson, which engages in the practice of accounting, Salmen had practiced that profession in Grand Island as a sole practitioner for approximately a year. In the summer of 1969 Salmen merged his Grand Island practice with that of Johnson and moved to Hastings. A long period of negotiations ensued during which a number of proposals were made by Salmen and acceded to by Johnson. A partnership agreement between Johnson and Salmen was signed, effective July 1, 1975, which contains a restrictive covenant. In essence, it provided that in the event that a partner withdraws from the partnership or retired, said partner would not “take any action which may disturb the existing business relations between the firm or its successors, if any, and any of its client” or directly or indirectly solicit or accept any professional engagements, perform services as an employee, partner, or associate, or take a position as an employee or paid officer or advisor of the partnership’s clients or former clients without authorization from the partnership within three years. Should this be breached, the partner shall pay an ‘acquisition cost’ to the partnership. Salmen withdrew from the partnership effective December 31, 1976. Following that departure he accepted professional employment from clients who were previously served by Johnson. Thus, Philip G. Johnson & Co. (Johnson), brought an action for an accounting and to recover damages. The trial court refused to enforce the restrictive covenant, but also denied Salmen’s recovery of a share of the proceeds resulting from the sale of certain partnership assets that he helped effectuate.

Issue:

Is the restrictive covenant a valid contract?

Answer:

No.

Conclusion:

The covenant in question undertook to prohibit Salmen from earning fees from clients or former clients of the partnership, or from such clients' officers and agents, no matter where they may be. Whatever interest Johnson may have in its present clients, it certainly can have none in its former clients; in any event, the forfeiture of fees was not limited to those generated from serving Johnson clients in Hastings, where Salmen rendered his personal services. It may well be that the nature of the accounting practice was such that a partner may serve clients in cities other than where he offices. That fact, however, did not meet the objection that the restriction includes services to former Johnson clients and clients which Salmen had not served and did not know. On that ground alone, the covenant is impermissibly broad and is therefore unreasonable and unenforceable.