Unpublished Disposition, 921 F.2d 279 (9th Cir. 1989)

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U.S. Court of Appeals for the Ninth Circuit - 921 F.2d 279 (9th Cir. 1989)

BERWIND CORPORATION, a Pennsylvania corporation, Plaintiff-Appelleev.Edward R. FYFE, an individual, Fyfe Associates, Inc., aCalifornia corporation Defendants-Appellants

No. 89-55880.

United States Court of Appeals, Ninth Circuit.

Submitted and Argued Oct. 4, 1990.Decided Dec. 12, 1990.

Before PREGERSON, REINHARDT and CYNTHIA HOLCOMB HALL, Circuit Judges.


MEMORANDUM* 

STATEMENT OF THE CASE

In January 1985, appellant Edward R. Fyfe ("Fyfe") entered into a purchase/sale agreement with appellee Berwind Corporation ("Berwind") by which Fyfe sold his two companies, Elastometal, Ltd. and Elastometal, Inc. ("Elastometal") to Berwind. The sale price was approximately $1 million. As part of the overall purchase, Fyfe also signed a five-year consulting agreement worth approximately $100,000 per year. This agreement contained a covenant not to compete, clause 7, which extended through 1992 and applied to "any business or activity which is the same as or is or may be competitive with the Business as carried on by [Berwind] at the date hereof ..."1  The consulting agreement also contained a patents clause, clause 3, which stated that Fyfe assigned all current patents to Berwind as well as any inventions he made during the course of his employment.

As of the purchase date, both Berwind and Elastometal had developed, manufactured, marketed and sold various bearings and limit stop devices, many of which had seismic applications. Berwind and Elastometal were also developing and attempting to market base-isolation systems.2  Sometime in 1985, Fyfe developed the "Aseismos Control System", a base-isolation system designed to protect structures from earthquakes. Fyfe informed Berwind of his invention pursuant to clause 3 of the consulting agreement. Berwind later informed Fyfe that it would not pursue a patent for his invention because "the concept lacks novelty and is obvious to one skilled in the art." Berwind also informed Fyfe that it was "returning the draft application and patent attorney correspondence in the event you intend to pursue this on your own."3 

After receiving this letter, Fyfe developed and later marketed his invention. In January 1988, Fyfe was contacted regarding using his system in a 911 Emergency Center and subsequenty entered into a contract for its use. In April 1988, Berwind discovered that Fyfe was marketing the invention and demanded that he stop. When Fyfe refused, Berwind ceased making payments to him under the consulting agreement. Berwind then filed this lawsuit seeking injunctive relief and damages.

After a four-day bench trial, the district court entered a final ruling on June 14, 1989. The district court, determining that Fyfe had breached the consulting agreement, entered an injunction precluding Fyfe from competing with Berwind on a world-wide level until 1992. The district court also awarded Berwind a percentage of Fyfe's gross income, both present and future, on the 911 Emergency Center contract. Finally, the district court ordered Berwind to rehire Fyfe pursuant to the consulting agreement but did not require Berwind to make any back-payments for the period Fyfe was competing with Berwind.

Fyfe appeals from the district court's determinations, arguing that his product did not compete with any of Berwind's, that the covenant not to compete is unenforceable and/or illegal, that Berwind released him from his obligations under the covenant, that the district court improperly entered an injunction against him, and that the district court improperly ruled against his counterclaim for back-payments. The district court possessed diversity jurisdiction under 28 U.S.C. § 1332. We have jurisdiction over the appeal pursuant to 28 U.S.C. § 1292(a) (1). We affirm.

STANDARD OF REVIEW

The district court made findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). We review findings of fact under the clearly erroneous standard. United States v. Silverman, 861 F.2d 571, 575-76 (9th Cir. 1988). Where the consideration of legal concepts meshes with an essentially factual inquiry, we also review the district court's findings under the clearly erroneous standard. United States v. McConney, 728 F.2d 1195, 1202 (9th Cir.) (en banc), cert. denied, 469 U.S. 824 (1984). To find clear error, we must be "left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985) (citation omitted).

DISCUSSION

Appellant's first--and potentially dispositive--argument is that the Aseismos Control System, an earthquake protection system, is not in competition with any Berwind product since Berwind only manufactures bearings which are used to compensate for changing thermal conditions. Therefore, Fyfe reasons, even if the covenant not to compete is enforceable and Fyfe was not released, he still did not violate its terms. We reject this argument because there was ample evidence to support the district court's finding that Fyfe, in fact, was competing with Berwind. In particular, the district court determined that Fyfe's invention was based on the same types of bearings that Berwind produced, and that Berwind was also developing an earthquake protection system at the time of the purchase/sale agreement. These determinations indicate that appellant's invention was, at the least, a "related product" under the consulting agreement. The evidence to the contrary is insufficient to warrant a conclusion that the district court's findings on this issue were clearly erroneous.

Fyfe's next argument is that even if his invention was in competition with Berwind, he was released from the contract by the June 17, 1986 letter from Berwind's president.4  Berwind counters that this letter only entitled Fyfe to pursue a patent application--not to violate the terms of the covenant not to compete. The district court accepted Berwind's position, finding that the June 17, 1986 letter did not constitute a valid release, that Berwind did not intend to release Fyfe, and that Fyfe's own actions indicated that he knew he was not being released.5  While the letter may be ambiguous, we do not find the district court's construction to constitute reversible error.6 

Fyfe next contends that even if he was not released, Berwind is equitably estopped from suing him. The district court, however, found that Berwind did not release Fyfe and that Fyfe knew his Aseismos-Control System competed with Berwind. These findings were not clearly erroneous and show that (1) Berwind never intended Fyfe to rely on its statements and (2) any reliance Fyfe did possess was unreasonable.7  Thus, Berwind was not equitably estopped.

Appellant also asserts that the covenant not to compete is unconscionable and therefore unenforceable. We, like the district court, find this argument to be without merit: the covenant not to compete is, if anything, typical of those enforced under both California and Pennsylvania law. See Monogram Industries Inc., v. SAR Industries, 64 Cal. App. 3d 692, 134 Cal. Rptr. 714 (1977) (upholding similar covenant not to compete on a nationwide level); Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 628, 136 A.2d 838 (1957) (same). We likewise reject appellant's argument that the covenant not to compete violates public policy. Id.

Appellant's final unenforceability argument, namely that the covenant not to compete violates the antitrust laws and is therefore illegal, is similarly unpersuasive. The district court's conclusions that the covenant not to compete was ancillary to the main business purpose of the larger purchase/sale agreement and that it was necessary to protect Berwind's legitimate property interests were not clearly erroneous.8  Accordingly, the district court was correct in determining that the covenant did not violate the antitrust laws.

Appellant's remaining claims are without merit and may be summarily addressed. The district court's issuance of an injunction was not improper since covenants not to compete are "prima facie enforceable in equity." Records Ctr. v. Comprehensive Management, 525 A.2d 433, 435 (Pa.Super.1987); Robert Clifton Assoc., Inc. v. O'Connor, 487 A.2d 947, 951 (Pa.Super.1985). We also conclude that the district court findings underlying the time and territory provisions of the injunction were not clearly erroneous. See Alabama Binder & Chemical Corp. v. Pennsylvania Industrial Chemical Corp., 410 Pa. 214, 189 A.2d 180, 183 (1963); Prame v. Ferrell, 166 F. 702 (6th Cir.), cert denied, 215 U.S. 605 (1909) (cited in Plunkett Chemical v. Reeve, 373 Pa. 513, 95 A.2d 925 (1953)). Finally, in light of its other findings, the district court's ruling that Fyfe was not entitled to compensation during the period he competed with Berwind was also correct. See SHV Coal, Inc. v. Continental Grain Co., 545 A.2d 917, 920 (Pa.Super.1988) (employee owes duty of loyalty to employer); Onorato v. Wissahickon Park, Inc., 430 Pa. 416, 422, 244 A.2d 22, 25 (1968) (" [n]o man can serve two masters").

AFFIRMED.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

 1

The "Business" was defined elsewhere in the consulting agreement as "developing, manufacturing and selling bearing and expansion joints and related products."

 2

Base isolation systems use various types of bearings between the structure and the ground which isolate the structure from the effects of seismic activity

 3

There was a critical credibility dispute over whether or not a high-ranking Berwind executive also told Fyfe that he was free to pursue development of his product and should consider using Berwind as a supplier. The district court apparently believed the Berwind executive who denied making these statements. We cannot conclude on the record before us that the district court's determination was clearly erroneous

 4

The June 17, 1986 letter reads as follows:

Confirming our telephone conversation yesterday afternoon, we are not interested in your U.S. Patent Application for a device entitled "Apparatus for Limiting the Effect of Vibrations Between a Structure and Its Foundation." We feel that the concept lacks novelty and is obvious to one skilled in the art. We are concerned that while a patent might issue, it would be hard to defend validity [sic] and it would probably be relatively easy to circumvent.

I am returning the draft application and patent attorney correspondance in the event you intend to pursue this on your own.

 5

Pursuant to Paragraph 14 of the Consulting Agreement, the district court properly determined that Pennsylvania law applied to all claims related to the purchase/sale agreement. California law governs only in those situations in which application of Pennsylvania law would violate a California statute or public policy. Gamer v. duPont Glore Forgan, 65 Cal. App. 3d 280, 286, 135 Cal. Rptr. 230 (1976). No such circumstances were present in this case

 6

Significantly, those releases which have been upheld by Pennsylvania courts have consistently stated "release" on their face. See, e.g., In re Estate of Bodnar, 372 A.2d 746, 748 (Pa.1976) ("FOR AND IN CONSIDERATION of the sum of TWELVE THOUSAND NINE HUNDRED ($12,900.00) DOLLARS in hand paid by REICHER BUILDING COMPANY, INC., the receipt of which is hereby acknowledged, we, being of lawful age, hereby fully and forever release, acquit and discharge...."); Brosius v. Lewisburg Craft Fair, 557 A.2d 27, 28 (Pa.Super.1989) (release covering "any and all other persons, firms, corporations, associations, both known and unknown, whether herein named or referred to or not"); Smith v. Commonwealth Nat. Bank, 557 A.2d 775, 776 (Pa.Super.1989) ("in full satisfaction and payment of monies due us upon termination of the escrow account" while releasing defendant "from every claim which we may have in connection with said account"); Erie Telecommunications, Inc. v. City of Erie, Pa., 853 F.2d 1084 (3rd Cir. 1988) (applying Pennsylvania law) ("release, remise, quitclaim, and forever discharge")

 7

The elements of equitable estoppel are (1) knowledge and intent by the party to be estopped that the alleged conduct be relied upon; (2) actual reliance on that conduct; and (3) that such reliance be justified. Northcraft v. Edward C. Michener Assoc., 466 A.2d 620, 626 (Pa.Super.1983). Fyfe has failed to meet these requirements

 8

Covenants not to compete are valid under the Sherman Act if: (1) ancillary to the main business purpose of a lawful contract, and (2) necessary to protect the covenantee's legitimate property interests. Los Angeles Memorial Coliseum Com'n v. N.F.L., 726 F.2d 1381, 1395 (9th Cir. 1981), cert. denied, 469 U.S. 990 (1984); Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 265 (7th Cir. 1981), cert. denied, 455 U.S. 921 (1982)