Smith v. Burkitt

Case Date: 08/05/2003
Court: 5th District Appellate
Docket No: 5-02-0630 Rel

                 NOTICE
Decision filed 08/05/03.  The text of this decision may be changed or corrected prior to the filing of a Petition for Rehearing or the disposition of the same.

NO. 5-02-0630

IN THE

APPELLATE COURT OF ILLINOIS

FIFTH DISTRICT


BILLY SMITH and BRENDA SMITH, 

          Plaintiffs-Appellants,

v.

FRED BURKITT and DOROTHY BURKITT,

          Defendants-Appellees.

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Appeal from the
Circuit Court of
Franklin County.

No. 01-L-114

Honorable
Joe Harrison,
Judge, presiding.


JUSTICE WELCH delivered the opinion of the court:

The plaintiffs, Billy Smith and Brenda Smith, appeal from an order by the circuitcourt of Franklin County dismissing their complaint filed against the defendants, Fred Burkittand Dorothy Burkitt. The plaintiffs alleged in their complaint that they had purchased abusiness from the defendants and that the purchasing agreement contained a covenant not tocompete that prohibited the defendants from engaging in a business that competed with thepurchased business. The plaintiffs further alleged that the defendants had breached thecovenant not to compete by engaging in a business that competed with the businesspurchased by the plaintiffs. In dismissing the plaintiffs' complaint, the circuit court held thatthe agreement between the parties did not include the sale of goodwill but that even if it did,the covenant not to compete was unreasonable and unenforceable. For the reasons thatfollow, we reverse and remand.

On September 16, 1999, the plaintiffs and the defendants entered into a contractentitled, "Agreement for Sale of Business Assets and for Warranty Deed." The agreementnoted that the defendants owned a partnership business "previously doing business" as"Burlap and Lace." The agreement provided for the sale of the following to the plaintiffs:"[A]ll right, title[,] and interest in the assets of said business, plus the buildings and realestate on the terms and conditions herein set forth, all as set out on Exhibit A, Exhibit B[,]and Exhibit C, attached hereto." Exhibit A lists two fixtures. Exhibit B describes the realestate. Exhibit C is a list of inventory that includes several items such as quilts, a doll buggy,wicker tables, several rockers, and beds. Nothing in the agreement provides details about thenature of the business "Burlap and Lace."

The agreement stated a purchase price of $60,000. The amount consisted of $10,000for the fixtures, $22,000 for the two buildings, $2,000 for the land, and $26,000 for theinventory. A clause in the agreement specifically excluded from the sale "all other businessassets not specifically listed herein." The agreement also provided as follows: "[F]rom thedate of this Agreement through and until Closing, *** Seller shall preserve intact its businessorganization and use its best effort to keep available the services of its present officers andkey employees and to preserve the good will of those having business relationships with it." The covenant not to compete (the noncompetition clause) in the agreement provided asfollows:

"Seller covenants and agrees that they [sic] will not, within the geographical limits ofFranklin County, Illinois, engage in any business competitive with Purchaser for aperiod of five (5) years. Directly or indirectly engaging in business of Purchaser orin any competitive business shall include engaging in business as owner, partner[,]or agent[] or as employee of any person, firm[,] or corporation."

On November 16, 2001, the plaintiffs filed a complaint alleging that the defendantshad violated the noncompetition clause by engaging in a business that was competing withthe plaintiffs' business. No details were provided regarding exactly how the businessactivities of the defendants competed with the plaintiffs' business. The complaint simplyprovided that the business purchased from the defendants involved the sale of arts and crafts.

On November 30, 2001, the defendants filed a demand for a bill of particulars seekingprecise details about what business activities the defendants had allegedly engaged in thatwere competing with the plaintiffs' business. On December 21, 2001, the plaintiffs filed ananswer stating that the defendants were manufacturing, advertising, selling, and distributingdolls in Franklin County, Illinois, that are the same line of goods purchased by the plaintiffsfrom the defendants.

On January 29, 2002, the defendants filed a motion to dismiss the plaintiffs'complaint. The defendants claimed that the noncompetition clause in the agreement is "toovague and indefinite to enforce since it is not possible to determine from the contract whichbusiness activities are being restricted." The defendants asked the circuit court for a strictconstruction of the agreement because the agreement had been prepared by the plaintiffs'attorney, "who did not discuss the [noncompetition clause] with the [d]efendants at any timebefore said [a]greement was executed."

On June 14, 2002, following a hearing, a transcript of which is not contained in therecord, the circuit court granted the defendants' motion to dismiss. The circuit court strictlyconstrued the agreement against the plaintiffs and ruled, "The [noncompetition] [c]lause ***is too vague and indefinite to interpret and enforce since it is not possible to determine fromthe [a]greement which business activities are being restricted, and therefore, the[noncompetition] [c]lause is not reasonable and is totally void ***." The circuit court alsoruled that the agreement did not include the sale of any goodwill but that if it had, the circuitcourt would have reached the same conclusion regarding the enforceability of thenoncompetition clause. On August 23, 2002, the circuit court denied the plaintiffs' motionto reconsider.

The only issue raised by the plaintiffs on appeal is "whether the circuit court abusedits discretion in granting the defendants' motion to dismiss." However, within this issue, theplaintiffs present two arguments. First, the plaintiffs contend that the circuit court erred inconcluding that the agreement did not include the sale of goodwill. The plaintiffs argue thatgoodwill was transferred as an incident to the business and that if goodwill was not includedin the sale of the business, then there would not have been a need for a noncompetitionclause. Second, the plaintiffs contend that the circuit court erred in ruling that thenoncompetition clause was unenforceable. The plaintiffs argue that the noncompetitionclause is "reasonable" and that a "nearly identical" noncompetition clause was foundenforceable in Jackson v. Hammer, 274 Ill. App. 3d 59 (1995).

In response, the defendants contend that the circuit court did not err in ruling thatgoodwill was not included in the sale of the business. The defendants argue that theagreement was for the sale of specified assets and real estate and that the agreement did notinclude the sale of a "business." The defendants contend that because the agreement was notfor the sale of a business, there was no goodwill transferred. The defendants point out thata restrictive covenant is designed to protect the purchaser in the enjoyment and possessionof the goodwill of the ongoing business transferred and that because there was no sale of abusiness or goodwill, the noncompetition clause is unreasonable. Second, the defendantscontend that the circuit court did not err in ruling that the noncompetition clause isunenforceable, even if the agreement did involve the sale of goodwill. The defendantscontend that the clause is unreasonable because it is not possible to determine from theclause which business activities are being restricted. The defendants argue that thenoncompetition clause could be construed to mean any type of any conceivable businessactivity and that, therefore, it is unreasonable and unenforceable.

We begin our analysis by first determining the appropriate standard of review. Although the plaintiffs argue that the circuit court "abused its discretion" in granting thedefendants' motion to dismiss, we review a circuit court's decision to grant a motion todismiss under a de novo standard of review. In the instant case, the defendants' motion todismiss cites section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 2000)). However, based on the arguments of the parties and the analysis of the circuit court, itappears that the parties and the trial court analyzed the issues pursuant to subsection (a)(9)of section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 2000)). Section 2-619(a)(9) allows a dismissal when "the claim asserted *** is barred by otheraffirmative matter avoiding the legal effect of or defeating the claim." 735 ILCS5/2-619(a)(9) (West 2000). The term "affirmative matter" as used in section 2-619(a)(9) hasbeen defined as a type of defense that either negates an alleged cause of action completelyor refutes crucial conclusions of law or conclusions of material fact unsupported byallegations of specific fact contained in or inferred from the complaint. Krilich v. AmericanNational Bank & Trust Co. of Chicago, 334 Ill. App. 3d 563, 569 (2002). Accordingly, ourreview is conducted de novo because the circuit court dismissed the complaint pursuant tosection 2-619, and thus, we need not afford deference to the circuit court's reasoning. SeeYoung v. McKiegue, 303 Ill. App. 3d 380, 386 (1999).

We turn now to the dispute over the circuit court's ruling that the agreement did notinclude the sale of goodwill. When a court construes a contract, the principal objective isto give effect to the intent the parties possessed at the time they entered into that agreement.Pennsylvania Life Insurance Co. v. Pavlick, 265 Ill. App. 3d 526, 529 (1994). Theagreement is to be construed as a whole, giving meaning and effect to every provision wherepossible, and "[i]t is presumed the provisions are purposefully inserted and the language isnot employed idly." Coles-Moultrie Electric Cooperative v. City of Sullivan, 304 Ill. App.3d 153, 159 (1999). A court is not to interpret an agreement in a way that would nullify anyof the provisions in the agreement or render them meaningless. Coles-Moultrie ElectricCooperative, 304 Ill. App. 3d at 159.

In the instant case, the circuit court ruled that the agreement did not include the saleof goodwill. We disagree and reject the defendants' argument that because goodwill was notspecifically provided for in the sale and because the contract specifically provided that assetsnot specified were not included in the sale, goodwill was not intended by the parties to beincluded in the sale of the business.

The agreement contains a clause that provides as follows: "Seller shall preserve intactits business organization and use its best effort to keep available the services of its presentofficers and key employees and to preserve the goodwill of those having businessrelationships with it." If goodwill was not contemplated in the sale of the business, then thisprovision is mere surplus and meaningless. In addition, if goodwill was not intended to betransferred, it would render the noncompetition clause mere surplus and meaningless. Wepresume that each provision in a contract was inserted deliberately and for a purpose, andtherefore, we should not afford zero weight to these provisions. See White v. White, 62 Ill.App. 3d 375, 378 (1978).

In addition, even though goodwill was not specifically listed as an asset transferredin the agreement, goodwill is generally transferred as an incident to the sale of a business. A similar issue arose in Weitekamp v. Lane, 250 Ill. App. 3d 1017, 1023-24 (1993), wherethe appellate court held that simply because the agreement did not refer to goodwill did notmean that goodwill was not transferred as an incident to the business. In Weitekamp,Weitekamp claimed that he had purchased a refrigeration repair company, C & L Company,from Lane. The purchasing agreement included a covenant not to compete. Weitekamp fileda motion for a preliminary injunction seeking to stop Lane from engaging in a competitivebusiness. The circuit court heard testimony at a hearing on the motion, where Lane claimedthat he had not sold the business to Weitekamp but that he had merely sold the assets ofC & L Company to Weitekamp.

On appeal, Lane argued that the agreement did not refer to the trade name, goodwill,or customer lists and that it only pertained to the assets from the business that werementioned in the agreement. Weitekamp, 250 Ill. App. 3d at 1024. The appellate courtrejected Lane's argument, noting, "[Lane] provides no authority which indicates [trade name,goodwill, and customer lists] must be listed in an agreement for the trial court or this courtto conclude they[,] too[,] were transferred when the business was transferred." (Emphasisin original.) Weitekamp, 250 Ill. App. 3d at 1024. The court noted that the list of assets tobe sold appeared to be the entire inventory of C & L Company, including necessary tools andequipment to operate a refrigeration repair business, and that it was unlikely Weitekamp paid$50,000 for equipment such as ladders and tools but the money did not include the sale ofthe business.

We find the analysis in Weitekamp applicable to the instant case. Although theagreement in the instant case provided for the sale of "all right, title[,] and interest in theassets of said business, plus the buildings and real estate," and specifically excluded "allother business assets not specifically listed herein," as we have already noted above, thereare provisions in the agreement that reveal that the parties intended to include the sale ofgoodwill and, hence, the sale of a business. In addition, similar to Weitekamp, we note thatthe agreement allocates $26,000 of the purchase price for inventory that includes mostlyquilts, tables, chairs, rockers, and beds. The list of inventory does not contain a costallocated to each item but merely values the inventory as a whole at $26,000. As inWeitekamp, this amount certainly could include more than just those pieces of inventory (i.e.,goodwill).

We therefore reject the circuit court's ruling that the parties did not intend for the saleof a business or the sale of goodwill. Insofar as the circuit court ruled that the agreementbetween the parties did not include the sale of a business or the sale of goodwill, the circuitcourt is reversed.

We now turn to the remaining dispute-whether the noncompetition clause isunreasonable even if the agreement provided for the sale of the business and the sale ofgoodwill. To begin, we note that with the sale of a business, the interest to be protected bythe covenant not to compete is the goodwill that is transferred. Eichmann v. NationalHospital & Health Care Services, Inc., 308 Ill. App. 3d 337, 343 (1999). " 'Goodwill'represents the advantages a business has over competitors due to its name, location, andowner's reputation." Weitekamp, 250 Ill. App. 3d at 1025. A covenant ancillary to the saleof a business ensures the buyer that the former owner will not walk away from the sale withthe company's customers and goodwill, leaving the buyer with an acquisition that turns outto be only chimerical. Hamer Holding Group, Inc. v. Elmore, 202 Ill. App. 3d 994, 1007(1990).

However, courts are to apply scrutiny to restrictive covenants because they impair theavailability of services and interfere with competition. Eichmann, 308 Ill. App. 3d at 342. For this reason, the restraints in a restrictive covenant that is ancillary to the sale of abusiness must be reasonable. Eichmann, 308 Ill. App. 3d at 342. Reasonableness pertainsto the time, geographic area, and scope of the prohibited business activity. Hamer HoldingGroup, Inc., 202 Ill. App. 3d at 1007. However, whether the restraint is reasonable is judgedby the circumstances of the particular case. Weitekamp, 250 Ill. App. 3d at 1028. Thecovenant cannot be greater than necessary to protect the purchaser, oppressive to the seller,or injurious to the interest of the general public. Weitekamp, 250 Ill. App. 3d at 1028;Hamer Holding Group, Inc., 202 Ill. App. 3d at 1009.

In the instant case, the parties do not dispute the reasonableness of the covenant as itpertains to the temporal or geographical restrictions. The only dispute pertains to the scopeof the activity prohibited. As noted earlier, the defendants contend that prohibiting thedefendants from engaging "in any business competitive with" the plaintiffs is "too vague andindefinite to interpret and enforce since it is not possible to determine from the contractwhich business activities are being restricted" and that "this clause can be construed to meanany type of any conceivable business activity there is." The plaintiffs, on the other hand,argue that this covenant is not unreasonable. In the plaintiffs' complaint, they contend thatthey purchased a business from the defendants that dealt in the sale of arts and crafts. Intheir answer to the bill of particulars, the plaintiffs claimed that the defendants wereengaging in the manufacturing, selling, advertising, and distribution of dolls and that suchactivities had been purchased by the plaintiffs. Accordingly, the plaintiffs are arguing thatthe covenant is not as vague as the defendants contend.

In Hamer Holding Group, Inc., the appellate court reviewed a covenant not tocompete, ancillary to the sale of a business, where the seller then became an employee of thebusiness sold. The covenant provided that the seller could not " 'in any manner engage ina business competing with the business of Employer anywhere in the Restricted Area.' " Hamer Holding Group, Inc., 202 Ill. App. 3d at 1009. On appeal, the seller argued that thecovenant was "unduly broad" because it "fail[ed] to describe the nature and scope of thatbusiness." Hamer Holding Group, Inc., 202 Ill. App. 3d at 1009. On review, the appellatecourt noted, "Although the enforceability of a restrictive covenant is a question of law whichdepends on the reasonableness of its terms, such a determination depends on the uniquecircumstances of each case." Hamer Holding Group, Inc., 202 Ill. App. 3d at 1009. Thecourt noted that the circuit court did not reach the issue of the nature and scope of thebusiness in which the seller could not engage and that the resolution of that issue, a factualissue intimately connected to the enforceability of the restraint, rests in the first instance withthe trier of fact. Hamer Holding Group, Inc., 202 Ill. App. 3d at 1009. The appellate courtremanded the matter to the circuit court for determinations of the nature and scope of theplaintiff's business and whether the restraint on the seller's activity in that business was areasonable one. Hamer Holding Group, Inc., 202 Ill. App. 3d at 1010.

In the instant case, the covenant restricts the defendants from engaging in "anybusiness competitive with [the plaintiffs] for a period of five (5) years." Contrary to thedefendants' assertion, we do not believe that this prohibits the defendants from engaging in"any type of any conceivable business activity there is." Based on the plaintiffs' complaint,the business purchased from the defendants pertains to arts and crafts. If that is the case,then the covenant is certainly not unreasonable or too vague. However, because theagreement itself does not reveal the precise nature of the business purchased by the plaintiffsand what specific business activity the noncompetition clause sought to prohibit, we believethat this issue should not be determined by a motion to dismiss. Such a determination is afactual one that must be made in the first instance by the circuit court. However, in thecontext of the instant case, we do not believe that the noncompetition clause that prohibitsthe defendants from engaging in any business competitive with that of the plaintiffs is toovague and unreasonable and, therefore, unenforceable. We do believe that the oppositefinding constitutes reversible error.(1)

Accordingly, we reverse the decision of the circuit court granting the defendants'motion to dismiss, and we remand for further proceedings not inconsistent with this opinion.

Reversed; cause remanded.

CHAPMAN and KUEHN, JJ., concur.

 

 

1. The plaintiffs rely on Jackson v. Hammer, 274 Ill. App. 3d 59 (1995), arguing thatthe noncompetition clause in that case prohibiting a party from "directly or indirectlycarrying on or engaging in any retail business that is similar" to the one sold was enforceable. However, in Jackson, the appellate court never addressed the reasonableness of the clause. In fact, the party restricted by the clause agreed that the actions he had performed violatedthe prohibitions set out by the clause, and he agreed to not violate it further. Jackson, 274Ill. App. 3d at 64. As the court did not address the reasonableness of the clause in that case,we believe that case offers little precedential value for the issues before us on appeal.