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American Air Filter Co. v. McNichol

decided: December 16, 1975.



Seitz, Chief Judge, Rosenn and Garth, Circuit Judges.

Author: Rosenn


ROSENN, Circuit Judge.

Plaintiff American Air Filter, Inc., (AAF) brought this suit against a former employee, Michael J. McNichol, and his new employer, John F. Scanlan, Inc., (Scanlan) seeking injunctive and monetary relief for an alleged breach of a restrictive covenant in an employment contract.*fn1 Judge Luongo denied plaintiff's motion for a preliminary injunction, 361 F. Supp. 908 (E.D. Pa. 1973), and further injunctive relief was not sought. The damage case was tried to a jury which returned a verdict in favor of both defendants. Plaintiff appeals from the judgment entered against it by the trial court. We affirm.

AAF manufactures and distributes equipment to move, clean, and condition air. Air moving equipment manufactured by AAF and its competitors periodically requires replacement of an air filter. AAF also manufactures and distributes replacement air filters (RAF).

In early 1971, AAF changed its Philadelphia area distribution scheme for RAF's from independent distributors to employee salesmen. Defendant McNichol was hired by AAF as a salesman on February 1, 1972. Prior to commencing work, he signed a written employment agreement containing a covenant not to work for a competitor of AAF in the Philadelphia area for two years after leaving AAF's employ.*fn2 McNichol remained at his job with AAF until January 19, 1973, when he voluntarily resigned and went to work for defendant Scanlan at a higher salary.

Scanlan is a local Philadelphia company which sells and distributes the products of various air handling equipment manufacturers. Among its products are filters which directly compete with AAF filters. Although McNichol while employed by Scanlan apparently solicited some customers previously solicited by him for AAF, there is no evidence that he actually made sales to them.

AAF eventually learned of McNichol's new employment. On April 3, 1973, AAF, through its counsel, forwarded to McNichol and Scanlan a copy of the employment agreement with AAF and a request that McNichol and Scanlan terminate their relationship. Until this time, no employee of Scanlan had knowledge of the restrictive covenant in McNichol's employment agreement with AAF. On the advice of counsel, McNichol and Scanlan did not discontinue their relationship. AAF then instituted suit.

On this appeal, plaintiff urges a number of issues: (1) the district court submitted the issue of reasonableness and validity of the restrictive covenant to the jury when it should have been decided by the court as a matter of law; (2) that the restrictive covenant is reasonable and valid and the district court should have so instructed the jury; (3) if the validity of the covenant is a jury issue, the court erroneously failed to put the burden of proving unreasonableness on defendants;*fn3 (4) if the validity of the covenant is a jury issue, the district court erred in requiring AAF to prove that McNichol received specialized training and knowledge; and (5) the district court improperly restricted AAF on its proof of damages.*fn4

We turn to the last issue first. It is our judgment that the district court properly excluded certain evidence (discussed below) proffered by the plaintiff and that plaintiff failed to establish that any damage resulted to it from McNichol's employment by Scanlan. That determination is sufficient to uphold the judgment of the district court and we need not reach plaintiff's other contentions.

This action proceeded on a separate legal theory with respect to each of the two defendants. McNichol's alleged liability is predicated on breach of the restrictive covenant in the employment agreement. It is elementary that the "aim of the law in awarding compensatory damages for breach of contract is to put the injured party in the position he would have been in had there been full performance." Maxwell v. Schaefer, 381 Pa. 13, 112 A.2d 69, 73 (1955). To that end, damages are measured by the "losses caused and gains prevented by defendant's breach, to the extent they are in excess of any savings made possible by nonperformance." In Re Kellett Aircraft Corp., 191 F.2d 231, 236 (3d Cir. 1951); Restatement, Contracts, ยง 329. Applying those principles to the instant facts, the measure of AAF's damages is the profits it would have made on sales it could reasonably expect to have secured had McNichol not sold in breach of the agreement. Kochenrath v. Christman, 180 Ky. 799, 203 S.W. 738 (1918).*fn5

The action against Scanlan is based on its retention of McNichol after it was informed that McNichol was in violation of his employment agreement. This action is one in tort for interference with contractual relations.*fn6 Courts are divided on an appropriate measure of damages for this tort, some limiting recovery to the contractual measure of damages, some using an amorphous "injuries proximately caused" analysis, and some allowing a whole range of tort damages, such as injury to reputation or mental suffering. See W. Prosser, The Law of Torts (4th ed. 1971) at 948-9; Annotation, 26 A.L.R. 2d 1227, 1272. In this case, there are no injuries alleged other than pecuniary losses resulting from McNichol's employment with Scanlan. In these circumstances the measure of damages for interference with contractual relations will be identical to that for breach of contract.*fn7

Plaintiff here sought to establish damages under three different theories: (1) an accounting for profits earned by Scanlan from sales by McNichol; (2) commissions earned by McNichol from his sales for Scanlan to former AAF customers; and (3) AAF's decrease in profits in the territory serviced by McNichol after he left AAF. ...

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