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decided: January 29, 1976.



Bernard V. O'Hare, O'Hare & Heitczman, Bethlehem, for appellants.

Donald B. Corriere, Bethlehem, for appellee.

Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Manderino, J., filed a concurring and dissenting opinion. Roberts, J., filed a dissenting opinion.

Author: Jones

[ 465 Pa. Page 504]


This appeal follows the entry of a final decree in equity of the court en banc against the appellants, Paul J. Hoffner, Jr., and Kay Hoffner. The decree enforces a restrictive covenant not to compete, and requires an accounting from the appellants for amounts earned in violation of a provision in the parties' franchise agreement which provides that the appellants purchase all their earring requirements from the appellee, Piercing Pagoda, Inc.

Piercing Pagoda, Inc., is a Pennsylvania corporation which engages in the selling of earrings and provides an ear piercing service for its customers. Piercing Pagoda was originally started through the efforts of Bernard Cohen, Piercing Pagoda's sole stockholder. Prior to Mr. Cohen's dealings with the appellants he owned and operated a "Piercing Pagoda" at Whitehall Mall in the City of Allentown.*fn1

Sometime in October of 1970, appellants contacted Bernard Cohen and expressed their interest in operating a Piercing Pagoda in York, Pennsylvania. The appellants procured a location for the store, and took a lease in their names. Thereafter, a letter of intent creating franchise rights in the Hoffners was signed by the parties.

Piercing Pagoda, in the November 1970 letter of intent, agreed to "honor the exclusive territorial rights" of the Hoffners "to open three . . . Pagoda within the York City, Berks City and Lancaster City areas." In addition, appellee agreed to supply the Hoffners with a line of earrings, and all materials and supplies necessary for the operation of their businesses. Piercing Pagoda

[ 465 Pa. Page 505]

    also agreed to train an employee of the Hoffners in the proper method of ear piercing, and to teach the operational methods required in running the businesses.

The Hoffners agreed to purchase all earring requirements from Piercing Pagoda at 10% over listed cost, to pay a franchise price of $7,000 and to submit to one inspection per month by a staff person of Piercing Pagoda, Inc.*fn2 In addition, the franchisee agreed to the following covenant not to compete:

"In the event of the termination of this business contract and following a 30 day written notice by registered mail, or otherwise mutually agreed, the franchisee will not own, operate or participate in any business employing ear piercing; for three years within 30 miles of any existing Pierding [sic] Pagoda or for one year where the business had been operated and terminated."

Apparently the Hoffners were satisfied with the terms of the original agreement for they purchased franchise rights in four other locations.*fn3 After the filing of the instant law suit the appellants opened an additional operation at King of Prussia Mall which is within ten to fifteen miles of the Piercing Pagoda operation, owned and operated by appellee at the Plymouth Meeting Mall.

On March 19, 1972, the appellants terminated their agreement by letter charging that the appellee improperly overcharged them on certain quantities of earrings.*fn4 The appellee brought this equitable action seeking the enforcement of the covenant not to compete which was contained in the original letter of intent and an accounting.

[ 465 Pa. Page 506]

The chancellor found that although Piercing Pagoda had a legitimate interest to protect, which warranted the use of a restrictive covenant, the enforcement of the covenant was not proper in this case since the franchisor did not bargain for a share of the profits but for the "requirement that the franchisee purchase all earring inventory from the franchisor." In the chancellor's opinion the appropriate relief was found in requiring the appellants to purchase all their earring requirements from the appellee for five years. The chancellor found that the appellee did not breach the agreement by engaging in over-pricing.

Both sides challenged the chancellor's conclusions of law and the decree nisi. In addition, the appellant challenged the chancellor's finding of fact, arguing principally that the appellee's over-pricing was of such a nature ...

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