Ralph H. German, Houston, Cooper, Speer & German, Pittsburgh, for appellants.
Walter T. McGough, Roger C. Wiegand, Reed, Smith, Shaw & McClay, Pittsburgh, for appellee.
Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Jones, former C. J., did not participate in the consideration or decision of this case. Mr. Justice Pomeroy filed an opinion, joined by Mr. Chief Justice Eagen and Mr. Justice O'Brien, which would affirm the decree below insofar as it finds a breach of the covenant not to compete but would vacate the award insofar as it fixes the amount of damages and would remand for the recalculation of damages. Mr. Justice Roberts, Mr. Justice Nix and Mr. Justice Manderino filed separate opinions which would reverse the decree below on the ground the non-competition agreement was not breached.
The Court being equally divided with respect to the question of appellant's liability, the decree below is affirmed.
Each party to bear own costs.
POMEROY, Justice, in support of affirmance and modification.
Thomas A. Wilson was the sole shareholder of National Carbide Die Company (National). In 1967, in a tax-free transaction, Wilson caused all the assets of National to be sold to Aiken Industries, Inc. (Aiken) in exchange for $2,000,000 worth of Aiken stock. One of the terms of the sales transaction was that Mr. Wilson would be employed by Aiken and that while so employed would refrain from competition with National. In this action for damages,*fn1 Aiken alleges a breach of that covenant as well as a breach of a fiduciary duty Wilson owed to Aiken.*fn2 The chancellor, upheld by a court en banc, found that Wilson did violate both his contractual and fiduciary duties and awarded damages. This is an appeal by the executors of Wilson's estate in which it is asserted that: (1) there was no evidence of breach of the non-competition agreement; (2) Wilson's actions were not in violation of his fiduciary duty; and (3) the measure of damages was improper.*fn3
. Breach of Covenant Not to Compete.
As an initial matter, it is to be observed that the function of this Court on an appeal from an adjudication in equity is not to substitute its view for that of the lower court; our task is rather to determine whether "a judicial mind, on due consideration of all the evidence, as a whole, could reasonably have reached the conclusion of the chancellor." Masciantonio Will, 392 Pa. 362, 367, 141 A.2d 362, 365 (1968). See also Yuhas v. Schmidt, 434 Pa. 447, 258 A.2d 616 (1969). A chancellor's findings of fact, approved by a court en banc, have all the force and effect of a jury's verdict if they are supported by adequate evidence and ordinarily will not be disturbed on appeal. Jacobson & Co. v. International Environmental Corp., 427 Pa. 439, 235 A.2d 612 (1967).
With this standard of review in mind, we have carefully reviewed the record and find substantial evidence to support the chancellor's findings. He found that subsequent to Aiken's acquisition of National, Wilson engaged in the following activities: (1) made outright gifts of $60,000 to two of his former employees with full knowledge that this money would be used by them as initial capital for a company known as Compacting Tools, Inc. (Compacting), a company which the donees were then forming and which was organized to engage in direct competition with National; (2) rented to the same two former employees (the now owners and managers of Compacting) the building in which Compacting carried on its activities; (3) waived rent on the premises leased to Compacting for the first seven months of the lease because of the tight money situation at Compacting; (4) made two automobiles available to the former employees, both of whom used those vehicles in connection with the new business; (5) donated furniture and office equipment for use in the offices of Compacting; and (6) executed a waiver of his security interest (a landlord's lien) in Compacting's machinery located on the premises, thus enabling Compacting to negotiate a loan of $160,000 which it required to purchase necessary equipment. These findings properly led to the chancellor's conclusion that Wilson had
engaged in activities in connection with the "ownership, management, operation or control" of a competitor in direct violation of the express language of the contract.*fn4
The appellants urge that Mr. Wilson did no more than engage in harmless acts of beneficence. We think, however, that the breach of a restrictive covenant such as the one here involved*fn5 does not depend upon a finding of specific intent to harm; the covenant is breached if the covenantor knowingly engages in activity the necessary effect of which will be to foster, if not instigate, competition. Assuming that Mr. Wilson was indeed motivated solely by benevolence towards his two close friends and former associates, it was incumbent upon him to give expression to that generosity in a manner consistent with the contractual duty he had but recently assumed with respect to Aiken.
2. The Measure of Damages.
With respect to the issue of damages, the chancellor awarded appellee $196,576.75. The appellants challenge this sum as being both speculative and improperly calculated.
At trial, Aiken presented convincing evidence to the effect that National's sales to 25 particular customers constituted 50% of its business in 1970 whereas after the incorporation of Compacting and the ensuing competitive activities of that
company during the years in question, 1970 through 1972, National's sales to these same 25 customers declined by one-half, or by approximately $700,000. During this same period, Compacting had sales of $694,000, some 95% of which was attributable to the business of these same 25 customers who correspondingly decreased their orders to National. Aiken presented evidence showing the National Division's "marginal income percentage"*fn6 during the period 1970 through 1972 to be 44% and, applying this percentage to its $700,000 lost sales arrived at a figure of $308,000 as lost profits. The chancellor reduced the lost sales total to $400,000 to take into account factors in the record which he found to be not directly attributable to the competition of Compacting (market recession, a strike in the automobile industry, etc.). He also found that 33 1/3% was a more realistic "marginal income percentage" than 44%. Having made these adjustments, the chancellor determined that the lost profits suffered by National and attributable to the competition of Compacting were $133,330.
The appellants challenge the chancellor's calculation of $400,000 representing lost sales as "speculative." We recognize, however, that the breach of non-competition agreements of the type with which we are here concerned necessarily involves damages which are difficult to calculate with absolute precision. See Ross v. Houck, 184 Pa. Super. 448, 136 A.2d 160 (1957). The indefiniteness consequent upon this difficulty does not, however, by itself preclude
relief. In Massachusetts Bonding & Ins. Co. v. Johnstone & Harden, Inc., 343 Pa. 270, 278-80, 22 A.2d 709, 714 (1941), this Court stated:
". . . In Osterling v. Frick et al., Executors, 284 Pa. 397, 131 A. 250, this court held [second syllabus]: 'While damages cannot be based on a mere guess or speculation, yet where the amount may be fairly estimated from the evidence, a recovery will be sustained even though such amount cannot be determined with entire accuracy'.
"Williston on Contracts, Revised Edition, Vol. 5, lays down these principles in respect to measuring damages: Section 1345, p. 3776, 'Though any breach of contract entitles the injured party at least to nominal damages, he cannot recover more without establishing a basis for an inference of fact that he has been actually damaged. A mere possibility that the plaintiff might have made a profit if the defendant had kept his contract will not justify damages based on the assumption that the profit would have been made. But though there must be evidence of substantial damage in order to justify recovery of more than a nominal sum, the exact amount need not be shown. Where substantial damage has been suffered, the impossibility of proving its precise limits is no reason for denying substantial damages altogether.'
"The essence of the legal principles above cited is that compensation for breach of contract cannot be justly refused because proof of the exact amount of loss is not produced, for there is judicial recognition of the difficulty or even impossibility of the production of such proof. What the law does require in cases of this character is that the evidence shall with a fair degree of probability establish a basis for the assessment of damages."
See also Solar Electric Corporation v. Exterminator Corporation of America, 384 Pa. 233, 120 A.2d 533 (1956); Lambert v. Durallium Products Corporation, 364 Pa. 284, 72 A.2d 66
(1950); Hahn v. Andrews, 182 Pa. Super. 338, 126 A.2d 519 (1956). We believe that appellee Aiken presented evidence enough to prove that it had suffered substantial damages and that the amount of $400,000 determined by the chancellor to represent sales lost because of the breach of contract does "with a fair degree of probability establish a basis for the assessment of damages." Massachusetts Bonding, supra. The contrary standard urged by appellants would encourage the violation of contracts with impunity, the breaching party resting secure in the knowledge that the injured ...