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WESTEC SEC. SERVS. v. WESTINGHOUSE ELEC. CORP.

April 1, 1982

WESTEC SECURITY SERVICES, INC.
v.
WESTINGHOUSE ELECTRIC CORPORATION



The opinion of the court was delivered by: POLLAK

Westec Security Services, Inc. ("Westec"), the plaintiff in this matter, seeks to enforce a covenant not to compete against defendant Westinghouse Electric Corporation ("Westinghouse"). A bench trial on the merits has been completed, and what follow are my final findings of fact and conclusions of law.

 Plaintiff is a corporation organized under California law, and its principal place of business is in that state. Defendant is a corporation organized under Pennsylvania law with its principal place of business in Pennsylvania. The amount in controversy, exclusive of interest and costs, exceeds $10,000., and the diversity jurisdiction of this court, is therefore, properly invoked pursuant to 28 U.S.C. ยง 1332(a)(1).

 For a ten year period from 1969 to 1979, defendant was engaged in the residential security business through its sole ownership of Westinghouse Security Systems, Inc. ("WSSI"). By an agreement dated July 19, 1979, Westinghouse sold to plaintiff, then named Certified Security Services, Inc., all of the stock of WSSI. The agreement contains the following covenant:

 
COVENANT NOT TO COMPETE.
 
Stockholder [Westinghouse] agrees not to reestablish or reopen any business or trade which provides security systems or services similar to that provided by the business hereby sold, or in any manner to become interested, directly or indirectly, either as owner, partner, joint venturer, agent, stockholder (other than as a passive, nonmanaging investor) or otherwise, in any such business or trade for a term of twenty years from the date hereof or such shorter period that a court of competent jurisdiction, may find to be reasonable in the case of any dispute. Should any court of competent jurisdiction find this covenant to be unreasonable under the laws of such jurisdiction, then any finding of a shorter period of restriction shall apply only to the jurisdiction of such court and shall not serve to amend this Agreement in any other jurisdiction. This covenant shall not be construed to prohibit, however, Westinghouse from continuing any business which it now conducts which may provide institutional, industrial, or governmental security services or systems. (P-21, p. 30, P16)

 Closing on the agreement of sale took place on August 31, 1979.

 Some fifteen months later, in November, 1980, Westinghouse, two wholly owned subsidiaries of Westinghouse, and Teleprompter Corporation ("Teleprompter") entered into a plan of acquisition and merger whereby Teleprompter became, in August, 1981, a wholly owned subsidiary of Westinghouse. Teleprompter's principal business is the operation of cable television franchises throughout the country.

 Among the features which Teleprompter has recently begun to offer prospective subscribers to its cable television systems are home security systems and services. These systems would use the Teleprompter system's t.v. cable to link various types of alarm devices -- burglary, fire and medical emergency -- in subscribers' homes with central monitoring stations. *fn1" Teleprompter plans to provide subscribers with home security systems and services through a variety of business arrangements. In some instances, it envisions leasing a cable channel to an independent residential security company which would, in turn, offer to sell home security equipment to subscribers, install it in their homes, and provide both maintenance and monitoring services. In other instances, Teleprompter plans to contract with independent companies to carry out some or all of these activities. And in still other cases, Teleprompter may undertake all of these activities itself.

 Plaintiff contends that all of these various forms of involvement in the residential security business are barred to Teleprompter under the terms of the Westec-Westinghouse covenant not to compete. Defendant does not contest the covenant's validity as such -- it concedes that the covenant was ancillary to the sale of a business -- but it argues that the covenant's terms do not embrace any of the activities in the residential security field to which Teleprompter is committed or on which it soon plans to embark. In other words, the parties' dispute has focused upon the nature and scope of the business sold by defendant to plaintiff in 1979 and on whether that business's activities may be said to have been "similar" to those planned by Teleprompter. Therefore, I begin my more detailed recitation of factual findings by turning to WSSI's history.

 I.

 A. The History of Westinghouse Security Systems, Inc.

 Westinghouse established WSSI as a wholly owned subsidiary in 1969, and through it embarked on the business of marketing residential security systems and services. As already noted, residential security systems consist of an array of electronic devices installed in homes and designed to detect burglary, smoke, fire and other emergencies. *fn2" These devices transmit electronic signals or "data" to a central monitoring station equipped with computers which decode the data. In the event of an emergency, such as a fire, the appropriate "detector" is triggered; it sounds an in-home alarm and also transmits signals alerting personnel at the monitoring station that a fire has occurred at that location. The monitoring personnel in turn summon appropriate aid from local authorities. While the home security systems Teleprompter has begun to offer would link home and monitoring stations through a television cable, WSSI's systems utilized telephone cables for that purpose, as do Westec's systems today.

 Throughout its history, WSSI itself manufactured only a small fraction of the parts composing the home security and monitoring systems which it marketed. It purchased the rest from Ascensores Westinghouse, a Westinghouse subsidiary in Puerto Rico, and from other manufacturers -- testing and, where necessary, assembling such parts before shipping them to its market outlets. The greater portion of WSSI's management's energies was devoted to an ultimately unsuccessful quest for a profitable way of marketing the firm's products (P-3, P-19).

 Initially, WSSI set out to market its residential security systems through franchise operations, and by 1971 it had established twenty-three franchises with twenty-five year franchise agreements. However, in 1971, WSSI management decided to abandon the use of franchises in favor of five-year term distributorships on the one hand, and company-owned retail outlets on the other *fn3" (P-3, P-19). Both distributors and company-owned outlets sold home security equipment to consumers and also provided installation, maintenance and monitoring services. From its retail outlets WSSI derived revenue from all of these activities, including monthly billings for monitoring by central communication centers. From its distributors WSSI's revenue took the form of equipment sales.

 By 1976, WSSI appeared to have settled upon a strategy of "going to market" "through two primary channels" -- (1) retail outlets and distributorships, and (2) equipment sales to builders of condominiums and apartment buildings (P-19, P.III-2). WSSI management's scheme grouped its retail outlets and distributorships in a single "channel" because both sold to the same customers, home dwellers, and competed with the same companies (id.).

 Finally, in 1977, because its retail outlets were not proving profitable, WSSI decided to sell them. Generally, they were sold to buyers who became WSSI distributors. At this point, defendant's strategy was either (1) to make WSSI's business -- conducted chiefly now via its distributor network-- profitable by 1979; *fn4" or (2) to divest itself of WSSI by the end of that year.

 Throughout its ten-year history WSSI's marketing strategy emphasized that what the company offered for sale to the consumer was not discrete pieces of equipment, but a residential security "system" embracing all the various services which the system required -- installation, maintenance, and monitoring through a central communication center. Indeed, WSSI considered its competitive strength to rest (1) in this "total system" approach; and (2) in the "Westinghouse" name which distinguished its product in the residential security market as the sole system enjoying a widely recognized corporate name and one with a reputation for reliability (P-25, P-26, P-28, P-30).

 During the period 1977-79, after the sale of its retail outlets, WSSI continued to advertise and promote its product as a total "system" and array of services, and it continued to urge its distributors to do the same, encouraging them to use liberally the Westinghouse name and "logos." Having sold its retail outlets, WSSI no longer sold directly to consumers, and no longer provided installation, maintenance or monitoring services itself. WSSI's distributors provided these services and derived the revenue they generated. However, WSSI continued to train its distributors and their personnel in selling, installing, repairing and monitoring home security systems (P-6).

 B. The Sale of WSSI to Westec

 In the spring and summer of 1979, in the wake of an unsuccessful negotiation to sell WSSI to a major German electronics corporation and another unsuccessful contact with a major security and guard corporation (P-23), Westinghouse decided to negotiate for the sale of WSSI to Westco, WSSI's Pittsburgh, Pennsylvania, distributor. Mr. Mathis recommended to his superiors in the Westinghouse hierarchy that WSSI be sold to Westco, predicting good chances of success on Westco's part by virtue of its intimate knowledge of the business (P-24; N.T. 1.95). However, Westco proved unable to finance the purchase, and on July 10, 1979, Mr. Newlin, as president of plaintiff, met in Pittsburgh with Westco and representatives of other WSSI distributors. That meeting endorsed Mr. Newlin's proposal that plaintiff, (then Certified Security Systems, Inc., and now Westec) would negotiate with defendant to purchase WSSI.

 On July 11, 1979, Mr. Newlin met with Mr. Mathis. Mr. Mathis brought to that meeting a copy of the agreement of sale which had been negotiated by WSSI with Westco, and which contained the first and third sentences of what became the covenant not to compete at issue here. Newlin told Mathis that plaintiff's primary concern was its ability as a potential purchaser of WSSI to use the Westinghouse name (N.T. 2.48-50).

 To resolve that issue Mathis and Newlin met the next day with Tom Coyne, a trademark attorney for Westinghouse. They negotiated what became the Tradename License Agreement between plaintiff and defendant (P-41). In these negotiations Newlin contended that plaintiff needed a combination of a 6-8 year period to use the name Westinghouse security systems and a 10-year period thereafter during which Westec would be protected from competition by Westinghouse. Westinghouse would only agree to allow Westec and its newly-to-be-acquired distributors to use the name "Westinghouse Security Systems" for a one-year period. However, it agreed to a period of five years use of the Westinghouse logos -- during which it was understood plaintiff would endeavor to transfer public recognition of "Westinghouse" security systems and services to "Westec" security systems and services. Defendant also offered, and plaintiff accepted, a twenty-year time period with respect to the covenant not to compete (N.T. 2.66-67).

 Following the July 11-12, 1979 negotiations, Newlin returned to California, agreeing to return to Pittsburgh before a Westinghouse board of directors meeting on July 20, 1979 by which time Mr. Mathis wanted to present the agreement of sale to the board for its approval. Newlin returned on July 18, 1979, and he and Mathis met with Robert J. Tubbs, counsel for Westinghouse and a Mr. Polston, counsel for plaintiff. Together, they undertook a thorough review of the agreement of sale. The testimony on both sides revealed that the covenant not to compete, paragraph 16 of the final agreement (P-21), was not a point of contention during these final negotiations and did not generate any sustained discussion. Indeed, the first of paragraph 16's three sentences was unchanged from a sentence prepared by the attorney for Westco in the unconsummated Westco-Westinghouse negotiations (N.T. 3.7-8). The Westco attorney had also drafted the covenant's third sentence. He did so in response to an observation by Mr. Mathis that defendant's Baltimore "defense center" had developed a security system for defense or industrial purposes. During the July 18, 1979 negotiations, Mr. Tubbs explained to Mr. Newlin that he wanted to insure that an "exception" for this system and like systems be included in the covenant, and Mr. Newlin agreed (N.T. 3.12). *fn5" The only other discussion regarding the covenant which testimony about the July 19, 1979 meeting disclosed was this: Mr. Newlin commented that he thought the covenant was "very fair and very complete," and Mr. Tubbs replied that he was sure that Westinghouse would not get back into the residential security business (N.T. 2.54). The Agreement in its final form was signed on July 19 and approved by defendant's Board of Directors on July 20, 1979. Closing on the Agreement occurred on August 31, 1979.

 The Agreement provided for an initial payment on plaintiff's part of $155,000. In addition, the parties, at the closing on August 31, 1979, entered into a Manufactured Products Agreement committing plaintiff to purchase from Ascensores Westinghouse equipment at a total price of $1,312,449.00. Mr. Newlin testified that this figure was understood by the parties to represent an inflated price: $400,000 of the purchase price paid by plaintiff for WSSI was "buried" in this figure. *fn6"

 C. Westec's Business After the Acquisition

 Since acquiring WSSI, plaintiff has conducted an extensive national advertising campaign aimed at transferring consumer identification from Westinghouse to Westec Security Systems (P-31; N.T. 2.72-3). Westec presently has twenty-seven distributors in nineteen states. It has substantially increased its volume of business over that done by WSSI at the time of the sale, and it currently plans to add 100 distributors over the next five years (N.T. 2.74). *fn7" Finally, Westec has sought to expand and enhance the product line which it inherited, completing the introduction into the market of a new home security system developed and initially introduced by defendant, and investing in the development of other systems (N.T. 2.75-76).

 D. Westinghouse and Teleprompter

 I have already noted that in 1980 defendant began negotiations for the acquisition of Teleprompter. These negotiations led to the purchase of all Teleprompter stock by defendant in August, 1981 for about $650 million, and Teleprompter Corporation is now a wholly owned subsidiary of a wholly owned subsidiary of Westinghouse Broad-casting Company -- itself a wholly owned subsidiary of defendant. I have also already noted that Teleprompter's chief business is the operation of cable television franchises. Indeed, Teleprompter is the country's largest cable television company. As of January, 1981, it had some 1.36 million subscribers in thirty-two states (P-33; N.T. 1.158).

 In November, 1980, a Dr. Drumheller, the former engineering manager of WSSI and a present employee of defendant, informally told Kenworthy and Newlin of Westec about defendant's planned acquisition of Teleprompter, and also noted that, through Teleprompter, defendant would be reentering the home security business (N.T. 1.160). Kenworthy wrote to the chairman of defendant's board of directors calling his attention to the covenant not to compete. Defendant responded by a letter dated December 23, 1980 and signed by a Mr. D. J. Povejsil, a Westinghouse vice-president for corporate planning (P-54). Mr. Povejsil wrote (1) that the issue of whether the Teleprompter acquisition would conflict with the provisions of the Westinghouse-Westec agreement was under review; and (2) that "[currently] it is my understanding that Teleprompter is not in the residential security business" (P-54).

 As of the time of trial, Teleprompter was still not "currently" providing residential security systems or services to its subscribers. *fn8" However, from January, 1979 to July, 1981, Teleprompter submitted at least sixty-five cable television franchise applications to municipalities throughout the country which included home security systems and services among the various optional features which Teleprompter proposed to offer subscribers if granted the franchise awards (P-34 to P-39). At the time of trial Teleprompter had been awarded fifty-three such franchises, permitting or requiring Teleprompter to offer residential security systems and services to its subscribers in the franchise areas (P-39). *fn9"

 The home security systems and services described in some detail by Teleprompter in its franchise applications are markedly similar to those marketed by WSSI and its distributors at the time of WSSI's sale to plaintiff and to those presently marketed by Westec and its distributors (P-34 to P-39). *fn10" Indeed, the only significant difference is that plaintiff's systems are linked with monitoring centers via telephone lines, whereas the systems described by Teleprompter are to be linked via "interactive," "coaxial," or two-way cable t.v. lines.

 Teleprompter plans to provide these home security systems and services to subscribers through one of four different business arrangements:

 
(1) by leasing a cable t.v. channel to an independent company which would sell home security equipment to Teleprompter subscribers in a given franchise area, install and maintain the equipment in their homes, and operate a monitoring center linked to ...

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