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BUSINESS FOODS SERV. v. FOOD CONCEPTS CORP.

February 17, 1982

BUSINESS FOODS SERVICE, INC., Plaintiff,
v.
FOOD CONCEPTS CORP. and Freshway Food Systems, Inc., Defendants



The opinion of the court was delivered by: MCLAUGHLIN

MEMORANDUM AND ORDER

The parties to this antitrust action compete in the employee or commissary catering business in the States of New York and New Jersey. They supply their respective customers with daily deliveries of a wide variety of food, except for items such as milk, eggs and bread, and they do almost no on-premises cooking. In the overall cafeteria service industry, commissary catering lies somewhere between vending machines and extensive on-premises cooking.

 Plaintiff has moved for summary judgment alleging that the defendant *fn1" utilizes a restrictive covenant that is both an unreasonable restraint of trade under Section 1 of the Sherman Act, 15 U.S.C. ยง 1, and a violation of Section 340 of the New York General Business Law. Since there are disputes as to the size of the geographic market and the scope of the relevant product market, the reasonableness of the alleged restraint cannot be presently assessed. Accordingly, summary judgment is denied.

 I. The Covenant.

 The restrictive covenant *fn2" in question is atypical. It is a hybrid provision incorporating aspects of both a traditional employer-employee covenant not to compete and an exclusive dealing arrangement. While the covenant restricts the employment opportunities of former employees of the defendant, the covenant itself appears in contracts entered into by the defendant and its customers, rather than in contracts between the defendant and its employees. If a competitor of the defendant hires a former employee of the defendant, the controversial covenant bars the defendant's customers from using the services of the defendant's competitor for one year after the termination of the service contract between that customer and the defendant.

 II. The Companies and their Employees.

 When the lawsuit was commenced, the plaintiff corporation employed approximately twenty-eight individuals formerly employed by the defendant. Three of these individuals, Joseph Pacifico, Michael Cutsumbis, and Robert Botwinick, currently hold positions of major responsibility in the plaintiff corporation, specifically President, Vice President and Marketing Executive, respectively. It has been at least seven years since any of the three worked for the defendant.

 The plaintiff alleges that the covenant goes beyond what is necessary to protect the defendant's business. It claims that the duration of the provision's restriction is potentially infinite. The plaintiff also notes that the employees involved were not privy to business secrets nor did they hold unique positions while employed by the defendant.

 Furthermore, plaintiff claims that it has lost at least three customers directly as a result of the restrictive covenant in question. According to the plaintiff, these customers failed to make contracts with the plaintiff because they feared that the defendant would start litigation over the restrictive covenant. Indeed, since the commencement of this action, the defendant has in fact brought two lawsuits against several of its customers and in each case has joined the plaintiff in order to enforce the provision.

 The defendant counters by asserting that the covenant is fair, reasonably warranted, and necessary for its protection. It asserts that the purpose of the restrictive covenant is to prevent the unfair use of information (e.g., business secrets) gleaned by employees while in the employ of the defendant. As an added fillip, the defendant notes that Robert Botwinick, its former employee, who now works for plaintiff, drafted the covenant while working for the defendant. If, therefore, the covenant violates the law, then, according to the defendant, the plaintiff should be barred from receiving equitable or monetary relief because of its unclean hands.

 III. The Law.

 A. The Sherman Act

 Although the reasonableness of employee covenants not to compete is seldom raised in the federal courts, such restrictive covenants are "proper subjects for scrutiny under section 1 of the Sherman Act." Newburger, Loeb & Co. v. Gross, 563 F.2d 1057, 1082 (2d Cir. 1977). See Schine Theatres v. United States, 334 U.S. 110, 68 S. Ct. 947, 92 L. Ed. 1245 (1948); Brunswick Corp. v. Sheridan, 582 F.2d 175 (2d Cir. 1978); Lektro-Vend Corp. v. Vendo Corp., 500 F. Supp. 332 (N.D.Ill.1980). So too, the reasonableness of an exclusive dealing contract may also be measured against Section 1. *fn3" See Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 81 S. Ct. 623, 5 L. Ed. 2d 580 (1961); Standard Oil of Calif. and Standard Stations v. United States, 337 U.S. 293, 69 S. Ct. 1051, 93 L. Ed. 1371 (1949).

 While Section 1 applies both to covenants not to compete and to exclusive dealing arrangements, neither of these potentially anticompetitive contractual provisions is per se illegal. The per see rule has not been extended to restrictive covenants primarily because of the limited experience courts have had in judging the competitive impact of such covenants within the rubric of Section 1 of the Sherman Act. Bradford v. New York Times Co., 501 F.2d 51, 59-60 (2d Cir. 1974). See also, United States v. Topco Assoc., Inc., 405 U.S. 596, 607-08, 92 S. Ct. 1126, 1133-34, 31 L. Ed. 2d 515 (1972). Similarly, the benefits to sellers and buyers as well as to society from ...


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