Appeal and cross-appeal from a judgment of the United States District Court for the Eastern District of New York (Mishler, J.) in favor of Chevron U.S.A. Inc. in the amount of $717,586.53, and from an order staying execution pending appeal. Judgment vacated and new trial directed. Appeal from order dismissed as moot.
Van Graafeiland and Pierce, Circuit Judges, and Lasker, Senior District Judge.*fn*
VAN GRAAFEILAND, Circuit Judge:
Following a jury trial before Judge Mishler in the United States District Court for the Eastern District of New York, Roxen Service, Inc., Beneficial Oil Co., Inc., and Robert C. Sturm (defendants) were found liable in the amount of $717,586.83 for breach of a restrictive covenant in a contract with Gulf Oil Corporation, predecessor in interest to plaintiff Chevron U.S.A. Inc., and for tortious interference with customer contracts of Gulf. Defendants have appealed from the judgment, and plaintiff has appealed from the district court's order staying execution on the judgment pending appeal. We vacate the judgment and remand for a new trial. This makes moot the appeal from the order staying execution.
Prior to June 6, 1957, a company called Roxen Utilities, Inc., located in Oceanside, Long Island, supplied its customers with home heating oil through defendant Roxen Service, Inc. (Roxen). Roxen also installed and serviced oil burners for Roxen Utilities. The shares of Roxen Utilities and three sister corporations involved in heating and air conditioning were owned by Henry J. Schwindt, who is not a party to this action. The shares of Roxen were owned by Robert Zufall, Schwindt's son-in-law. On April 2, 1957, Schwindt agreed to sell all of the assets of his companies to Gulf Oil Corporation. These assets included "all degree-day and other records relating to heating oil . . . and oil burner service customers", which information Roxen Utilities had provided Roxen in the ordinary course of business.
The actual conveyance to Gulf, which took place on June 6, 1957, was not from Schwindt, but was directly from the four companies which Schwindt owned. On the same day, Zufall sold all of his Roxen stock to defendant Sturm, a Roxen employee. Sturm borrowed money from Gulf to assist him in financing the purchase, and repaid it in full by 1971. Thereafter, Sturm acquired defendant Beneficial Oil Co., a small supplier of home fuel oil.
Following Sturm's purchase of Roxen, he entered into a one-year, automatically renewable Oil Burner Installation and Service Agreement with Gulf, in which it was agreed that Roxen would install new oil burners and perform the oil burner service work it had performed theretofore for Roxen Utilities. Sturm and Roxen also promised that, for five years after the agreement was terminated, they would not solicit or take away any of the customers of Gulf serviced by Roxen, assist any persons in doing so, or disclose to anyone the names or addresses of Gulf's customers.
Relations between Gulf, Sturm and Roxen continued without incident for the next twenty-six years. As did Roxen Utilities before it, Gulf provided Roxen with the names and addresses of new customers for Roxen to service. During this time, however, Gulf lost over half of its heating oil customers to competing suppliers. By 1983, Gulf had decided to move its retail and service operations from Roxen to Lewis Oil Company, a Gulf subsidiary. On March 31, 1983, Gulf notified Sturm that it intended to terminate the 1957 service agreement on June 1, 1983, which it did. Thereafter, customers of Gulf, who had been serviced by Roxen, began to receive unsolicited letters and telephone calls from Roxen and Beneficial encouraging them to leave Gulf. Some of these customers also received contracts for burner service by Roxen, which were " not valid unless all fuel oil requirements [were] purchased from Beneficial Oil Company, Inc." Gulf contends that as a result of the defendants' activities, it lost over 1,000 customers to Beneficial Oil and other heating oil suppliers.
Gulf's amended complaint alleges that Sturm and Roxen, in concert with Beneficial, violated the service agreement's covenant which prohibited them from soliciting and taking away Gulf's customers. The complaint also alleges that the defendants tortiously interfered with Gulf's customer contracts and breached certain fiduciary duties owed Gulf. We will discuss these claims separately.
The district judge did not instruct the jury to return a general verdict, but, instead, solicited answers to special interrogatories. See Fed.R.Civ.P. 49. However, the only questions submitted to the jury on the restrictive covenant issue were whether Roxen, Sturm and Beneficial solicited, diverted and took customers away from Gulf and the amount of the resultant damages. The district judge held as a matter of law that the five-year restrictive covenant was reasonable and binding and that Gulf's customer list was a protectable trade secret. He so instructed the jury.
In the district judge's decision denying defendants' motion to set aside the judgment, he began his explanation for this ruling with the unassailable statement of New York law that "where the sale of a business includes the transfer of its good will, a reasonable covenant restricting the seller's right to compete with the purchaser will be enforced." The district judge did not explain, however, how this rule applied to Sturm and Roxen. Sturm and Roxen did not sell Roxen Utilities to Gulf. Their covenant did not purport to be enforceable upon the sale of a business but upon the termination of a service, which in this case occurred twenty-six years later. In this respect, the covenant is more like an employer-employee agreement than one resulting from the sale of a business. In either event, the covenant must be reasonable. The restraint imposed by a sale-of-business covenant must be no "more extensive, in terms of time and space, than is reasonably necessary to the buyer for the protection of his legitimate interest in the enjoyment of the asset bought." Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267, 271-72, 246 N.Y.S.2d 600, 196 N.E.2d 245 (1963). An employer-employee covenant will be enforced only if it is reasonably necessary to protect the employer's reasonable interests and "not unreasonably burdensome to the employee." Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307, 386 N.Y.S.2d 677, 353 N.E.2d 590 (1976); Greenwich Mills Co. v. Barrie House Coffee Co., 91 A.D.2d 398, 401, 459 N.Y.S.2d 454 (1983).
Instead of discussing the question of reasonableness in the context of the instant case, the district judge turned from the contractual covenant not to compete to a judicially created, or implied, covenant which restrains the seller of a company's good will from soliciting business from his former customers. Under New York law, the purchaser of the good will of a business obtains the exclusive right "as between" himself and the seller to exploit established customer loyalty. Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 286, 437 N.Y.S.2d 646, 419 N.E.2d 324 (1981). This implied covenant against the solicitation of former customers is neither limited by time nor subject to the test of reasonableness. Id. at 284-87; Alexander & Alexander Services, Inc. v. Maloff, 105 A.D.2d 1066, 1067-68, 482 N.Y.S.2d 386 (1984). However, its concept of perpetual, unlimited restraint cannot be applied to one who, as here, is only a contractual convenantor and not a vendor at all. Nonetheless, referring to the implied covenant against solicitation, the district judge said:
While such protection is usually afforded to the purchaser against the seller of the business, to prevent the seller "from recapturing and utilizing, by his competition, the good will of the very business which he transferred for value," . . . it is no less important in the present case. Because Gulf was justified in protecting its ...