June 8, 2011

 

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A restrictive covenant in a contract is a provision that prohibits certain conduct. In the context of buy out agreements or employment agreements the restrictive covenant generally prohibits competition, often in a particularly described way. The restriction can pertain to solicitation or service, or both, to disclosure of confidential or proprietary information, or both, and can be for a specified time and geographic location.

Typically enforcement of the restrictive covenant will hinge on the needs of the buyer, or employer, to protect its business investment, weighed against the needs of the seller, or employee, to earn a living. The party who seeks to enforce the restrictive covenant, almost always the buyer of a business or the ex employer, will have to establish the business needs for the restriction.

A recent appellate court decision in Illinois, a copy of which is below, does a good job [though tedious] explaining the enforcement of restrictive covenants. A few words of caution to those interested enough to tackle the written decision. It's very lengthy. Yes, I could analyze, summarize and explain the decision, but I'd rather have those interested read it.

I will point out that here the ex employee originally sold the business to the buyer who then became his employer; there was a restrictive covenant in the buy out agreement and again in the employment agreement. The lower court denied a motion for a preliminary injunction preventing the employee from working, but the Appellate Court reversed and directed the lower court to issue the injunction.

Also, be ready to be thoroughly depressed because the first thing that's going to come to your mind is that you,- all of us and that includes me - are in the wrong business !!!!

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WM RECYCLE AMERICA, LLC, Plaintiff-Appellant, v. SHAWN

LAVIN, Defendant-Appellee (David Pelz, Defendant.).

 

APPELLATE COURT OF ILLINOIS, SECOND DISTRICT

2011 Ill. App. Unpub. LEXIS 1067

May 13, 2011, Order Filed

 

NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited

as precedent by any party except in the limited circumstances allowed under Rule

23(e)(1).

 

PRIOR HISTORY:

Appeal from the Circuit Court of Du Page County. 10-CH-6665. Honorable Bonnie

M. Wheaton, Judge, Presiding.

 

DISPOSITION: Reversed and remanded.

 

JUDGES: JUSTICE ZENOFF delivered the judgment of the court. Justices Schostok

and Birkett concurred in the judgment.

 

OPINION BY: ZENOFF

 

OPINION

 

 

ORDER

 

Held: Trial court erred in denying motion for preliminary

injunction; restrictive covenants in employment agreement were

reasonable as employment agreement and amendment to employment

agreement were ancillary to sale of a business.

 

Plaintiff, WM Recycle America, LLC. (WMRA), appeals from an order of the

circuit court of Du Page County denying its motion for a preliminary injunction

against defendant, Shawn Lavin, to enforce restrictive covenants in an

employment agreement. For the reasons that follow, we reverse and remand this

matter to the trial court with directions.

 

BACKGROUND

 

Waste Management's Acquisition of the Peltz Group

 

Waste Management, Inc. (WMI) is a provider of waste collection and disposal

services throughout the United States. WMI's services include the recycling of

paper. In general, the brokerage of recycled waste paper consists of purchasing

the waste material from various vendors, such as printers, making the material

market ready by processing it, if necessary, and then selling the product to a

consumer such as a paper mill. Prior to 2003, WMI's recycling arm, Recycle

America, LLC (RA), was a relatively insignificant presence in the market as it

related to the brokerage of waste paper.

 

In 2003, the Peltz Group, a Wisconsin corporation specializing in the

brokerage of waste paper, had a national presence with six or seven plants.

Defendant was a one-third owner of the Peltz Group. The Peltz Group was well

known and well respected in the industry, as were defendant and his partners at

the Peltz Group. In January 2003, the Peltz Group and RA formed an entity under

the WMI umbrella called Recycle America Alliance, LLC (RAA). Waste Management1

paid the Peltz Group approximately $60,000,000 and acquired a 91% interest in

RAA. Peltz acquired a 9% interest represented by membership shares in RAA. As a

one-third owner of the Peltz Group, defendant received approximately

$20,000,000. This transaction provided for Waste Management's eventual buyout of

Peltz's shares through a put/call agreement.2 Also as part of the transaction,

defendant (and the other Peltz shareholders) signed a business protection

agreement that contained restrictive covenants relating to competitive activity,

non-solicitation, and non-disparagement. Similar restrictive covenants were

contained in an employment agreement defendant (and certain other principals of

the Peltz Group) signed as a condition of the transaction's closing. Defendant's

position at RAA was vice-president of marketing. At first, defendant was in

charge only of the Midwest, but within 90 days his territory was national in

scope in keeping with his title.

 

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 The

acquisition of the Peltz Group was effected through the use of holding

companies, but for the purpose of clarity, we refer to the various Waste

Management entities, except WMI, generically as Waste Management.

2 We use Waste Management generically here because the put/call agreement is

not part of the record; therefore, we do not know the precise Waste Management

entity or entities named in that agreement.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

 

From Waste Management's perspective, its purchase of the Peltz Group was

going to expand its brokerage business greatly, and defendant was the most

important person in the acquisition of the Peltz Group. Defendant was regarded

as a solid, innovative, and creative participant in the brokerage business.

Defendant was the "architect" of Waste Management's expansion of the brokerage

business into a national business, the one responsible for managing, guiding,

and directing the business's development, the one with the relationships with

the nation's largest printers like RR Donnelly. According to Matthew Coz, WMRA's

vice-president of growth, commodity sales, and marketing at the time of trial,

defendant was able to see the complexities of the market, bring together assets

to solve problems in the marketplace, and do so in a financially meaningful way.

He was responsible for the financial results of the brokerage group. Defendant

was part of a team of Waste Management's top 200 managers who set the direction

and decision-making for the company. Defendant reported directly to the

president of RAA in Houston, Texas, where RAA's headquarters were located.

 

By May 2005, Waste Management and the Peltz Group were in negotiations for

Waste Management to buy the Peltz Group's membership shares in RAA, as

contemplated in the 2003 transaction. The buyout occurred on September 30, 2005.

On that date, Waste Management executed a promissory note for approximately

$17,000,000, defendant receiving his proportionate one-third share; the Peltz

Group assigned its membership shares in RAA to Waste Management; defendant

resigned from RAA's board of directors; and defendant signed a first amendment

to his employment agreement. Following the buyout, RAA changed its name to the

present WM Recycle America, LLC (WMRA).3

 

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3 Prior to

the acquisition of the Peltz Group in 2003, Waste Management's recycling

business was known as Recycle America, LLC; following the acquisition, the

recycling business was known as Recycle America Alliance, LLC; after the 2005

buyout, the recycling business was known as WM Recycle America, LLC. According

to Waste Management's attorney, these were name changes only, but pertained to

the same company.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

 

Defendant's Employment Agreement

 

As a condition of the $60,000,000 acquisition, defendant signed an employment

agreement that became effective on January 1, 2003. Defendant's term of

employment was three years with automatic renewals for successive two-year

periods thereafter unless terminated pursuant to the agreement. Defendant could

voluntarily terminate his employment at anytime upon written 90-days' notice.

Defendant's duties and responsibilities were as vice-president-marketing,

reporting directly to the president of RAA. His base salary was $250,000 per

year with eligibility for an annual bonus equal to from 40% up to 80% of his

annual base salary.

 

Section 8 of the employment agreement was entitled "Restrictive Covenants."

For a period of the longer of one year after final payments under the agreement

or two years following termination of employment, defendant agreed not to engage

in competition with any business conducted or carried on by Waste Management or

any of its subsidiaries within 100 miles of any of Waste Management's operating

locations or marketing offices, including those of any Waste Management

affiliates. The employment agreement also contained restrictions against

solicitation of customers and disclosure of confidential information. The

agreement contained a provision that Texas law applied to disputes arising under

it.

 

By the fall of 2005, the other Peltz principals had left RAA. Defendant

testified that he, too, was planning to leave, but the president of WMI asked

him to stay for three years. Defendant agreed to stay for two years, and they

compromised at two and a half years. On September 30, 2005, defendant signed a

"First Amendment To Employment Agreement." That document amended the term of the

original employment agreement by extending it to March 31, 2008; it amended

defendant's compensation by providing, inter alia, that upon termination he

would be paid two times his annual base salary and one times his target annual

bonus. Paragraph 4 of the amendment provided: "Except as expressly modified or

amended herein, all provisions of the Employment Agreement shall remain in full

force and effect and continue to govern the parties thereto." The restrictive

covenants remained in full force and effect. The amendment provided that Texas

law applied.

 

Defendant left WMRA at the end of May 2008. WMRA paid defendant the benefits

under the amendment to the agreement. On August 16, 2010, while the restrictive

covenants were still in effect, defendant went to work for Pioneer Industries,

Inc. (Pioneer), located in Minneapolis, Minnesota, as its president and CEO.

Defendant testified that the offer of a $45 million bonus upon the sale of

Pioneer lured him out of retirement. Matthew Coz described Pioneer as a

recycling company with multiple locations that operates in a business format

comparable to Waste Management's recycling business. In Coz's opinion, Pioneer

Industries competes against WMRA for recyclable material. Michael Tunney, WMRA's

recycling operation's director for Illinois, Indiana, Michigan, and Ohio,

testified that anyone who participates in recycling is WMRA's competitor. James

Chafoulias, Pioneer's owner who recruited defendant, testified that anyone who

calls on a printer (WMRA does) is Pioneer's competitor. Defendant insisted that

Pioneer is a "niche" company that does not compete for the same waste materials

as WMRA.4

 

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -4 At trial,

the issue of competition was the subject of much discussion. On appeal, the

issues focus on the reasonableness of the restrictions in the employment

agreement. Therefore, we do not recount the voluminous testimony dealing with

competition.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

 

The Lawsuit

 

On November 24, 2010, WMRA sued defendant and David Pelz, who was one of the

principals of the Peltz Group, alleging violations of the restrictive covenants

in their respective employment agreements. WMRA moved for a temporary

restraining order, which the trial court denied. This court affirmed the trial

court's decision in WM Recycle America, LLC v. Lavin, No. 2--10--1216 (2010)

(unpublished order under Supreme Court Rule 23). Following this court's

decision, WMRA voluntarily dismissed Pelz from the suit and proceeded in the

trial court against defendant only. On January 24, 2011, defendant filed an

answer and affirmative defenses to the complaint, and, after discovery, the

parties proceeded to an evidentiary hearing on WMRA's motion for a preliminary

injunction. Following the hearing, the trial court took the case under

advisement and issued its written memorandum opinion and order denying the

preliminary injunction on February 3, 2011.

 

As stated above, the employment agreement contained a provision that Texas

law applied. WMRA argued for the application of Texas law, while defendant

argued for the application of Illinois law. The trial court did not expressly

rule on the choice of law issue, but found that Texas and Illinois law were both

governed by the guiding principle that restrictive covenants are enforceable if

they are reasonable. The court found that the main difference between Illinois

and Texas law is that Texas's law relating to restrictive covenants is codified.

Under both laws, the court stated, the question of the reasonableness of the

covenants is one of law. The trial court also found that both states have

similar requirements for preliminary injunctions. The court applied both Texas

and Illinois law.

 

Central to the trial court's analysis was its finding that the 2003

employment agreement was ancillary to the sale of a business while the 2005

amendment to the employment agreement was ancillary to employment and not to the

sale of a business. Pursuant to this analysis, the court examined whether the

restrictive covenants served to protect WMRA's confidential information or

customer relationships. The court found that defendant did not have confidential

information he gained as WMRA's employee. The trial court made no finding

regarding WMRA's customer relationships. The trial court found that there was no

reasonable relationship between the 100-mile restriction and any legitimate

interest of WMRA, given that WMRA's customers are located throughout the globe.

The court further found that the phrase "any operating location or sales or

marketing office of [WMRA] or any of its affiliates" is vague and ambiguous due

to the fact that many of WMRA's sales people worked from their homes and the

agreement did not define "operating location," "marketing office," or

"affiliate." The trial court concluded that the restrictive covenants were

unreasonable because they restricted defendant from "accepting employment

anywhere on the planet."

 

The trial court ruled that WMRA did not meet the requirements for a

preliminary injunction because it did not demonstrate a likelihood of success on

the merits or demonstrate that it would be irreparably harmed if an injunction

did not issue. The court acknowledged that Texas requires the court to reform

covenants it finds to be unreasonable, but held that to do so at the preliminary

injunction stage would be premature. This timely appeal followed.

 

ANALYSIS

 

WMRA contends that the trial court erred in denying the motion for

preliminary injunction on four grounds: (1) the covenants protected the value of

the business goodwill WMRA acquired through its acquisition of the Peltz Group;

(2) the covenants were reasonable considering the breadth of WMRA's operations

and the nature of defendant's high-level position; (3) absent an injunction,

WMRA will suffer irreparable injury to its business goodwill and competitive

edge; and (4) the harm to defendant is insignificant because he agreed to be

bound by the covenants and was handsomely compensated for doing so.

 

Choice of Law

 

We must first determine which law governs. WMRA contends that Illinois law

governs the standards for granting a preliminary injunction but Texas law

governs the issue of the reasonableness of the restrictive covenants. Defendant

agrees that Illinois law governs the standards for preliminary injunctions but

contends that Illinois law also governs the issue of whether the restrictive

covenants are enforceable. Accordingly, we will apply Illinois law to determine

the standards for granting or denying a preliminary injunction and then discuss

the parties' contentions regarding the law to be applied to the covenants.

 

A preliminary injunction is a provisional remedy to preserve the status quo

pending a hearing on the merits of a case. Hanchett Paper Co. v. Melchiorre, 341

Ill. App. 3d 345, 351 (2003). A court may not grant a preliminary injunction

unless the party seeking the preliminary injunction shows that (1) it possesses

a clear right or interest needing protection; (2) it has no adequate remedy at

law; (3) irreparable harm will result if the preliminary injunction is not

granted; and (4) there is a reasonable likelihood of success on the merits.

Hanchett, 341 Ill. App. 3d at 351.

 

Although the parties debate the standard of review and discuss it in

different terms, they essentially are in agreement on it. The issue in this case

is whether a preliminary injunction should issue to enforce a restrictive

covenant, the validity of which is in question. Therefore, under this court's

decision in The Agency, Inc. v. Grove, 362 Ill. App. 3d 206, 216 (2005), three

different standards of review apply. We review questions of fact under a

manifest weight standard; whether a covenant is enforceable is reviewed de novo;

and whether a preliminary injunction should issue to enforce a restrictive

covenant is reviewed for abuse of discretion. Grove, 362 Ill. App. 3d at 215 216

.

 

We turn now to the issue of which state's law applies to the restrictive

covenants. As we previously noted, the employment agreement and the amendment to

the employment agreement provided that Texas law applies. Illinois will give

effect to an express choice of law provision in a contract where (1) the law of

the chosen state does not contravene Illinois' public policy and (2) there is

some relationship between the chosen forum and the parties or the transaction.

Potomac Leasing Co. v. Chuck's Pub, Inc., 156 Ill. App. 3d 755, 757-759 (1987).

Public policy considerations must be "strong and of a fundamental nature" to

justify overriding the chosen law. Potomac, 156 Ill. App. 3d at 759.

 

We consider the public policy of each state. In Reliable Fire Equipment Co.

v. Arredondo, 405 Ill. App. 3d 708 (2010), this court reiterated the common law

principles relating to restrictive covenants, which our supreme court has

recognized. Foremost among those principles is the doctrine against restraint of

trade. Reliable, 405 Ill. App. 3d at 724. "'A promise is in restraint of trade

if its performance would limit competition in any business or restrict the

promisor in the exercise of a gainful occupation, and a promise that is

unreasonably in restraint of trade is unenforceable.'" Reliable, 405 Ill. App.

3d at 724, quoting E. Farnsworth, Contracts, § 5.3, at 19 (3d ed. 2004). In

order for a promise to refrain from competition to be reasonable, the promisee

must have an interest worthy of protection that may be balanced against the

hardship on the promisor and the likely injury to the public. Reliable, 405 Ill.

App. 3d at 724.

 

Texas has codified its law regarding restrictive covenants. Section 15.50(a)

of the Covenants Not to Compete Act (Act) provides:

 

 

(a) *** [A] covenant not to compete is enforceable if it is

ancillary to or part of an otherwise enforceable agreement at the time

the agreement is made to the extent that it contains limitations as to

time, geographical area, and scope of activity to be restrained that

are reasonable and do not impose a greater restraint than is necessary

to protect the goodwill or other business interest of the promisee."

Tex. Bus. & Com. Code § 15.50(a) (Vernon 2009).

 

 

Section 15.51(c) provides that if the limitations as to time, geographical area,

or scope of activity to be restrained are not reasonable and impose a greater

restraint than is necessary to protect the goodwill or other business interest

of the promisee, the court shall reform the covenant, may not award damages

before its reformation, and the relief granted to the promisee is limited to

injunctive relief. In section 15.52, the Texas legislature provided that the

criteria for enforceability of a covenant not to compete as stated in section

15.50 of the Act are exclusive and preempt any other criteria for enforceability

under common law or otherwise.

 

Under Texas law, covenants not to compete are generally considered restraints

of trade and are disfavored. Valley Diagnostic Clinic, P.A. v. Dougherty, 287

S.W. 3d 151, 155-56 (Tex. App. 2009). "It is evident that Texas has a

fundamental policy to enforce reasonable covenants not to compete." Intermetro

Industries Corp. v. Kent, 2007 WL 518345 (M.D. Pa. 2007). In interpreting the

provisions of the Act, the Court of Appeals of Texas stated:

 

 

"The Act balances both the interests of employees and their

employers, recognizing that restraints should be no greater than

'necessary to protect the goodwill or other business interest of the

promisee.' [Citation]. Thus, Texas will enforce reasonable restraints

on competition that protect legitimate business interests of the

employer." Holeman v. National Business Institute, Inc., 94 S.W. 3d

91, 98 (Tex. App. 2002).

 

 

The Texas Supreme Court held that the "core inquiry" of section 15.50(a) of the

Act is whether the restraints imposed by a covenant not to compete are

reasonable. Alex Sheshunoff Management Services, L.P. v. Johnson and Strunk &

Assoc., L.P., 209 S.W. 3d 644, 655 (Tex. Sup. Ct. 2006). Texas Supreme Court

Chief Justice Jefferson put it thusly in a concurring opinion: "In sum, section

15.50(a) seeks to enforce reasonable covenants that protect legitimate business

interests and are supported by valid consideration." Alex Sheshunoff, 209 S.W.

3d at 660 (Jefferson, C.J., concurring).

 

In our case, defendant contends that the Texas Act contravenes Illinois'

public policy in two regards: (1) the hardship to the employee is not expressly

considered, and (2) Texas courts must reform an unreasonable restraint to make

it reasonable rather than declare it unenforceable. Thus, defendant concludes

that Illinois has chosen to provide its workers greater protection than does

Texas. The Act takes into account the hardship to the employee because it first

requires that the covenant not to compete be ancillary to or part of an

otherwise enforceable agreement at the time the agreement is made. First,

section 15.50(a) does not permit the covenant to stand alone. Alex Shehunoff,

209 S.W. 3d at 658 (Jefferson, C.J., concurring.) It must arise out of a

relationship between the employer and the employee that safeguards a legitimate

business interest of the employer. Alex Sheshunoff, 209 S.W. 3d at 658-59

(Jefferson, C J., concurring.) Second, the covenant's restraints cannot be

greater than necessary to protect the legitimate business interest of the

employer. Taken together, this means what Holeman concluded, that the Act

balances the interests of both the employee and the employer. So, while the

Texas legislature did not use the words "hardship to the employee," it provided

for consideration of that factor.

 

Mandatory judicial reformation of an agreement gives us more pause. In

Cambridge Engineering, Inc. v. Mercury Partners 90 BI that allowing extensive

judicial reformation of blatantly unreasonable posttermination restrictive

covenants maycontravene Illinois public policy because of the potentially severe

effect it could have on employees subject to such covenants. Cambridge, 378 Ill.

App. 3d at 456. The Cambridge court was concerned that a policy allowing

extensive reformation would give employers an incentive to draft restrictive

covenants as broadly as possible, which could have a "severe chilling effect" on

an employee's posttermination activities. Cambridge, 378 Ill. App. 3d at 456.

The Cambridge court viewed judicial reformation of restrictive covenants with

suspicion because it increases the hardship to the employee. Cambridge, 378 Ill.

App. 3d at 456. At the same time, the court in Cambridge acknowledged that in

some circumstances courts may choose to modify an overbroad restrictive covenant

rather than invalidate it outright. Cambridge, 378 Ill. App. 3d at 456-57. The

court held that, in deciding whether modification is appropriate, the fairness

of the restraints contained in the contract is a key consideration. Cambridge,

378 Ill. App. 3d at 457. A court would not err in failing to modify an

unconscionable contract. Cambridge, 378 Ill. App. 3d at 457.

 

While we share the Cambridge court's reservations, we do not believe that

Texas' policy is so strongly and fundamentally contrary to the public policy in

Illinois that it overrides the instant parties' choice of law. Illinois allows

for modification, or blue-pencilling, albeit we are more circumspect in applying

the rule.

 

Having determined that Potomac's first test, public policy, does not require

that we apply Illinois law, we next consider Potomac's second test, whether

there is some relationship between the chosen forum and the parties or the

transaction. Defendant argues that the only relationship this case has to Texas

is that WMRA is headquartered there, defendant's paychecks were generated there,

and defendant visited there "from time to time." Defendant ignores that he

agreed to be bound by Texas law. This is not a case where, in the absence of a

choice-of-law provision in a contract, this court must decide the conflict

question. Here, the parties were of equal bargaining power, and in both the

employment agreement and the amendment, they agreed Texas law would apply.

Moreover, defendant's contacts with Texas were not casual. He reported directly

to the president of RAA who was in Texas. He traveled to Texas for meetings

monthly or every two months. Under Potomac, there must be "some" relationship

between the parties or the transaction and the chosen forum. Potomac, 156 Ill.

App. 3d at 757-59. The record here demonstrates "some" relationship between the

parties and Texas. Accordingly, we hold that Texas law governs the restrictive

covenants in this case.

 

Whether the Covenants Are Ancillary to the Sale of a Business or Ancillary to

Employment

 

The trial court found that the employment agreement defendant entered into in

2003 was ancillary to the sale of a business, because it was entered into in

conjunction with Waste Management's acquisition of the Peltz Group. The trial

court found that the 2005 amendment to the employment agreement was ancillary to

employment, not to the sale of a business. WMRA challenges the second finding as

being against the manifest weight of the evidence.

 

A covenant not to compete, ancillary to the sale of a business, is upheld as

a necessity to secure the goodwill the buyer purchases. Williams v. Powell

Electrical Manufacturing Co., Inc., 508 S.W. 2d 665, 667 (Tex. App. 1974). Put

another way, such restraints are justified by the buyer's need to protect the

value of the goodwill it purchased with the business. E. Farnsworth, Contracts §

5.3, at 22 (3d ed. 2004). Goodwill is an integral part of the business, which

includes the competitive advantages accruing to a business on account of its

name, location, reputation, and success. Airflow Houston, Inc. v. Theriot, 849

S.W. 2d 928, 933 (Tex. App. 1993). Absent a promise not to compete, the seller

is free to open a new business in competition with the buyer. E. Farnsworth,

Contracts § 5.3, at 23 (3d ed. 2004). An analogous situation arises where a

corporation's business depends heavily on the goodwill of one or more officers

or significant shareholders. When such a person, on the sale of a business,

promises not to compete, the promise is one ancillary to the sale. E.

Farnsworth, Contracts § 5.3, at 23 (3d ed. 2004). If the restraint is ancillary

to the sale of a business and its goodwill, the employer has a legitimate

interest in the protection of that goodwill. E. Farnsworth, Contracts § 5.3, at

29 (3d ed. 2004).

 

Promises not to compete ancillary to employment, however, are sustained only

if the employer stands to lose its investment in confidential information or in

customer lists or similar information. E. Farnsworth, Contracts § 5.3, at 24-25

(3d ed. 2004). In other words, the inquiry in analyzing a covenant not to

compete ancillary to employment is to what extent the employee has appropriated

an asset of the employer and used it against the employer. E. Farnsworth,

Contracts § 5.3, at 29 (3d ed. 2004). A post-employment restraint is scrutinized

with more care than are covenants in the sale of a business, because

post-employment restraints are often the product of unequal bargaining power. E.

Farnsworth, Contracts § 5.3, at 25 (3d ed. 2004).

 

This distinction reflects that over a long period of time courts have

consistentlyfound sale-ofbusiness covenants more acceptable. Budget Rent-A-Car

Corp. of America v. Fein, 342 F. 2d 509, 515 (5th Cir. 1965). A covenant

ancillary to the sale of a business enables the seller to capitalize on and

dispose of his goodwill, thereby receiving a higher price. Fein, 342 F. 2d at

515. A covenant is an inducement to a purchaser of a going concern who hopes to

retain the seller's customers. Fein, 342 F. 2d at 515. Far different

considerations adhere in covenants ancillary to employment, because such

contracts restrict an employee's choice of occupation after termination and may

produce severe hardship on some employees. Fein, 342 F. 2d at 516.

 

In a nutshell, the central issue in our case is whether the amendment to the

employment agreement was necessaryto protect the goodwill Waste Management

purchased when it acquired the Peltz Group and defendant, or whether WMRA had to

raise a fair question that defendant appropriated confidential information or

customers.

 

Rather than summarize, we set forth the trial court's findings:

 

 

"Testimony established that [defendant] owned approximately 1/3 of

the shares of the Pelz [sic] Group, and received a substantial sum of

money both when the merger5 occurred in January 2003 and in September

2005 when WMRA bought back the 9% interest in WMRA that the members of

the Pelz [sic] Group retained. It is clear, and the Court so finds,

that the initial Employment Agreement was ancillary to the purchase of

a business.

 

However, it is equally clear that the nature of the Employment

Agreement changed in September 2005 when [defendant] was preparing to

leave WMRA. His agreement to remain with WMRA for an additional 21/2

years was supported by ample consideration, i.e., the assurance that

he would receive two years' compensation when he voluntarily

terminated employment at the of the agreed period. By that time, the

nature of [defendant's] employment had changed and WMRA had reaped the

benefit of any goodwill and synergies achieved by its merger with the

Pelz [sic] Group. The Court finds that the Employment Agreement as

amended in 2005 was not an agreement ancillary to the sale of a

business." (Emphasis in original).

 

 

The trial court did not elaborate on its findings by citing testimony or

evidence in the record to support them. Specifically, the trial court did not

say why it concluded that the September 2005 buyout of the Peltz Group's

membership shares in RAA did not relate to the 2005 amendment to the employment

agreement, or why it concluded that in only two years Waste Management had

reaped the benefit of the goodwill it purchased for $60,000,000.

 

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -5

Throughout its memorandum opinion, the trial court mischaracterized the

transaction as a merger. Defendant, in his testimony and in his brief, similarly

mischaracterizes the transaction.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

 

Defendant asserts that WMRA has forfeited this issue because it does not

argue that the trial court's findings are against the manifest weight of the

evidence. At page 27 of its opening brief, WMRA states, "The trial court erred

in finding that while the restrictive covenants were originally ancillary to the

sale of the Peltz Group, they became ancillary to the employment agreement after

the 2005 amendment to [defendant's] contract." Defendant apparently believes

that the assertion the trial court "erred" in its findings is insufficient to

raise the issue. Defendant's argument is without merit. Accordingly, WMRA has

not forfeited the issue.

 

WMRA argues that Waste Management had a protectable interest in the goodwill

it purchased, which could be ensured by curtailing defendant's post-employment

activities. WMRA maintains that the amendment to the employment agreement had no

effect on the restrictive covenants because the amendment pertained solely to

compensation and benefits and provided that the remainder of the agreement

remained in full force and effect. Further, WMRA argues that there is no

evidence to suggest that Waste Management contemplated that it would have reaped

the goodwill it purchased in a mere two years. Had that been the case, WMRA

argues, Waste Management would have paid far less than $60,000,000 to acquire

the Peltz Group. Defendant argues that the amendment to the employment agreement

was ancillary to employment because it was supported by consideration and the

nature of defendant's employment changed.

 

Although WMRA contends that Texas law applies to the determination of the

enforceabiliity of the restrictive covenants, it relies on an Illinois case,

Hamer Holding Group, Inc. v. Elmore, 202 Ill. App. 3d 994 (1990), in which the

court held that a covenant was ancillary to the sale of business where execution

of an employment agreement was a condition precedent to the sale. Elmore was the

sole owner and CEO of a realty and management company he conveyed with all its

assets, including goodwill. Hamer, 202 Ill. App. 3d at 996-97. As a condition

precedent to the sale, Elmore was to execute and deliver an employment agreement

. Hamer, 202 Ill. App. 3d at 997. Thus, the purchaser deemed Elmore's services

an indispensable asset. Hamer, 202 Ill. App. 3d at 1008. As in Hamer, WMRA says

the purchase of the Peltz Group was conditioned on defendant's employment

agreement, and, like Elmore, defendant was an indispensable asset. Defendant

distinguishes Hamer on the basis that the closing documents in the instant case,

unlike those in Hamer, did not condition Waste Management's acquisition of the

Peltz Group on the execution of the employment agreement. Our research did not

uncover any Texas case on point. Therefore, we find Hamer persuasive.

 

Defendant would have us divorce the circumstances surrounding the 2005

amendment to the employment agreement from those that preceded it. This we

cannot do. The record shows that the amendment to the employment agreement was

tied to the buyout of the Peltz Group's shares in RAA, which was the culmination

of the transaction in which Waste Management acquired the Peltz Group.

 

Waste Management's waste-paper recycling business was negligible as of 2003.

In order to make its paper brokerage business a market force, Waste Management

acquired the Peltz Group, a paper recycler with a national presence. According

to Waste Management's Matthew Coz, this acquisition was "very significant." Coz

also made it clear that gaining defendant was no less significant. Coz testified

that "[defendant] was the most important person in the acquisition." Defendant

had the contacts with the largest printers, like RR Donnelly, and the market

knowledge to transform Waste Management into a major competitor. To acquire this

stature and competitive edge, Waste Management spent approximately $60,000,000.

 

Waste Management obtained 91% of the membership shares in the newly formed

RAA, while the Peltz Group obtained 9%. At the time of this transaction in 2003,

the parties obviously contemplated and expected that Waste Management would buy

the Peltz Group's shares, because the parties entered into a put/call agreement

for those shares.6 Simultaneously, defendant, as a shareholder in the Peltz

Group, entered into a Business Protection Agreement with Waste Management, and

defendant (as well as the other Peltz Group principals) signed an employment

agreement. The Business Protection Agreement recited that the put/call agreement

was in "furtherance of and in connection with" the transaction and further

recited that the transaction would not occur unless defendant entered into the

Business Protection Agreement, which contained restrictive covenants identical

to those in the employment agreement. While the employment agreement contained

no language making it a condition of the transaction, Mary Kliesmet, an attorney

for the Peltz Group who worked on the transaction, testified that defendant's

employment agreement was a condition of the sale. Defendant counters this

testimony by arguing that it lacked foundation, an objection the trial court

overruled. The record shows that Kliesmet did the due diligence for the

transaction, reviewed the documents exchanged between the parties, and was part

of the negotiations. After the acquisition, she became a senior attorney for

Waste Management. Therefore, the record demonstrates the foundation for her

testimony.

 

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -6 The

put/call agreement was not introduced in evidence. It was mentioned in

testimony, and there is a letter in evidence that gives some insight into the

put/call agreement.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

 

Nevertheless, defendant asserts that two facts refute the evidence that the

employment agreement was a condition precedent to the sale, the business

protection agreement and his right to leave at any time upon 90-days' notice.

Defendant posits that if the employment agreement were a condition precedent,

there would have been no need for the business protection agreement because it

contained restrictive covenants of its own. Moreover, defendant argues, pursuant

to the 90-day notice provision of the employment agreement, he could have given

notice the day after the closing and still have collected his share of the

$60,000,000 purchase price. WMRA contends that the business protection agreement

was an example of prudent "belt-and-suspenders-drafting" and that the 90-day

notice requirement meant that defendant could not leave immediately upon signing

the closing documents. We are not persuaded by defendants' arguments. First, it

is not clear how Waste Management could have provided that defendant could never

leave its employ; second, the time restrictions in the business protection

agreement and the employment agreement were not coextensive. The business

protection agreement provided that the restrictions were tied to the periods

defendant had an interest in the distributions under the put/call agreement or

otherwise beneficially owned an interest in the Peltz Group, whereas the

restrictions in the employment agreement were tied to the periods of defendant's

employment. Tying the restrictions to the period of defendant's employment in

the employment agreement was in furtherance of Waste Management's purchase of

goodwill in the transaction. Consequently, Kliesmet's testimony that the

employment contract was a condition of the sale was not refuted by the existence

of the business protection agreement.

 

The term of defendant's employment agreement was three years, automatically

renewable for two-year increments. Between January 1, 2003, the beginning of the

term of the agreement, and September 30, 2005, the effective date of the

amendment, defendant had become the "architect" of Waste Management's brokerage

business, which grew to be national, even international, in breadth. According

to Coz, defendant was "a significant force for our company during that

time--still today."

 

On May 1, 2005, a letter from the Peltz Group to Waste Management detailed

that negotiations were underway for Waste Management's "early" buyout of the

Peltz Group's shares in RAA pursuant to the put/call agreement signed in 2003.

The buyout was effected on September 30, 2005, when Waste Management gave the

Peltz Group a promissory note for approximately $17,000,000; the Peltz Group

assigned its shares in RAA to Waste Management; defendant resigned from RAA's

board of directors; and defendant signed an amendment to the employment

agreement. Defendant testified that the divestiture of his shares in RAA was

"written into" the "original" agreement, meaning the 2003 transaction. As for

the amendment to the employment agreement, Kliesmet testified that the amendment

was done in conjunction with the buyout.

 

As a one-third owner of the Peltz Group, defendant was compensated in the

amount of approximately $20,000,000 in 2003 and approximately $6,000,000 in 2005

(these sums were paid over time instead of in a lump sum.) The timing of the

other principals of the Peltz Group's departure from Waste Management coincided

with the buyout. It was against this scenario that defendant and Waste

Management negotiated the amendment to defendant's employment agreement. The

record does not support defendant's assertion, and the trial court's finding,

that the nature of defendant's employment changed. Defendant testified that

Patrick De Rueda, RAA's president, gave defendant additional responsibilities,

but defendant also testified that his assignment remained the same upon

execution of the amendment. "***[The president of Waste Management] wanted

[defendant] to do the same thing, manage the brokerage business and sell all the

volume out of [Waste Management.]"

 

Similarly, we do not find support in the record for the trial court's finding

that Waste Management had reaped the benefit of the goodwill it purchased with

its 2003 acquisition of the Peltz Group by the time it entered into the

amendment to defendant's employment agreement. The term of the employment

agreement was three years; the three years had not expired at the time of the

amendment. Therefore, Waste Management had not realized its investment in

defendant as of the date of the amendment. Moreover, Waste Management was

willing to invest another $17,000,000 to acquire the Peltz Group's shares in RAA

plus additional consideration to keep defendant.

 

As in Hamer, Waste Management would not have proceeded with the acquisition

of the Peltz Group without the execution of the employment agreement, and it

deemed defendant's services an indispensable asset. Waste Management spent

handsomely to ensure that its acquisition was not an illusory one.

 

Just as we cannot ignore the significance of the 2003 acquisition having been

completed by the 2005 buyout, we cannot ignore the significance of an amendment

to the employment agreement instead of the execution of a new agreement. The

amendment showed an intention to change some provisions in the original document

instead of an intent to supercede the original document. See In re Oceanside

Properties, Inc., 1 B.R. 747, 749 (D. Hawaii 1980). ("There is a difference

between a 'First Amendment to [a document]' and a 'First Amended [document]. The

first shows merely an intent to change some provisions in the original document,

whereas the second shows an intent to supercede the original document with the

amended document.").

 

We also cannot ignore that the bargaining position of the parties here was

not uneven, as it often is in an employer/employee relationship. See Hamer, 202

Ill. App. 3d at 1007-08. The acquisition of the Peltz Group was negotiated, as

was the buyout, and defendant negotiated the terms of the amendment directly

with the president of Waste Management. Defendant accepted over $20,000,000 in

exchange for his promise not to compete against his former employer. None of the

concerns inherent in an employment agreement ancillary to employment, such as

hardship to the employee or injury to the public, is present in this case.

 

WMRA cites Business Records Corp. v. Lueth, 981 F. 2d 957 (7th Cir. 1992),

which we find instructive. In Lueth, the defendant who had, over many years,

become prominent selling election equipment to state and local governments,

worked for Thornber at the time it was acquired by the plaintiff. Lueth, 981 F.

2d at 958-59. The plaintiff sold election equipment nationwide, and it required

the defendant to sign a noncompetition agreement as a condition precedent to its

purchase of Thornber. Lueth, 981 F. 2d at 959. The defendant signed the

agreement and received as consideration stock in the plaintiff. Lueth, 981 F. 2d

at 959. He became vice-president of the plaintiff. Lueth, 981 F. 2d at 959.

Before the expiration of his employment agreement, the defendant went to work

for one of the plaintiff's competitors, and the plaintiff sued the defendant,

alleging a violation of the noncompetition agreement. Lueth, 981 F. 2d at 959.

The district court granted an injunction in the plaintiff's favor, and the

defendant appealed. The Seventh Circuit first held that the noncompetition

agreement was made ancillary to the sale of a business because it was signed as

part of the sales agreement. Lueth, 981 F. 2d at 960. "[T]he noncompetition

agreement and the sales agreement were executed simultaneously; and [the

plaintiff] gave [the defendant] 3750 shares of its parent's common stock."

Lueth, 981 F. 2d at 960. The court noted that the defendant accepted the

restraints voluntarily at the bargaining table and enthusiastically accepted

valuable consideration. Lueth, 981 F. 2d at 960. The court upheld the restraint

imposed upon the defendant for two years past his quitting time on the basis

that the defendant had worked for the plaintiff for only six years and the

plaintiff still had goodwill it needed to protect. Lueth, 981 F. 2d at 960-61.

 

In our case, as in Lueth, defendant signed the employment agreement as part

of the sale of the Peltz Group to Waste Management. Then in 2005, defendant

signed the amendment to the employment agreement in conjunction with the Peltz

Group's sale of its shares in RAA, which represented the culmination of the 2003

transaction. As in Lueth, Waste Management "invested in preserving" defendant's

loyalty. In addition to the millions defendant was paid as his share of the

initial sale and then the buyout, he received two years' salary plus a bonus as

consideration for the amendment to the employment agreement. If, under similar

circumstances, the goodwill attached to the transaction was intact after six

years in Lueth, it follows that Waste Management would not have reaped the

benefit of the goodwill it purchased after less than three years.

 

Accordingly, we determine that the trial court's finding that the 2005

amendment to the employment agreement was ancillary to employment was against

the manifest weight of the evidence. Waste Management's legitimate business

interest was the value of the goodwill it purchased. It was entitled to protect

that interest. Thus, defendant's inquiry into whether defendant appropriated

confidential information, or whether Waste Management enjoyed a near-permanent

relationship with its customers, is irrelevant.

 

Whether the Restrictive Covenants Are Overbroad

 

Having determined that defendant's employment agreement was ancillary to the

sale of a business, we proceed to the issue of whether the restrictive

covenants' limitations as to time, geographical area, and scope of activity were

reasonable and did not impose a greater restraint than necessary to protect

Waste Management's goodwill.

 

Section 8 of the employment agreement contained the restrictive covenants.

Section 8(a), the noncompetition agreement, provided in relevant part as

follows:

 

 

"Employee *** agrees that for a period of one (1) year after the

date payments made to, or benefits received by, Employee pursuant to

this Agreement cease, or for a period of two (2) years following the

date of termination of Employee's employment whichever is later

(whether such termination is voluntary or involuntary by wrongful

discharge, or otherwise), Employee will not, directly or indirectly

through other persons, within 100 miles of any operating location or

sales or marketing office of the Company or any of its affiliates,

engage in, assist (whether Employee receives a financial benefit or

not), or have any active interest or involvement, whether as an

employee, agent, consultant, creditor, advisor, officer, director,

stockholder (excluding holdings of less than 1% of the stock of a

public company), partner or proprietor of, or any type of principal

whatsoever in, any person, firm, or business entity which, directly or

indirectly, is engaged in a business competing with any business

conducted and carried on by the Company or any of its subsidiaries,

without the Company's prior written consent."

 

 

Section 8(b) of the employment governed non-solicitation, and for the same time

periods as section 8(a) provided:

"***Employee will not, directly or indirectly through others, (i)

induce any customers of the Company or its affiliates to patronize any

similar business which competes with any business of the Company or

its affiliates to patronize any similar business which competes with

any business of the Company or its subsidiaries; (ii) canvass, solicit

or accept any similar business from any customer of the Company or its

affiliates; (iii) request or advise any customers of the Company or

its affiliates to withdraw, curtail or cancel such customer's business

with the Company or its affiliates; (iv) disclose to any other person,

firm or corporation the names or addresses of any of the customers of

the Company or its subsidiaries; or (v) cause, solicit, entice, or

induce any present or future employee of the Company or any of its

subsidiaries to leave the employ of the Company or such subsidiary or

to accept employment with, or compensation from, the Employee or any

other person, firm, association, or corporation, without the Company's

prior written consent."

 

 

Section 8(c) was a non-disparagement clause, and section 8(d) prohibited the

disclosure of confidential information.

 

The non-disparagement clause was not a subject of the litigation. However, in

its complaint, WMRA alleged that defendant breached the non-disclosure clause

and requested that injunctive relief include prohibiting defendant from

disclosing confidential information. In this appeal, WMRA reiterates its

position that the non-disclosure clause, which is indefinite in duration, is

enforceable. WMRA argues that the non-disclosure clause is not in restraint of

trade and, therefore, its reasonableness is not at issue. It appears that the

trial court in its memorandum opinion did not address this issue. The trial

court's discussion of confidential information was directed toward whether

defendant had appropriated confidential information for purposes of determining

whether WMRA possessed a legitimate business interest that would justify the

restraint imposed by the restrictive covenants in the noncompete and

non-solicitation clauses. In his brief, defendant similarly addresses only the

legitimate-business-interest.

 

The trial court found that the restrictions in the noncompete and

non-solicitation clauses of the employment agreement amounted to an

industry-wide exclusion in that it prohibited defendant from engaging in any

activity in any business entity that is engaged in a business competing with any

business conducted by Waste Management or any of its subsidiaries. Given that

Waste Management operates around the world in all areas of recycling, the court

found that defendant would act at his peril in accepting employment "anywhere on

the planet."

 

WMRA argues that the restrictions are reasonable. It maintains that the time

restriction is three years after termination of employment, which is reasonable.

It asserts that the geographical restriction is reasonable because WMRA conducts

business nationwide and defendant's duties as vice-president of sales and

marketing extended to the entire country. WMRA argues that one of its business

interests is the goodwill it acquired through the purchase of the Peltz Group,

which did business throughout the country. Therefore, WMRA concludes that the

restrictions are not greater than necessary to protect its goodwill.

 

On its face, section 15.50 of the Act does not apply to non-solicitation

agreements. However, Texas courts apply the same analysis to non-solicitation

agreements as to covenants not to compete. Shoreline Gas, Inc. v. McGaughey,

2008 WL 1747624, at *10 (Tex. App. 2008); Miller Paper Co. v. Roberts Paper Co.,

901 S.W. 2d 593, 600 (Tex. App. 1995).

 

We first consider the time restriction. Defendant's employment agreement

prohibited him from competing or soliciting for a period of one year following

his receipt of payment and benefits under the agreement, or for a period of two

years after termination from employment, whichever is later. In Gallagher

Healthcare Insurance Services v. Vogelsang, 312 S.W. 3d 640, 655 (Tex. App.

2010), the court stated "[t]wo to five years has repeatedly been held as a

reasonable time in a noncompetition agreement." Consequently, we hold that the

time restriction is reasonable.

 

We next consider the geographical restrictions. WMRA disputes the trial

court's finding that the restriction was national in scope, arguing that

defendant could work in Kansas City, Missouri, because WMRA does not operate

within 100 miles of that city. However, for purposes of our discussion, we will

accept the trial court's finding. Generally, a reasonable area for purposes of a

covenant not to compete is the territory in which the employee worked while in

the employment of his employer. Curtis v. Ziff Energy Group, Ltd., 12 S.W. 3d

114, 119 (Tex. App. 2000). In our case, defendant began his employment as

vice-president of sales and marketing in the Midwest, but within 90 days, he was

made vice-president of sales and marketing nationwide. Consequently, the

territory in which he worked was the entire country.

 

We are persuaded by the facts of this case that it is governed by Powell. In

Powell, the issue was whether the trial court erred in issuing a nationwide

injunction. Powell, like the present case, involved a restrictive covenant

ancillary to the sale of a business. "When a business is sold, a reasonable area

is that which is no larger than necessary to protect the business sold." Powell,

508 S. W. 2d at 667-68. Faced with an issue of first impression, the appellate

court upheld the injunction. The court stated that it would have agreed that a

nationwide restriction was unreasonable "if appellees had not demonstrated that

the business sold was national in character." Powell, 508 S.W. 2d at 668. Here,

the evidence showed that the Peltz Group, the business sold to Waste Management,

was national in character. "In an era of national and international

corporations, a modern court of equity cannot feel constrained by past

precedents involving the sale of barber shops and livery stables." Powell, 508

S.W. 2d at 668. Consequently, the territorial restrictions in the instant case

are reasonable.

 

We reiterate that the instant case does not present us with a situation in

which defendant had no bargaining power, or where to abide by the restrictions

visited harm on defendant. Indeed, defendant testified that he had looked

forward to retirement and was lured out of retirement by the prospect of a $45

million bonus upon the sale of Pioneer. Defendant argues that in balancing the

harms, we should take into account that Waste Management is a

multi-billion-dollar company. If this were not an employment agreement ancillary

to the sale of a business, and if defendant had been a mere salaried employee,

this argument might carry weight. However, defendant was paid over $20,000,000

plus two years' salary and a bonus to keep a three-year promise. Accordingly, we

determine that the restrictive covenants in the noncompete and non-solicitation

clauses are enforceable. Whether the Trial Court Abused Its Discretion In

Denying the Motion for Preliminary Injunction

 

The trial court held that WMRA could not demonstrate a likelihood of success

on the merits. The trial court also held that WMRA did not demonstrate

irreparable harm. Defendant contends that WMRA has no protectable interest

because defendant did not appropriate or use confidential information and

because WMRA did not have near-permanent relationships with its customers.

However, as we have determined that WMRA's protectable interest was the goodwill

it purchase upon its acquisition of the Peltz Group, defendant's arguments lack

merit.

 

Defendant further argues that WMRA cannot meet the irreparable harm criterion

because WMRA has suffered no economic disadvantage as a result of defendant's

activities. WMRA contends that injunctive relief is appropriate because it is

difficult to quantify its damages. WMRA relies on Agrimerica, Inc. v. Mathes,

170 Ill. App. 3d 1025 (1988). In Agrimerica, the plaintiff, who appealed from

the trial court's denial of its motion for a preliminary injunction,

demonstrated that the restrictive covenants in its employment agreement with the

defendant were reasonable and that the restrictions were necessary to protect

its legitimate business interest. Agrimerica, 170 Ill. App. 3d at 1033-34. The

appellate court held that, even if the plaintiff could calculate with precision

its lost profits, it was still entitled to injunctive relief because the court

could not compensate the plaintiff for the loss of competitive position it

sustained. Agrimerica, 170 Ill. App. 3d at 1035. We agree with WMRA. When WMRA

acquired the Peltz Group, it purchased the goodwill, which consisted, in part,

of a competitive edge. The evidence showed that the Peltz Group was a national

presence in the waste-paper recycling industry, whereas Waste Management was

insignificant. The evidence also showed that, through defendant's contacts and

innovative and creative approach, Waste Management expanded into a national and

international market force. According to Coz, defendant remained an important

figure in the industry "right to this day." Thus, WMRA had the expectation,

having purchased the goodwill, that defendant would not do for a competitor what

he did for Waste Management. Accordingly, we hold that the trial court abused

its discretion when it denied WMRA's motion for a preliminary injunction.

 

We remand this matter to the trial court with instructions to issue a

preliminary injunction in favor of WMRA and against defendant. On remand, we

direct the trial court to determine whether the injunction shall include a

prohibition against defendant's violation of section 8(d) of the employment

agreement, the non-disclosure of "protected information" clause.

 

CONCLUSION

 

For the foregoing reasons, the judgment of the circuit court of Du Page

County is reversed, and the cause is remanded with directions.

 

Reversed and remanded.