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04/21/76 WOODWARD v. CADILLAC OVERALL SUPPLY

April 21, 1976

WOODWARD
v.
CADILLAC OVERALL SUPPLY COMPANY



Lindemer, J. Coleman and Fitzgerald, JJ., concurred with Lindemer, J. Levin and Ryan, JJ., took no part in the decision of this case. Williams, J. (dissenting). Kavanagh, C.j., concurred with Williams, J.

SYLLABUS BY THE COURT

Opinion of the Court

1. Contracts -- Retirement Plan -- Employment by Competitor -- Forfeiture of Benefits.

A forfeiture-of-benefits clause of a company's retirement plan which denies the right to further participation in the retirement plan if a person enters the employment of a competitor without the company's written permission but which neither extracts nor embodies a promise not to engage in any employment does not violate the statute prohibiting agreements not to engage in employment (MCLA 445.761).

2. Contracts -- Retirement Plans -- Employment by Competitor -- Forfeiture -- Public Policy.

The Legislature has chosen to bar only agreements which prevent an employee from engaging in other employment and it has not barred any restraint upon seeking other employment, nor has it, despite public Discussion of forfeitures under retirement plans, declared a public policy against enforcement of such clauses (MCLA 445.761).

Dissenting Opinion

Kavanagh, C. J., and Williams, J.

3. Contracts -- Retirement Plans -- Employment by Competitor -- Forfeiture -- Restraint of Trade.

An unnegotiated forfeiture clause in an employee pension plan which restrains all forms of competitive activity by the employee for an unlimited time and in an unlimited area is unreasonable per se and unenforceable; the clause is necessarily broader than required to protect the legitimate interests of the employee and contrary to the public interest.

4. Contracts -- Restraint of Trade.

Any bargain or contract which purports to limit in any way the right of either party to work or to do business, whether as to the character of the work or business, its place, the manner in which it shall be done, or the price which shall be demanded for it, may be called a bargain or contract in restraint of trade.

5. Contracts -- Restraint of Trade -- Reasonableness -- Balancing Test.

A balancing test is used to determine the reasonableness of a contractual restraint of trade; the court weighs the interests of the party in favor of whom the restraint runs, the interests of the party being restrained and the interests of the public in the context of the type of restraint being examined.

6. Contracts -- Restraint of Trade -- Reasonableness.

The reasonableness of a covenant not to compete incident to the sale of a business has been generally scrutinized less rigorously by the courts than the reasonableness of such a convenient when incident to an employment contract.

7. Contracts -- Retirement Plans -- Employment by Competitor -- Forfeiture -- Restraint of Trade.

A forfeiture-of-benefits clause for becoming associated in any manner with a competitor in an employee retirement plan is reasonable only if the restraint (1) is no greater than is necessary for the protection of the employer in some legitimate interest, (2) does not impose undue hardship on the employee, and (3) is not injurious to the interests of the public; the burden is upon the employer to show the validity of the restraint.

The opinion of the court was delivered by: Lindemer

Arthur Woodward and others brought a class action to recover pension benefits pursuant to a plan adopted by Clean-Wear Service Company or Cadillac Overall Supply Co., its parent. The trustee, National Bank of Detroit, terminated pension rights at the direction of the Pension Trust Advisory Committee, under the provision of the retirement plan that any participant in the trust would lose his share if he entered the employment of a competitor without the written approval of the company. The Wayne Circuit Court, John D. O'Hair, J., denied plaintiffs' motion for summary judgment as to liability but certified the question for interlocutory appeal. The Court of Appeals, Quinn, P. J., and McGregor and Carland, JJ., denied leave to appeal (Docket No. 19,923). Plaintiffs appeal. Held:

The forfeiture-of-benefits clause does not violate the statute prohibiting agreements not to engage in any business because it neither extracts nor embodies such a promise; instead, it denies the right to further participation in the retirement plan if a person does engage in such employment, an acknowledgment of his right to do so. The statute, MCLA 445.761; MSA 28.61, bars only agreements which prevent engaging in other employment, not any restraint upon seeking other employment. The Legislature has not declared a public policy against enforcement of such clauses.

Justice Williams, with whom Chief Justice Kavanagh joined, Dissented: This case may be resolved by the use of common-law principles, and it is not necessary to reach the question whether the statute restricting agreements not to compete applies. A clause in an employee retirement profit-sharing plan unilaterally established by the employer, or negotiated where the employee was substantially disadvantaged in bargaining power, which provides that a participant in the plan forfeits all rights to benefits if the employee enters into the employment of a competitor is void and unenforceable as a matter of law, where there are no limitations whatever in time and area. Since there are none here, the plaintiffs should be granted summary judgment.

Affirmed and remanded for further proceedings.

This is a class action by employees and the widow of a deceased employee to recover pension benefits allegedly due pursuant to a plan adopted by Clean-Wear Service Company or Cadillac Overall Supply Co., its parent. All parties' benefits were 100% vested but trustee National Bank of Detroit terminated pension rights at the direction of the Pension Trust Advisory Committee. The committee acted under the following provision of the retirement plan, entitled "Forfeiture of Benefits":

"In the event that any participant shall enter the employment of any competitor of any Company without the written approval of such Company, or become associated in any manner with such a competitor in the opinion of the Advisory Committee, whose decision shall be final, before such participant has received the full amount in his segregated account or accounts to which he otherwise would be entitled, such participant shall lose all right to any balance in such account and the interest of such participant in any Trust shall at once cease and terminate and be allocated to other eligible employees covered by such Trust in accordance with the provisions of Section 3 below."

When this clause was raised as a defense, plaintiffs moved for summary judgment as to liability pursuant to GCR 1963, 117.2(2). The trial court denied the motion but certified the question for interlocutory appeal. The Court of Appeals denied leave but this Court granted leave.

Appellants claim that the clause in question violates MCLA 445.761; MSA 28.61:

"All agreements and contracts by which any person, co-partnership or corporation promises or agrees not to engage in any avocation, employment, pursuit, trade, profession or business, whether reasonable or unreasonable, partial or general, limited or unlimited, are hereby declared to be against public policy and illegal and void."

Appellees rely on Couch v Difco Lab, Inc, 44 Mich App 44; 205 NW2d 24 (1972). We agree that Couch controls.

The Legislature declared that promises or agreements not to engage in any employment were against public policy, illegal and void. This clause neither extracts nor embodies such a promise. Instead, it denies the right to further participation in the retirement plan if he does engage in such employment, an acknowledgment of his right to do so. While we recognize that employees may be deterred from engaging in competition by such an arrangement, we agree with Judge (now Justice) Levin's interpretation of the Michigan statute in Couch:

"The Legislature has chosen to bar only agreements which prevent an employee from engaging in other employment. It has not barred any restraint upon seeking other employment. Nor has it, despite public Discussion of forfeitures under private sector retirement plans, declared a public policy against enforcement of such clauses." *fn1

See also Judge (now Justice) Fitzgerald's opinion in Tobin v General Motors Corp, 17 Mich App 475; 169 NW2d 644 (1969). If a broader prohibition is to be imposed, it is up to the Legislature, not this Court.

Appellants' other arguments are not properly presented for our consideration by this motion for summary judgment but depend upon facts which must be developed at trial. See Hubbard v Miller, 27 Mich 15; 15 Am Rep 153 (1873), and Reed v Kaydon Engineering Corp, 38 Mich App 353; 196 NW2d 487 (1972).

The trial court's denial of summary judgment is affirmed. Remanded for further proceedings.

Williams, J. (dissenting).

In this action for a summary judgment, we are asked to determine whether a clause in an employee retirement profitsharing plan unilaterally established by the employer, which provides for the forfeiture of all benefits if an employee becomes associated in any manner with a competitor, is an unreasonable restraint of trade. The clause contains no limitations in time and area.

We hold that such a clause is void and unenforceable as an unreasonable restraint of trade unless there are reasonable limitations in time and area. Since there are none here, we grant a summary judgment for plaintiffs.

I -- Facts

This is a class action suit brought by persons who have been employees of Clean-Wear Service Company, or its parent company, Cadillac Overall Supply Company. The plaintiffs seek to recover benefits which had vested under a profit-sharing retirement plan unilaterally established by their employer and administered by the National Bank of Detroit.

The case comes to us on the pleadings only as the appeal is from the denial of the plaintiffs' ...


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