Heritage Operating, L.P. D/B/A Metro Lift Propane of Dallas v. Rhine Brothers, LLC, DFW Propane Exchange, LLC, Kendall L. Rhine, Kendall T. Rhine, Anthony L. Rhine, Janice Rhine, and James Marcus Withers

Citation: Not availableDocket: 02-10-00474-CV

Court: Court of Appeals of Texas; June 21, 2012; Texas; State Appellate Court

Original Court Document: View Document

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Heritage Operating, L.P. (Heritage) appeals a take-nothing judgment from the 153rd District Court of Tarrant County concerning a breach of a noncompetition covenant involving Kendall L. Rhine and other appellees. The court denied motions for rehearing and reconsideration en banc and substituted a new opinion. 

Kendall L. Rhine was a significant figure in Metro Lift Propane, becoming an officer and shareholder in 1997. By 2003, Metro Lift operated ten locations, including one in Grand Prairie, where his son Anthony managed. In 2004, the Rhine family sold these locations to Heritage for over $15 million, with Kendall L. declining a position with Heritage. As part of the sale, he signed a noncompete agreement for which he was compensated $500,000 over five years. This agreement prohibited him from engaging in the propane cylinder exchange business within a 75-mile radius of Metro Lift locations for ten years and restricted access to confidential information related to the business.

In late 2008 and early 2009, Kendall L.'s wife, Janice, began investing in propane businesses owned by their sons, including DFW Propane. Kendall L. claimed Janice lacked experience in the industry, while she testified that she signed checks for DFW Propane from a joint account with Kendall L. and that he used funds from her living trust, which she would reimburse. The court's decision to reverse and remand the case indicates further examination of these actions in relation to the breach of the noncompete agreement.

Kendall L. wired $221,062.95 to a title company for a property purchase for DFW Propane and wrote checks to DFW Propane, which his wife signed. Heritage initiated a lawsuit against Kendall L., his sons, and his wife for multiple claims, including breach of contract and trade secret misappropriation, and sought an injunction against the Rhines. The jury determined that Kendall L. breached his noncompete agreement and that the defendants conspired against Heritage, but found no damages in terms of lost profits or goodwill. The trial court ruled the noncompete agreement unreasonable and void, granting judgment for the defendants and denying injunctive relief. Key findings included that the confidential information of Metro Lift was easily obtainable, lost value after the sale to Heritage, and that enforcing the noncompete beyond five years was unnecessary. The court reformed the noncompete to a five-year limit from execution. Heritage appealed, challenging the sufficiency of evidence for the trial court's determination of the noncompete’s unreasonableness, with specific legal standards for evaluating evidence cited for both legal and factual sufficiency.

Kendall L. Rhine's motion for rehearing and en banc consideration argues that the court improperly applied Texas law regarding a noncompete agreement, which includes a choice of law provision favoring Delaware. Rhine asserts that Texas courts typically enforce such provisions unless they conflict with public policy. The court must evaluate if another state's law applies under the Restatement's section 188 criteria, focusing on the relationships of the parties, the interests of the states, and fundamental policy considerations.

While Delaware has a connection through Heritage's corporate offices, Texas has a stronger relationship because two of the restricted Metro Lift locations are in Texas. Additionally, Texas has a greater interest in protecting the expectations of local businesses than Delaware does. The Texas Supreme Court has established the enforcement of noncompetition agreements as a fundamental policy, leading the court to reject the application of Delaware law.

According to the Texas Covenants Not to Compete Act, a noncompete is enforceable if it is part of a valid agreement and meets reasonable limitations. Noncompetes are considered a restraint of trade and are unenforceable unless they adhere to a reasonableness standard. The court evaluates whether a noncompete's restrictions are broader than necessary to safeguard the employer's legitimate interests. The trial court deemed the original ten-year noncompete unreasonable in scope and duration but suggested it could be reasonable if limited to five years. The current evaluation focuses solely on the reasonableness of the ten-year prohibition.

Kendall L. had the responsibility to prove that the noncompete restrictions were excessive according to Texas law (Tex. Bus. Com. Code Ann. 15.51(b)). He contended that confidential information lost its value rapidly; however, he failed to counter Heritage's assertion that it acquired Metro Lift's goodwill, a valuable and protectable interest. Texas law recognizes goodwill as a significant business asset, akin to physical property, characterized as a business's reputation and future earning potential (Black’s Law Dictionary).

While Kendall presented testimonies indicating that certain intangible assets, like customer and pricing lists, diminished in value within five years, he did not demonstrate that all of Metro Lift's intangible interests followed this trend. Tom Harlan, a former owner of Metro Lift, remarked that such lists would lose value after five years but did not address the value of goodwill. Evidence from Heritage's chief legal officer, Eric Beatty, highlighted the importance of goodwill, stating that Heritage valued it and other intangible assets at $7 million at the sale's closing, emphasizing the necessity of protecting future customer patronage through the noncompete clause.

The legal framework distinguishes between noncompete agreements for business sellers and employees, with courts generally enforcing longer or unlimited restrictions in the context of business sales. Texas courts have historically upheld lifetime noncompete agreements tied to business sales as lawful and not in restraint of trade, provided they are within reasonable territorial limits.

Kendall L. is semiretired, resides outside Texas, and owns propane cylinder exchange companies in multiple states, including Florida, Illinois, Indiana, and Alabama. He did not provide evidence of significant hardship from avoiding the Grand Prairie area, nor did he show that any public injury from the noncompete clause outweighed the benefits it offered to Heritage. Kendall L. was represented by counsel during negotiations and acknowledged that the noncompete was essential for finalizing the sale with Heritage. He expressed no objections to the fairness of signing the noncompete, noting he received compensation for it. Heritage valued the intangible assets of Metro Lift at $7 million and required noncompete agreements from former owners to protect these assets. Kendall L. received $500,000 for agreeing to a ten-year noncompete, which was deemed reasonable. The court found no evidence supporting the trial court's conclusion that the noncompete limitations were unreasonable, thus siding with Heritage's first issue.

In the second issue, Heritage contended that the trial court erred by not issuing a permanent injunction against Kendall L. to enforce the noncompete. The noncompete included a clause allowing for injunctive relief, stating that breaches would cause Heritage irreparable harm, making damages difficult to quantify. The court noted that granting or denying a permanent injunction is typically at the trial court's discretion. Under common law, a party must demonstrate that without the injunction, they would face irreparable harm with no adequate legal remedy.

Heritage asserts in its motion for rehearing that when a party relies on statutory provisions for injunctive relief, the specific statutory language prevails over common law requirements. Under the Covenants Not to Compete Act, a party can seek “damages, injunctive relief, or both” without having to demonstrate irreparable injury or inadequate legal remedy, as long as there is proof of a substantial breach. The Act's provisions are exclusive and preempt any common law criteria. While the court acknowledges Heritage's argument about the irreparable injury requirement, it refrains from addressing this further as the case is remanded for a new trial, where the trial court will reconsider Heritage’s request for injunctive relief.

Regarding damages, Heritage contends that the jury's finding of zero damages is against the great weight of the evidence and is unjust. The jury awarded no damages despite evidence suggesting otherwise. Heritage subsequently sought to have the trial court disregard the jury's responses and requested a judgment notwithstanding the verdict, arguing the zero damage award was excessively low. The standard for reviewing such claims involves assessing all evidence to determine if the jury’s finding is clearly erroneous. Heritage presented testimony from CPA Mark Rambin, who analyzed financial data and projected lost profits amounting to $287,970 due to lost customers, further accounting for business risks.

Rambin estimated lost net profits for Heritage at $235,202. Although Kendall L. did not provide a competing expert, he questioned Rambin's calculations, particularly concerning Ram Tool's decision not to purchase propane from DFW Propane. Rambin argued that this loss of business did not significantly affect the profit projections because sales to Ram Tool had already declined. Kendall L. also suggested that Big D Clutch was out of business, but Rambin maintained that his calculations adjusted for such business risks through a discount rate that accounted for uncertainties and the time value of money.

Kendall L. presented testimony from five former Metro Lift customers who switched to DFW Propane for better pricing. Notably, only two customers were actively seeking new providers, and only one recalled contacting DFW Propane before being solicited. Although DFW Propane's lower rates could explain customer departures, this did not negate Metro Lift's claim of lost business due to DFW Propane's competition. Despite Kendall L.'s challenges to Rambin’s methodology, he did not dispute the evidence, including signed contracts, indicating that Metro Lift lost customers to DFW Propane.

The legal precedent requires a party to demonstrate a history of profitability or the existence of future contracts for calculating lost profits. Rambin's testimony, supported by contracts and Metro Lift's financial records, provided credible evidence of the lost profits. The court concluded that there was sufficient evidence of damages suffered by Heritage, thus rejecting a finding of zero damages as manifestly unjust and upholding part of Heritage’s claims.

Heritage did not conclusively prove its damages, as established by legal precedent, due to disputes regarding the validity of contracts and their contribution to sales. A calculation of lost profits is fact-intensive and requires careful examination, meaning a damages award cannot be issued without clear evidence. Kendall L. Rhine contended that the trial court erred by not excluding Rambin’s testimony, claiming it was speculative and lacked a reliable basis. To assess whether the trial court abused its discretion, one must review whether it acted arbitrarily or against established legal standards. Expert testimony must be relevant, qualified, and based on a reliable foundation. Rhine challenged Rambin's testimony primarily on reliability grounds, citing that it was based on hypothetical lost profits rather than verified data. Rambin’s deposition indicated he lacked complete sales information necessary for accurate calculations, yet he had analyzed available historical sales data. The trial court rejected Rhine’s objections to Rambin’s testimony, even after Rambin submitted revised calculations shortly before the trial. On rehearing, Rhine reiterated objections, claiming Rambin’s opinions were speculative, unverified regarding customer migrations to DFW Propane, and lacking knowledge of historical propane costs or future margins for Heritage.

Rambin's approach to calculating lost future profits using Metro Lift’s historical sales data around DFW Propane's market entry is deemed acceptable and aligns with established methods for demonstrating lost profits. This includes analyzing revenue from periods immediately prior to the relevant timeframe. Historical profit data or objective indicators like future contracts can substantiate damages with reasonable certainty, as established in case law. Although Rambin could not predict future propane costs, his reliance on historical data for estimating sales trends establishes a basis beyond mere speculation. The argument that some customers Heritage claimed to have lost due to a noncompete breach were not actually lost does not undermine the admissibility of Rambin's testimony; it instead pertains to its weight. On cross-examination, Rhine effectively questioned the basis for Rambin's customer loss claims. The burden lies with the defendant to prove any deficiencies in a complete lost profits calculation. The trial court did not err in admitting Rambin's expert testimony, and the court upheld Heritage's assertions of factual insufficiency, leading to the conclusion that the trial court's judgment regarding noncompete reasonableness and damages must be reversed. Consequently, the case is remanded for a new trial on both liability and damages. The jury’s findings on liability remain undisturbed, and the appeal did not contest the jury's determination of noncompete violations or trade secret misappropriation.

The locations relevant to the case include Charlotte and Mooresville (North Carolina), Dallas and Grand Prairie (Texas), Houston (Texas), Louisville (Kentucky), Nashville (Tennessee), Epping (New Hampshire), Boston and Taunton (Massachusetts), New Orleans (Louisiana), St. Louis (Missouri), and Greensboro (North Carolina). Kendall L. Rhine's motions for rehearing and reconsideration en banc assert that the trial court modified the Non-Competition Agreement by limiting its scope. The court found the original restrictions unreasonable regarding time and scope to protect Heritage's interests, reducing the limitation period to five years. It clarified that the scope of activity was partially ambiguous and included the phrase “engages in the propane cylinder exchange business,” aligning it with other similar agreements. Despite this clarification, the change did not lessen the activity's scope.

Rhine posits that if the non-compete clause is unenforceable, the associated compensation would also be unenforceable, referencing Sheline v. Dun. Bradstreet Corp. to support his argument that the promises were mutually dependent. He criticizes the court for allegedly acting as a second jury, suggesting that the jury's zero damage award indicated a lack of credible evidence linking his breach to Heritage's profit loss. However, testimony from Rhine’s witnesses, indicating they left Metro Lift for DFW Propane, and Rambin’s assertion about potential profits lost by Metro Lift due to DFW Propane's actions are cited as evidence that DFW Propane caused those losses.