Prym Consumer USA, Inc. v. Rhode Island Textile Co. , 388 F. App'x 352 ( 2010 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1599
PRYM CONSUMER USA, INCORPORATED; WILLIAM PRYM,
INCORPORATED,
Plaintiffs - Appellees,
v.
RHODE ISLAND TEXTILE COMPANY,
Defendant - Appellant.
Appeal from the United States District Court for the District of
South Carolina, at Spartanburg. G. Ross Anderson, Jr., Senior
District Judge. (7:08-cv-03518-GRA)
Argued: May 11, 2010 Decided: July 21, 2010
Before KEENAN, Circuit Judge, HAMILTON, Senior Circuit Judge,
and Samuel G. WILSON, United States District Judge for the
Western District of Virginia, sitting by designation.
Affirmed by unpublished per curiam opinion.
ARGUED: John W. Matthews, III, HAYNSWORTH, SINKLER & BOYD, PA,
Greenville, South Carolina, for Appellant. Natalma Morison
McKnew, SMITH MOORE LEATHERWOOD, LLP, Greenville, South
Carolina, for Appellees. ON BRIEF: H. Donald Sellers, Joel M.
Bondurant, Jr., HAYNSWORTH, SINKLER & BOYD, PA, Greenville,
South Carolina, for Appellant. Peter A. Rutledge, SMITH MOORE
LEATHERWOOD, LLP, Greenville, South Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Rhode Island Textile Company (RITCO) appeals from the
district court’s award of summary judgment to Prym Consumer USA,
Inc. (Prym). In its complaint, Prym sought a declaration of the
parties’ rights under a non-competition agreement that
restricted Prym’s business in the consumer elastics market. The
district court held that RITCO was not entitled to enforce the
non-competition agreement. Finding no error, we affirm.
I.
A.
The following facts are undisputed. Prym manufactures and
distributes sewing and other craft-related notions. In 1991,
Prym’s predecessor, Prym-Dritz Corporation (Prym-Dritz), sold
its consumer elastics business to RITCO. Prym-Dritz transferred
to RITCO all the fixed assets and certain intangible assets,
including “good will,” associated with that business. To
achieve this transfer of “good will” to RITCO, Prym-Dritz agreed
that it would not manufacture or sell elastic fabrics in
competition with RITCO for a period of twenty-five years (Prym
Non-Compete). 1 As relevant to this appeal, the parties’ purchase
1
Prym-Dritz’s parent company, William Prym, Inc., executed
a non-competition agreement that is virtually identical to the
Prym Non-Compete. William Prym, Inc. was a party in the
(Continued)
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agreement contained express language stating that neither party
could assign any of its rights in the agreement without
obtaining the prior written consent of the other (the no-
assignment clause). After the sale of Prym-Dritz’s consumer
elastics business, Prym succeeded to the interests of Prym-
Dritz.
In 2006, RITCO sold its consumer elastics line,
“Stretchrite,” to Dyno, LLC. As part of this transaction, RITCO
purported to transfer to Dyno all the rights accruing to RITCO
under certain contractual provisions, including RITCO’s rights
in the Prym Non-Compete. However, contrary to the no-assignment
clause, RITCO did not obtain Prym’s consent to assign to Dyno
Prym’s obligations under the Prym Non-Compete. Instead, RITCO
and Dyno executed a separate agreement stating that if any of
the assignments were ineffective, RITCO would “reasonably
cooperate . . . to provide for Dyno the benefits” that Dyno
otherwise would have acquired. J.A. 413.
RITCO also executed a non-competition agreement to
facilitate the transfer to Dyno of any “good will” associated
with the Stretchrite brand. RITCO agreed that until 2013, it
would refrain from “selling, manufacturing . . . or marketing
proceeding in the district court but is not a party to this
appeal.
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any goods similar to or competitive with the Stretchrite
Products” in the consumer elastics market. However, RITCO has
continued to conduct business in the broader market for sewing
notions that, apart from elastics, includes sewing and
needlecraft accessories such as buttons, needles, and thread.
B.
In 2008, RITCO executed a settlement agreement that
resolved certain disputes with Dyno. Under the terms of this
settlement, RITCO agreed to take action to enforce the Prym Non-
Compete against Prym on Dyno’s behalf, if requested to do so by
Dyno. 2 After receiving such a request from Dyno, RITCO sent a
letter to Prym stating that RITCO was prepared to initiate
litigation to stop Prym from conducting business in the consumer
elastics market.
On receipt of this letter, Prym filed a complaint for
declaratory judgment against RITCO in the district court. Prym
sought declaratory relief on the basis that RITCO lacked
authority to enforce the Prym Non-Compete because, having
2
The agreement further provided that RITCO would “permit
Dyno to assume control of the prosecution or defense of such
enforcement actions or claims.” J.A. 456-57. On appeal in
this case, Prym argues that Dyno is using RITCO to re-litigate
issues conclusively decided by a South Carolina court in an
earlier litigation between Prym and Dyno. We need not reach
that argument to decide the issues raised by RITCO on appeal.
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removed itself from the consumer elastics market in 2006, RITCO
no longer had a legitimate interest that would justify
restraining Prym from selling consumer elastics products. The
district court agreed with Prym’s argument, and entered summary
judgment for Prym.
II.
On appeal, RITCO asserts that it has “legitimate interests”
that justify enforcement of the Prym Non-Compete. RITCO
observes that it is required by its settlement agreement with
Dyno to enforce the Prym Non-Compete on Dyno’s behalf, and
argues that this independent contractual obligation is an
interest that permits RITCO to enforce the restraint on
competition imposed by the Prym Non-Compete.
Alternatively, RITCO contends that irrespective of any
rights acquired by Dyno, RITCO has separate, legal interests in
enforcing the Prym Non-Compete. According to RITCO, although it
stopped selling consumer elastics in 2006, the Prym Non-Compete
protects RITCO’s remaining interests in the general sewing
notions market until 2016, and RITCO’s future interest in
resuming the manufacture and sale of consumer elastics when
RITCO’s non-competition agreement with Dyno expires in 2013.
RITCO explains that if the district court’s decision is
permitted to stand, Prym will use its consumer elastics business
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to increase its share of the broader sewing notions market,
thereby harming RITCO. RITCO also argues that if Prym currently
is permitted to compete in the consumer elastics market, this
competition will affect any future consumer elastics business
that RITCO may decide to develop in 2013. We disagree with
RITCO’s contention that these are “legitimate interests”
protected by the Prym Non-Compete.
III.
A.
We review the district court’s entry of summary judgment de
novo. Universal Concrete Prods. Corp. v. Turner Constr. Co.,
595 F.3d 527, 529 (4th Cir. 2010). Like the district court, we
apply the law of Rhode Island because the parties agreed in the
Prym Non-Compete that Rhode Island law would govern the
resolution of any contract disputes between them. Under Rhode
Island law, we consider the plain and ordinary meaning of the
language used in the parties’ contract. Cathay Cathay, Inc. v.
Vindalu, LLC, 962 A.2d 740, 746 (R.I. 2009).
RITCO’s first argument, that RITCO can enforce the Prym
Non-Compete to satisfy its independent contractual obligation to
transfer “good will” to Dyno, is foreclosed by the unambiguous
language of the no-assignment clause. That clause states: “Th[e
purchase] agreement shall not be assignable by either party
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without the prior written consent of the other party hereto.”
J.A. 50.
Because the Prym Non-Compete is part of RITCO’s purchase
agreement with Prym, the Prym Non-Compete is subject to the no-
assignment clause, which does not provide any exception that
would permit RITCO to assign rights acquired under the Prym Non-
Compete without Prym’s consent. It is undisputed that in 2006,
when RITCO sold Stretchrite to Dyno, RITCO did not obtain Prym’s
consent to assign Prym’s obligation to refrain from competition
in the consumer elastics market. Thus, RITCO lacked the
authority to transfer to Dyno the benefits of the Prym Non-
Compete, and RITCO cannot avoid application of the plain
language of the no-assignment clause by executing a separate
contract with Dyno.
B.
RITCO argues, nevertheless, that it can enforce the Prym
Non-Compete on its own behalf. As explained above, RITCO
maintains that such enforcement is necessary to protect RITCO’s
present interest in limiting competition relating to sewing
notions other than consumer elastics, and to protect RITCO’s
future interest in any consumer elastics business that RITCO may
develop in 2013.
In considering this issue, our interpretation of the Prym
Non-Compete is controlled generally by the clear and unambiguous
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language chosen by the parties. See Durapin, Inc. v. Am.
Prods., Inc., 559 A.2d 1051, 1056 (R.I. 1989). However, because
restraints on competition are disfavored, these restraints, even
when plainly expressed in a contract, still are subject to
judicial scrutiny. Id. at 1053.
Courts applying Rhode Island law generally assess non-
competition agreements by employing the “reasonableness” test
set forth in the Restatement of Contracts. See Dial Media¸Inc.
v. Schiff, 612 F. Supp. 1483, 1488-89 (D.R.I. 1985). This test
provides, in relevant part:
A promise to refrain from competition that imposes a
restraint that is ancillary to an otherwise valid
transaction or relationship is unreasonably in
restraint of trade if (a) the restraint is greater
than is needed to protect the promisee’s legitimate
interest, or (b) the promisee’s need is outweighed by
the hardship to the promisor and the likely injury to
the public.
Restatement (Second) Contracts § 188(1). Thus, in Rhode Island,
covenants that limit competition by businesses are enforced to
the extent necessary to protect a “legitimate interest” in the
promissee. 3 See Home Gas Corp. of Mass. v. DeBlois Oil Co., 691
F. Supp. 567, 573 (D.R.I. 1987) (applying Rhode Island law).
3
Although RITCO contends that the district court imposed an
inappropriately high burden by treating the Prym Non-Compete
like a restriction on individual employment, we find no
indication in the record that the district court applied an
incorrect standard.
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The determination whether a “legitimate interest” exists to
enforce a non-competition clause depends on the particular facts
surrounding the agreement. Durapin, 559 A.2d at 1053. In
conjunction with the sale of a business, the successful transfer
of a business’ “good will” from seller to buyer constitutes a
“legitimate interest” that can justify imposing a restraint on
competition. Id. However, a mere general interest in remaining
free from competition is not a sufficient basis to enforce a
non-competition agreement. See Dial Media, 612 F. Supp. at
1489.
Applying these principles, we disagree with RITCO that it
can enforce the Prym Non-Compete on its own behalf, to protect
its present interests outside the consumer elastics market, and
to protect any future business in consumer elastics that RITCO
may have in 2013. The Prym Non-Compete cannot be interpreted
so broadly. The Prym Non-Compete had the limited purpose of
protecting RITCO’s investment in the “good will” associated with
Prym’s consumer elastics business during the time of Prym’s
ownership. Between 1991 and 2006, the Prym Non-Compete
fulfilled this purpose by restraining Prym and its predecessor
corporation from marketing or selling “elastics fabrics of any
kind” in competition with RITCO. However, when RITCO sold its
consumer elastics business and withdrew from the consumer
elastics market in 2006, RITCO abandoned the very interest that
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justified the restraint on competition. Thus, RITCO’s present
attempt to use the Prym Non-Compete to protect the other
interests now asserted by RITCO would require a revision to,
rather than an enforcement of, the Prym Non-Compete.
Accordingly, we conclude that RITCO has not asserted “legitimate
interests” that would justify a continuing restraint on Prym’s
ability to market consumer elastics.
IV.
For these reasons, we hold that RITCO lacks any basis to
enforce the terms of the Prym Non-Compete. We affirm the
judgment of the district court.
AFFIRMED
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