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Bonney v. Northern Ariz. Amusement Co.

Supreme Court of Arizona

November 29, 1954

Charles A. BONNEY, Appellant,
v.
NORTHERN ARIZONA AMUSEMENT COMPANY, Inc., an Arizona corporation, Appellee.

Page 249

[78 Ariz. 156] Mangum & Flick, Flagstaff, for appellant.

McQuatters & Stevenson, Flagstaff, for appellee.

UDALL, Justice.

Whether a mutual covenant in the contract before us-restricting the parties from engaging in a competitive business for a stated period of years in a given territory-is violative of our statute, is the sole question now to be determined.

It has always been the policy of the common law to foster trade and promote free competition; most states, including Arizona, have statutes prohibiting, within certain limits, monopolies and combinations of capital, skill, or acts in restraint of trade or tending to suppress competition.

The facts, which are not in dispute, may be summarized as follows:

Charles A. Bonney, defendant-appellant, for a considerable period of time prior to September 20, 1950, had been and was then engaged in operating a vending business consisting principally of pinball machines, shuffle games and like vending machines. Harold Longfellow and wife (who are not parties to this litigation) were then engaged in the business of renting and servicing music boxes, cigarette vending machines and some other amusement devices. On said date appellant Charles A. Bonney, C.C. Cheshire and O. B. Custis agreed to form an Arizona corporation to be known as Northern Arizona Amusement Company, Inc., to be managed by appellant, which corporation would acquire and operate the business of Charles A. Bonney and that of the Longfellows.

The contribution of the appellant to the corporation was his then existing business for which he received 2000 shares of corporate stock (par value $10), plus payment of his personal debts in the sum of approximately $5,000. The contributions of C. C. Cheshire and O. B. Custis amounted to some $25,000 in cash, which made possible the purchase of the Longfellow business and the payment of the Bonney indebtedness. Each of these last-named parties was to receive 2000 shares of capital stock. Pursuant to this agreement the appellee corporation was formed and capital stock issued. Appellant, who was a man of many years of experience in the coin machine business, was elected president of

Page 250

the corporation and employed as its general manager at a salary of $500 per month. In this capacity appellant had personal contact with all customers and coin machine locations of said corporation.

This arrangement continued until February 6, 1952, on which date the majority stockholders discharged appellant as general manager and removed him as president of [78 Ariz. 157] the corporation. Fourteen days later appellant and appellee entered into a written agreement by which appellant was to surrender his 2000 shares of capital stock in the appellee corporation, and to receive therefor the coin machine business and property he had originally contributed, plus machines of like nature acquired during the interim-less those machines that had been junked. Appellant's personal indebtedness to the corporation was also to be cancelled. The corporation was to continue in that phase of the business originally acquired from the Longfellows.

The salient portion of the agreement of February 20, 1952, that forms the basis of present litigation, is as follows:

'3. It is mutually agreed:

'(c) That neither party shall directly or indirectly engage in competitive business for a period of five (5) years from and after March 1, 1952, within Coconino County, Arizona. That is to say, the First Party shall not compete with the Second Party in the sale, distribution or rental of music boxes, coin operated music machines, records and parts therefor, and in the sale, distribution and rental of cigarette vending machines and the sale of cigarettes thereby, and the Second Party shall not compete with the First Party in the sale, distribution and rental of those types of coin operated amusement devices which by this agreement are to by transferred to the First Party from the Second Party for the period and within the areas above described.'

The other terms and provisions of the agreement were substantially performed and the mutual covenant not to compete observed until on or about August 1, 1952, when appellant rented to certain of appellee's customers music boxes in violation of the agreement.

Appellee promptly instituted an action seeking an injunction to restrain a violation of their agreement. The trial court granted a temporary restraining order without notice, and after a hearing thereon a temporary injunction was issued. Thereafter when the case came on for trial on its merits judgment was entered enjoining the appellant, until March 1, 1957, ...


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