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L.G. BALFOUR CO. v. MCGINNIS

February 14, 1991

L.G. BALFOUR COMPANY, INC., Plaintiff,
v.
FRANK G. McGINNIS and AMERICAN AWARDS & GIFTS, INC., Defendants



The opinion of the court was delivered by: HARRIS

 This matter is before the Court on plaintiff's motion for a preliminary injunction. Upon consideration of the pleadings, the parties' oral arguments, and the entire record herein, the Court denies plaintiff's motion.

 Background

 This is an action for breach of contract, breach of fiduciary duty, tortious interference, unfair competition, and injunctive relief enforcing a covenant not to compete in a contractual relationship. Plaintiff, Balfour Company (Balfour), manufactures jewelry, plaques, trophies, and other items which it sells to businesses and government agencies through its Recognition Products Group (RPG). Balfour also has a separate division, the Education Products Group (EPG), that sells school rings, diplomas, and other items such as school awards. Defendant Frank G. McGinnis worked as a salesman for Balfour's RPG division in the Washington, D.C., area from 1966 until 1990. Defendant American Awards & Gifts (AA & G) is a corporation formed by McGinnis in April 1989, through which he now sells products similar to those he sold for Balfour. Balfour seeks a preliminary injunction preventing McGinnis and AA & G from competing against it in McGinnis's former territory.

 This action has been bitterly fought. On the one hand, Balfour seeks to protect itself from competition from a skilled salesman who is familiar with its products and pricing. On the other hand, McGinnis is fighting to protect his very livelihood. In addition, each side appears to believe that its honor has been impugned. The parties, who once enjoyed a compatible and lucrative business relationship, now view each other with animosity and cannot agree on any of the material facts surrounding McGinnis's retirement from Balfour.

 McGinnis began working as a sales representative for Balfour on July 1, 1966. At that time, he executed a Commercial Representative Agreement (Agreement) that assigned him to territory 22, the Washington, D.C., region. *fn1" The Agreement required McGinnis "to devote the whole of his time to servicing the assigned territory," to use his best efforts to promote the company's interests, and to sell only Balfour products. In addition, the Agreement contained a provision prohibiting McGinnis from selling "merchandise of the kind or character manufactured or sold" by Balfour for two years following the termination of the Agreement for any reason. Under the Agreement, Balfour supplied its prices to McGinnis, who then negotiated a sales price with customers. His "commission" consisted of the difference between the price he negotiated with the customer and Balfour's base price to him. The customer paid Balfour directly, and Balfour deposited McGinnis's commission in a commission account on receiving full payment. Balfour treated McGinnis as an independent contractor and did not withhold income taxes from the commissions it paid him. McGinnis maintained his own office and paid his business expenses out of his commissions. *fn2"

 In 1976, McGinnis and Balfour executed an amendment to the Agreement which provided that McGinnis would be entitled to the equity program in place at the time of his retirement. The parties executed a third instrument in 1985. This instrument was prompted by the retirement of another Balfour sales representative, Frank Shoaf, who had operated in the same territory as McGinnis since his original assignment to the Washington, D.C., area. The amended Agreement authorized Balfour to deduct amounts from McGinnis's commission account to make equity payments to Shoaf and correspondingly transferred "exclusive" rights to the territory to McGinnis. McGinnis emphasizes, however, that Balfour permitted Shoaf to form his own business, Balfour Supply Service. Through that business, Shoaf continued to sell Balfour products as well as products manufactured by Balfour competitors in the same territory as McGinnis. Balfour concedes that it did not enforce the covenant not to compete in Shoaf's contract and that it continued to sell products through him after his retirement. However, Balfour contends that Shoaf had developed such a strong relationship with several customers that it was in Balfour's best interest to allow him to continue to market Balfour products.

 The parties address the nature of sales efforts in the recognition products industry at length. They disagree as to the most significant aspects of successful sales. Balfour stresses the fact that a salesman generally sells the idea of an employee recognition program to a potential customer. The customer and the salesman then design the employee recognition program, and the awards themselves, which Balfour then manufactures. The salesman, therefore, develops a relationship with the representative in charge of the recognition program at the customer corporation or government agency. The salesman is familiar with the cycle of the customer's award program and knows when to contact the customer regarding new orders. Finally, Balfour contends, the awards themselves are easy to manufacture and a salesman can order them readily from another manufacturer once he has the specifications. Balfour is vulnerable when a salesman leaves the company because the salesman possesses specific knowledge and a long-term relationship that enables him to work with a customer.

 McGinnis minimizes the importance of special knowledge about customers. He maintains that customers often change suppliers and that a customer's main concerns are price, quality, and timely delivery of the product. He argues that Balfour has access to the customer's name, the contact person's name and the customer's phone number on each order sheet. This information is all Balfour needs to pursue its clients so that a former salesman has no special advantage based on his past dealings with customers. Defendant stresses that much of his business involved government agencies which deal with the lowest bidder who can provide an acceptable product on time. Balfour concedes that government orders are unique because of the bidding requirement, yet maintains that McGinnis's familiarity with Balfour's pricing policy gives him an advantage in bidding. McGinnis answers that within the industry prices change frequently, therefore, his knowledge of Balfour's early 1990 prices is not a great advantage. Furthermore, he notes that Balfour provided its prices to Frank Shoaf after his retirement and presumably did not expect the price lists to enable Shoaf to compete more successfully with Balfour.

 In September 1988, Town & Country, Inc., completed a takeover of Balfour. This buyout resulted in a change in management as well as several important policy changes within Balfour. The most significant change came in early 1989, when Balfour closed its RPG manufacturing facility in Attleboro, Massachusetts, and moved to a newer plant. As a result of this move, the RPG division began to suffer from late deliveries and lower quality products. McGinnis maintains that these problems were extremely severe and that late deliveries and poor quality caused him to lose his biggest customer, Marriott, which accounted for approximately $ 35,000.00 of his annual gross income. *fn3" McGinnis also states that he lost three other customers that generated another $ 10,000.00 of gross income annually. *fn4" Balfour concedes that some delivery problems arose from the move, but it contends that it quickly solved the problem through a "Vendor Drop Ship" (VDS) program. Through the VDS program, Balfour sales representatives could order products through Balfour-approved manufacturers. Thus, Balfour continued to make money through the sales and the sales representatives avoided the delivery delays from Balfour's own plant.

 Balfour maintains that the VDS program corrected the major delivery problems within several months and that Balfour eliminated the problems entirely by November 1989. McGinnis contends, however, that the delivery and quality problems continued up to his retirement. McGinnis compiled a table that illustrates the delivery time of each of his orders from February 1989 to April 1990. At the preliminary injunction hearing, Balfour argued that McGinnis's statistics are misleading, as statistics often are. Balfour argues that, in the recognition products industry, the only real deadline for the delivery of awards is the date of the award ceremony. Thus, delivery past the customer's requested delivery date is not late so long as the delivery precedes the award ceremony. This argument does not stand up to common sense and to Balfour's own characterization of the recognition products industry. Balfour argues vigorously that customer goodwill is critical to its success. It is inconsistent to argue that the customer's desired delivery date is not important. Whether such a deadline is "real," missing it on a consistent basis certainly would erode customer goodwill. Furthermore, some leeway between delivery and the award ceremony is necessary to discover and correct any mistakes. McGinnis's table of statistics shows many deliveries weeks beyond the requested delivery date. Even if the majority of these delays did not cause a serious problem for the customer, the table suggests that Balfour's problems were more serious than it admits.

 Early in the VDS program, Balfour learned from one of the participating manufacturers, Crest Craft, that McGinnis had placed an order directly with Crest Craft in April 1989. When Balfour questioned McGinnis about the order he acknowledged it, but McGinnis maintained that there was no other way to obtain delivery on time. McGinnis offered to pay Balfour a royalty equal to the usual profit on such an order and requested permission to continue that arrangement on future orders. Balfour maintains that it never approved such dealings. Later in 1989, McGinnis approached another of Balfour's subcontractors, Kirk Stieff, and requested a direct line of credit for AA & G, which he had incorporated in April 1989. Again, Balfour became aware of the unauthorized contact, and again, it warned McGinnis about operating outside the approved VDS program.

 In 1989, Balfour announced a new sales direction emphasizing "repeating program" corporate accounts. Balfour wanted to focus on corporate customers because they generally purchase high priced items. Balfour also indicated that it was not interested in new federal, state, or local government customers because they generally purchase inexpensive items. Consistent with this new direction, Balfour adopted a new policy regarding small orders. Balfour would no longer pay for artwork on orders for less than $ 2,500.00 and it would no longer accept any orders under $ 500.00. In a memorandum to its sales representatives, Balfour stated that the new policy would be flexible and urged the representatives to contact the regional vice president to work out any problems the policy might cause. The new policy threatened some of McGinnis's business with government agencies. His correspondence indicates that he attempted to contact the regional vice president to develop a compromise, but his calls were not returned. *fn5"

 Balfour's management also sent McGinnis new sales goals for 1990 in October 1989. In the past, McGinnis had met his sales goals for several years and won bonus trips from Balfour. Balfour set the 1990 sales goals at $ 805,000.00 total sales and $ 200,000.00 new sales from corporate customers -- sales to government agencies would not count toward meeting the new sales goal. *fn6" In his best year, McGinnis had generated new sales of $ 125,000.00 including government agencies. The new corporate sales goal therefore was very high and, in McGinnis's mind, unrealistic. Balfour argues that the goals ...


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