## Facts

- Interstate Distributors, Inc. (“Interstate”) sold ice-making machines and related equipment.
- William B. Ennis (“Ennis”) was Interstate’s president and owned one-third of its stock.
- When Ennis left Interstate and sold his stock back to the company, Interstate paid Ennis almost $20,000 specifically for a covenant not to compete.
- The covenant restricted Ennis for three years and within a defined territory where Interstate did business.
- The covenant required Ennis not to compete with Interstate, not to provide Interstate business information to competitors, and not to call on Interstate’s customers for competing business.
- During much of the three-year period, Ennis worked for competitors, contacted Interstate customers, and sold competing products to them.
- Ennis also dealt with some of Interstate’s manufacturers and distributors while representing competitors.
- Interstate sued Ennis seeking rescission of the noncompete agreement and restitution of the specific consideration paid for it.
- A jury found Ennis breached the covenant and that the breach was material.

## Issues

1. Whether a material breach of a covenant not to compete permits rescission and restitution of the separate consideration paid for the covenant, even if the covenantor claims some partial performance.
2. Whether rescission is barred because the parties cannot be restored exactly to their pre-contract positions.
3. Whether rescission and restitution are improper because Interstate could instead pursue legal damages for breach.
4. Whether the covenant’s scope was so unreasonable that it should bar the equitable relief Interstate sought.

## Decision

- The Court of Civil Appeals of Texas (Dallas) affirmed the trial court’s judgment.
- The court held that Ennis’s breach went to the essence of the bargain: Interstate paid a specific sum for Ennis’s promise not to compete or solicit, and he did exactly what the covenant prohibited.
- Rescission was not defeated by Ennis’s claim of partial performance because the jury found a material breach and the evidence showed substantial nonperformance during the restricted period.
- Rescission was not barred by the inability to restore the parties precisely to the status quo ante; equity could substantially restore matters by ordering return of the identifiable amount paid for the covenant.
- The availability of damages did not require the court to deny equitable relief because competitive-harm damages (lost customers and diverted business) would be difficult to prove with reasonable certainty.
- The covenant’s time and territory limits were not shown on this record to be so broad as to defeat rescission and restitution.

## Legal Principles

- A material breach that defeats the main purpose of an agreement can support rescission and restitution.
- Partial or minor breach typically supports damages rather than rescission, but substantial nonperformance may justify unwinding the agreement.
- Equity does not always require perfect restoration of the status quo; substantial restoration may be enough when restitution can return a discrete payment tied to the promise that failed.
- Restitution is a suitable remedy when a party paid a specific, separable sum for a restrictive covenant and the covenantor materially breaches that promise.
- When damages from competition and customer diversion are uncertain and difficult to measure, a court may allow rescission and restitution rather than forcing a damages remedy.
- A noncompete with defined time and territory limits will not be treated as invalid for overbreadth absent proof that its limits are unreasonable in relation to the business being protected.

## Conclusion

Because Interstate paid nearly $20,000 specifically for Ennis’s three-year, territory-limited promise not to compete or solicit Interstate customers, and the jury found Ennis materially breached that promise by working for competitors and calling on Interstate customers, the appellate court affirmed rescission and ordered restitution of the consideration paid, despite Ennis’s partial-performance argument, imperfect return to the pre-contract position, and the theoretical availability of damages.


Ennis v. Interstate Distributors, Inc., 598 S.W.2d 903 (1980)