Opinion
No. 04 Civ. 5103 (HB).
March 17, 2005
OPINION ORDER
Gibbs Soell ("Gibbs" or "Plaintiff") entered into an agreement with Armstrong World Industries, Inc. ("Armstrong" or "Defendant") to provide Armstrong with public relations services in exchange for payment. After the contract was terminated, Michele Zelman, an employee of Gibbs' was hired by and began working for Armstrong. Gibbs filed suit for breach of a restrictive covenant in the agreement, specifically a non-solicitation clause. Present before the Court is Gibbs' motion and Armstrong's cross-motion for summary judgment pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 56. I write here to briefly set forth the pertinent facts and the basis for my ruling, which grants summary judgment in favor of the Plaintiff.
I. BACKGROUND
On or about January 1, 2001, Gibbs and Armstrong entered into a letter of agreement (the "Agreement") whereby Gibbs was to provide public relations services to Armstrong. (Mallozzi Aff. at ¶ 2.) The Agreement, drafted by Gibbs, provided that there could be no termination "except . . . through the giving of 60 days written notice by either party" and "[u]pon termination of the Agency by the Client, the Agency's obligations during the 60-day termination period to the Client will be to continue to provide services to assure Client of a smooth transition." (Agreement at 4-5.) It also contained a restrictive covenant whereby each party agreed "not to hire or employ any of the other's employees during the duration of [the] agreement and for a period of one-year following termination of [the] agreement without express written consent." Id. at 3. In the event of a violation of this non-solicitation clause (the "non-solicit") the Agreement required a remedy of "payment in the nature of a recruiting fee equal to the most recent total compensation of the recruited employee as contained on the employee's W-2 form for his or her latest full year . . ." Id.
Armstrong provided notice of its intention to terminate the Agreement by way of a letter (the "Termination Letter"). (Mallozzi Aff. at ¶ 4.) Armstrong claims the Termination Letter was sent on or about December 30, 2002. Both parties agree the letter was incorrectly dated January 30, 2002. In any event, an email from Gibbs to Armstrong acknowledges the Termination Letter was received by January 6, 2003. (Def. Ex. 1 at AW0008.) Another email from Armstrong to Gibbs confirms that the Agreement terminated as of March 31, 2003. (Def. Ex. 1 at AW00010.) An Indemnification and Liability Agreement signed by both parties states that "Armstrong terminated the agreement between the parties effective March 31, 2003 (later extended through June 30, 2003)." (Def. Ex. 1 at AW00012.) It is undisputed that on January 12, 2003 Michele Zelman, a 20 year employee of Gibbs, was hired by and began employment with Armstrong. It is also undisputed that Armstrong never sought or received the express written consent of Gibbs to hire Zelman.
II. DISCUSSION
A. Standard of Review
Pursuant to Fed.R.Civ.P. 56(c), a district court must grant summary judgment if the evidence demonstrates that "there is no genuine issue as to any material fact and [that] the moving party is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). "Summary judgment is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to 'secure the just, speedy and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed.R.Civ.P. 1).
To determine whether there is a genuine issue of material fact, the Court must resolve all ambiguities and draw all inferences against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987). However, the mere existence of disputed factual issues is insufficient to defeat a motion for summary judgment. Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11-12 (2d Cir. 1986). The disputed issues of fact must be "material to the outcome of the litigation," id. at 11, and must be supported by evidence that would allow "a rational trier of fact to find for the non-moving party."Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The non-movant "must do more than simply show that there is some metaphysical doubt as to the material facts."Id. With respect to materiality, "substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Anderson, 477 U.S. at 248.
B. Choice of Law
The Agreement provides that it "shall be construed under the laws of the State of New York." Mallozzi Aff. Exhibit A at 5. It is firmly established under New York law, that where a case involves a contract with a clear choice-of-law provision, "[a]bsent fraud or violation of public policy, a court is to apply the law selected in the contract as long as the state selected has sufficient contacts with the transaction." Hartford Fire Ins. Co. v. Orient Overseas Containers Lines (UK) Ltd., 230 F.3d 549, 556 (2d Cir. 2000); Cargill, Inc. v. Charles Kowsky Res., Inc., 949 F.2d 51, 55 (2d Cir. 1991) ("New York courts generally defer to the choice of law made by the parties to a contract."). Moreover, the "parties' intention . . . [is] to be given heavy weight in determining which jurisdiction has the most significant contacts." Mechanic v. Princeton Ski Shop, Inc., No. 91 Civ. 6740, 1992 WL 397576, at *3 (S.D.N.Y. Dec. 30, 1992). Given that Gibbs is a New York corporation with its principal place of business in New York, and the parties have agreed that their rights under the Agreement are to be governed by New York law, the Court will apply New York law to this dispute.
C. Breach of Contract
Under New York law, a breach of contract claim requires that plaintiff prove (1) a valid contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages caused by the breach. Terwilliger v. Terwilliger, 206 F.3d 240, 245-46 (2d Cir. 2000). It is undisputed between the parties that a valid contract existed. It is also undisputed that both parties performed under the Agreement for a period of time, until Armstrong terminated it. The first issue before the Court is when the termination of the contract occurred. Gibbs claims it is entitled to summary judgment because Armstrong breached the non-solicit by hiring one of Gibbs' employees within a year of the termination of the Agreement. Gibbs also claims it was damaged as the result of the loss of an employee of 20 years. Armstrong argues it should be granted summary judgment because it hired Gibbs' employee after the one-year non-solicit period had expired. Armstrong also argues that, in any event, Gibbs is not entitled to summary judgment because the non-solicit is against public policy or, alternatively, is ambiguous.
1. Termination of the Agreement
Gibbs claims that the Agreement was effectively terminated at the end of the 60-day notice period provided in the Agreement. Gibbs also contends that the Termination Letter was sent on or about January 30, 2003, making the date at the end of the Agreement, and the beginning of the one-year non-solicit period, March 31, 2003. Finally, Gibbs claims that Armstrong breached the non-solicit by hiring Zelman on January 12, 2003, before the clock had run on the non-solicit period. On the other hand, Armstrong claims the Agreement was effectively terminated at the time notice of termination was given. Armstrong also states that the Termination Letter was sent on or about December 30, 2002, but in any event was received before it was acknowledged in an email from Gibbs on January 6, 2003. Armstrong contends the Agreement was terminated upon the giving of notice on January 6, 2003 at the latest, so that the year provided for in the non-solicit had come and gone, at the latest, by January 6, 2004. As such, Armstrong contends its hiring of Zelman did not violate the Agreement.
Gibbs also claims that the termination of the Agreement was later extended through June 30, 2003. See Mallozzi Aff. at ¶ 6.
Despite an issue of fact as to when the Termination Letter was sent, the earliest the Agreement could have effectively terminated was March 31, 2003, because "[u]nder New York law, an attempt to terminate a contract containing a notice provision does not take effect until the notice period has passed."Mill-Bern Assoc., Inc. v. Int'l Bus. Machs. Corp., 64 Fed. Appx. 792, 794 (2d Cir. 2003). Thus, drawing all ambiguities against Gibbs, the earliest date to which the non-solicit period could have ended is March 31, 2004. Because Zelman, an employee of Gibbs', was hired by and began working for Gibbs on January 12, 2004, Armstrong has violated the non-solicit provision in the Agreement.
Armstrong also argues the termination clause in the Agreement is ambiguous and necessitates discovery. The resolution of ambiguities in a contract is a question of law for the Court.Seiden Assocs. v. ANC Holdings, Inc., 959 F.2d 425, 429 (2d Cir. 1992). The right to limit the life of a contract through a notice provision "is absolute and will be upheld in accordance with its clear and unambiguous terms." Red Apple Child Dev. Ctr. v. Cmty. Schs. Dist. Two, 756 N.Y.S.2d 527, 529 (1st Dep't 2003). The language in a contract is ambiguous if it is "capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement." Krumme v. Westpoint Stevens, Inc., 238 F.3d 133, 139 (2d Cir. 2000). Contracts are not "made ambiguous simply because the parties urge different interpretations. Nor does an ambiguity exist where one party's view 'strains the contract language beyond its reasonable and ordinary meaning.'" Seiden Assoc., Inc. v. Am. Nat'l Can Co., 959 F.2d 425, 428 (2d Cir. 1992).
Applying these standards, I find that the language of the termination clause, supported as it is by the case law, posits that once notice is given the contract will terminate within a specified period of time. Armstrong argues that an ambiguity is created because the termination clause goes on to say that "upon termination of the Agency by the Client, the Agency's obligations during the 60-day termination period to the Client will be to continue to provide services to assure Client of a smooth transition." (Agreement at 5.) This language supports the concept that both parties must continue to perform under the contract until it is effectively terminated. The label "termination period" is admittedly not a model of clarity, but it fails to make the contract ambiguous. Put another way, it does not change the date termination is effective. Instead, this language only serves to outline the obligations of Gibbs to continue to protect Armstrong after notice of termination has been given. Moreover, Armstrong's argument that it is reasonable to have a different interpretation of this clause is belied by the fact that it signed a subsequent Record Transfer Indemnification and Liability Agreement with Gibbs where a recital states that Armstrong terminated the Agreement effective March 31, 2003 (and was later extended through June 30, 2003). (Mallozzi Aff. Exhibit C.)
2. The Non-Solicit Clause
Armstrong argues the non-solicit is a penalty and therefore void against public policy. Under New York law, parties have the right to specify in a contract the damages to be paid in the event of a breach, so long as the damages clause is neither unconscionable nor contrary to public policy. See Rattigan v. Commodore Int'l Ltd., 739 F. Supp. 167, 169 (S.D.N.Y. 1990) (citing Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 424 (1970). Whether a provision constitutes an enforceable liquidated damages clause or an unenforceable penalty is a matter of law for the Court. Vernitron Corp. v. CF 48 Assocs., 478 N.Y.S.2d 933, 934 (2d Dep't 1984). It is important to note that this is not a restrictive covenant in an employment contract. Here the parties simply agreed not to hire away employees from one another. Accordingly, the analysis is not the same as if it had been a restrictive covenant in an employment agreement. See Baker's Aid v. Hussmann Food Serv. Co., 730 F.Supp 1209 (E.D.N.Y. 1990) ("Because enforcement of employee restrictive covenants may result in the loss of an individual's livelihood, such covenants are 'rigorously examined' and enforced only to protect an employer from unfair competition stemming from — among other things — the disclosure of trade secrets").
In order for a court to enforce a liquidated damages clause under New York law, the clause must specify a liquidated amount which is reasonable in light of the anticipated probable harm, and actual damages must be difficult to ascertain as of the time the parties entered into the contract. Truck Rent-A-Center, 41 N.Y.2d at 425. An amount which is plainly disproportionate to actual damages is deemed a penalty and is not enforceable because it compels performance by the very disproportion between liquidated and actual damages. Id. Relevant also to this inquiry is the sophistication of the parties and whether both sides were represented by able counsel who negotiated the contract. Wilmington Trust Co. v. Aerovias de Mex., S.A. de C.V., 893 F. Supp. 215, 218 (S.D.N.Y. 1995). Moreover, a court should not interfere with the agreement of the parties, absent some persuasive justification. Id. (citing Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573, 577 (1979)).
Under the Agreement, neither Gibbs nor Armstrong may employ any of the other's staff for a year following the termination of the Agreement without express written consent. (Agreement at 3.) Here, Armstrong has the burden of proof that the non-solicit was not freely negotiated and agreed to and in fact constitutes an unenforceable penalty. Wilmington Trust Co., 893 F. Supp. at 218. Armstrong argues that the liquidated damages clause at issue calls for an amount disproportionate to the actual damages Gibbs suffered. Armstrong also argues the amount is unrelated to any 'actual damages' which might have occurred as the result of Zelman leaving Gibbs. But the measure to determine if a liquidated damages provision is an unreasonable penalty does not end at how accurately the clause resembles actual damages. Rather the specified amount must be reasonable in light of what both parties agree to be the anticipated harm. Id. Clearly, actual damages were difficult to ascertain because neither party could envision, nor would the Court expect them to, the cost of losing employees of varying experience and value. Almost by definition these employers consider at least some employees to be unique. The amount set in the Agreement was a reasonable prediction of what harm would likely befall the non-breaching party at the time the contract was made. Vernitron Corp., 478 N.Y.S.2d at 934. It is not, as Armstrong suggests, necessarily disproportionate to actual damages.
Second, Armstrong argues the non-solicit is ambiguous because "total compensation" is too difficult to define. As articulated above, the language in a contract is ambiguous if it is "capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement." Krumme v. Westpoint Stevens, Inc., 238 F.3d 133, 139 (2d Cir. 2000). The language of the non-solicit provides "[v]iolation of this provision shall require payment in the nature of a recruiting fee equal to the most recent total compensation of the recruited employee as contained on the employee's W-2 form for his or her last full year . . ." (Agreement at 3.) There is nothing ambiguous about it. Clearly both parties intend that damage in the event of breach will be measured by the amount of salary paid by the non-breaching employer, in this case that Armstrong would be liable for the amount of salary Gibbs paid to Zelman in her last full year before she left. The W-2 represents not how much Zelman earned in her last year, but the amount paid by Gibbs as her employer. This amount is reflected as $84,399.96. Armstrong's attempt to draw ambiguities because the W-2 breaks down earnings for tax purposes is without merit. In sum, this clause is unambiguous. The only reasonable meaning is that "total compensation" means the amount paid to Zelman as evidenced on her W-2 Tax Statement for 2003, or $84,3999.96.
III. CONCLUSION
Summary judgment is granted to Gibbs, denied for Armstrong and the Court awards $84,399.96 to Gibbs in damages. Under New York Law, a plaintiff that prevails on a claim for breach of contract is also entitled as a matter of right to prejudgment interest from the date of breach until the entry of final judgment. N.Y.C.P.L.R. § 5001(a)-(c) (2005); see U.S. Naval Inst. V. Berekley Publ'g Group, 936 F.2d 692, 698 (2d Cir. 1991). The clerk is instructed to calculate prejudgment interest from January 12, 2003 to the date of this Opinion and Order. The clerk is also instructed to close this motion and any open motions and remove the case from my docket.
SO ORDERED.