Opinion
21-CV-10525 (JSR) (RWL)
07-22-2022
PERMANENS CAPITAL L.P., Plaintiff. v. JEFFERY BRUCE, Defendant.
REPORT AND RECOMMENDATION TO HON. JED S. RAKOFF: MOTION TO DISMISS
ROBERT W. LEHRBURGER, UNITED STATES MAGISTRATE JUDGE.
Plaintiff Permanens Capital L.P. (“Plaintiff,” “Permanens” or the “Company”) filed this action against former Permanens employee Jeffrey Bruce (“Defendant” or “Bruce”), alleging breach of an employment agreement and tortious interference with business relations. Bruce moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that the provisions of the employment agreement at issue were either not breached or are unenforceable as overly broad or restrictive under New York law. Bruce also argues the tortious interference claim is duplicative of the breach of contract claim. For the reasons set forth below, I recommend that Bruce's motion be GRANTED in part and DENIED in part.
PROCEDURAL HISTORY
On November 5, 2021, Permanens filed a complaint in New York State Supreme Court alleging breach of contract and tortious interference with business relations. (Dkt. 1, Ex. A.) Bruce removed the case to federal court on the basis of diversity jurisdiction. (Dkt. 1, Ex. C.) He then filed a motion to dismiss for failure to state a claim for which relief can be granted. (Dkts. 10-12.) In response, Permanens filed an amended complaint. (Dkt. 20.) Bruce filed a motion to dismiss the amended complaint on February 18, 2022 (Dkts. 21-23), at which point the matter was referred to this Court for Report and Recommendation. (Dkt. 25.) Permanens filed a brief in opposition on March 18, 2022 (Dkt. 26), and Bruce replied on April 1, 2022. (Dkt. 28.) The Court heard oral argument on July 21, 2022.
FACTUAL BACKGROUND
As required on a motion to dismiss, the Court accepts as true all well-pled allegations of the Complaint and draws all reasonable inferences in favor of Plaintiff, the non-moving party. The Court also considers documents referenced in the Complaint, including the employment agreement at issue.
See Lotes Co. v. Hon Hai Precision Industry Co., 753 F.3d 395, 403 (2d Cir. 2014).
See Kleinman v. Elan Corp., 706 F.3d 145, 152 (2d Cir. 2013).
Permanens is an investment advisory firm that offers a range of investment management solutions to institutional and individual clients, including endowments, private foundations, family trusts, high-net-worth individuals, and investment funds. (Compl. ¶¶ 2, 32.) As of January 2022, it oversaw approximately $4.2 billion in assets. (Id.) In 2018, Bruce joined Permanens as a Senior Retirement Advisor, and, on July 23, 2019, Bruce and Permanens entered into an Employment Agreement (the “Agreement” or “EA”). (Compl. ¶¶ 34, 35, Ex. 1.) The Agreement set forth Bruce's employment responsibilities, salary, location, bonus entitlements, and covenants related to confidentiality, non-solicitation, non-competition, and transition compensation.
“Compl.” refers to the Amended Complaint at Dkt. 20.
Specifically, the Agreement provided that Bruce would be based in Lynchburg, VA, initially at an offsite office at Liberty University. (EA at § 3.) Both during, and for one year after, his employment, Bruce would not provide consultative wealth management services within a twenty-mile radius of any Company office with which he had dealings or met with clients (EA at § 12(a)); would not - with certain conditions - solicit Permanens clients or employees (EA at § 12(b)(C)); and if a Permanens client terminated its relationship with the Company and engaged Bruce, he would be required to pay Permanens a fee called Transition Compensation. (EA at § 13(a)).
On January 13, 2021, while still employed with Permanens, Bruce incorporated an investment management firm, Bison Creek Wealth Management LLC (“Bison Creek”) identifying as its principal place of business his home address approximately ten miles away from Lynchburg, Virginia. (Compl. ¶¶ 5, 41-42, Ex. 2 (“Bison Creek Articles of Incorporation”).) Bison Creek's website advertises itself as providing investment management services such as “creating investment strategies, programs, and portfolios to meet long-term financial goals for individuals and businesses.” (Compl. Ex 3.)
Once Bruce incorporated Bison Creek, his workplace performance declined, and he failed to follow Company directives. (Compl. ¶ 45-47.) During his two-year tenure at Permanens, Bruce failed to generate significant new business and increased assets under management by only $1.7 million. (Compl. ¶ 46.) Additionally, Permanens is the manager of Liberty University's endowment (Compl. ¶ 50), and in 2020, the then-president of Liberty, Jerry Falwall, Jr., resigned amid a “series of personal scandals” that were covered in the press. (Compl. ¶ 48.) In April 2021, following Liberty University's directive to Liberty employees, Permanens directed its employees not to have contact with Mr. Falwell. (Compl. ¶¶ 49, 52.) Permanens contends that Bruce refused to follow that directive on multiple occasions and continued to have contact with Mr. Falwell. (Compl. ¶¶ 47, 52-55.)
Permanens recognizes that Bruce is related to Mr. Falwell by marriage. (Compl. ¶ 52.)
On July 19, 2021, Bruce told Permanens' Chief Investment Officer (“CIO”) that he was planning to leave the Company and intended to take Permanens' clients with him, in particular Liberty University. (Compl. ¶ 60.) The CIO reminded Bruce of his obligations under the Agreement, and the two mutually agreed that Bruce should resign at the end of the year. (Compl. ¶¶ 61-62.) But rather than waiting, Bruce submitted a letter of resignation on July 26, 2021, claiming that he was no longer bound by the Agreement due to Permanens' breaches such as failing to pay him bonuses as required under the Agreement. (Compl. ¶¶ 64-65, Ex. 4.) Permanens accepted Bruce's resignation on July 27, 2021, effective immediately. (Compl. ¶ 67, Ex. 5.) Permanens alleges that, while it did not know at the time, Bruce had been in material breach of the Agreement for more than six months. (Compl. ¶ 66.)
On or around July 22, 2021, before handing in his letter of resignation, Bruce contacted the Company's account representative at Charles Schwab and asked for assistance transferring certain client accounts from Permanens to his new firm. (Compl. ¶ 68.) Between July 28, 2021 and mid-August 2021, approximately 70 client accounts “de-linked” their investment accounts from Permanens, representing an aggregate total of $17 million in assets. (Compl. ¶¶ 70-72, 76-78.) That amount accounted for approximately half of the assets under management previously advised by Bruce.
Permanens alleges Bruce's actions damaged its retail business to such an extent that Permanens concluded it was no longer profitable to maintain the Private Wealth Management practice. (Compl. ¶ 73.) On August 6, 2021, Permanens sent a letter to certain clients advising them that it would be winding down the service on their accounts after ninety days. (Compl. ¶ 75, Ex. 7.)
Permanens contends that Bruce breached Section 12 of the Agreement by soliciting clients of Permanens and Section 13 of the Agreement by failing to pay the Transition Compensation which is intended to compensate Permanens for the loss of clients and is owed at the time any Permanens client transfers its business to Bruce, regardless of whether Mr. Bruce has actively solicited the client or not. (Compl. ¶¶ 7879, 80-85.)
Permanens additionally accuses Bruce of “embark[ing] on a campaign” to interfere with Permanens' relationships with current and former employees and current and potential clients. (Compl. ¶ 90.) Bruce solicited current and former Permanens employees to join him in a proposed lawsuit against Permanens, asked the then-Chief Financial Officer to serve as a witness in the proposed lawsuit (Compl. ¶¶ 91-94), and contacted a number of Permanens employees and encouraged them to resign from Permanens - three have since done so. (Compl. ¶¶ 98-99.)
The Amended Complaint asserts claims for breach of contract and tortious interference with business relations. Permanens seeks relief consisting of damages; enjoining Bruce from continuing to violate the Agreement and from tortiously interfering with Permanens' business relations; pre-judgment and post-judgment interest; and attorneys' fees and expenses.
LEGAL STANDARDS
A. Motion To Dismiss For Failure To State A Claim
Under Rule 12(b)(6), a pleading may be dismissed for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). To survive a Rule 12(b)(6) motion, a complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974 (2007). A claim is facially plausible when the factual content pleaded allows a court “to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009).
“Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. at 1966). In considering a motion to dismiss, a district court “accept[s] all factual claims in the complaint as true, and draw[s] all reasonable inferences in the plaintiff's favor.” Lotes, 753 F.3d at 403 (internal quotation marks omitted). However, this tenet is “inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949. “[R]ather, the complaint's factual allegations must be enough to raise a right to relief above the speculative level ... i.e., enough to make the claim plausible.” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (internal quotation marks and brackets omitted). A complaint is properly dismissed where, as a matter of law, “the allegations in [the] complaint, however true, could not raise a claim of entitlement to relief.” Twombly, 550 U.S. at 558, 127 S.Ct at 1966.
For the purposes of considering a motion to dismiss pursuant to Rule 12(b)(6), a court generally is confined to the facts alleged in the complaint. See Cortec Industries v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991). A court may, however, consider additional materials, including documents attached to the complaint, documents incorporated into the complaint by reference, public records, and documents that the plaintiff either possessed or knew about, and relied upon, in bringing the suit. See Kleinman, 706 F.3d at 152 (quoting ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007)). In that regard, if “a document relied on in the complaint contradicts allegations in the complaint, the document, not the allegations, control, and the court need not accept the allegations in the complaint as true.” Poindexter v. EMI Record Group Inc., No. 11-CV-559, 2012 WL 1027639, at *2 (S.D.N.Y. March 27, 2012) (quoting Barnum v. Millbrook Care Ltd. Partnership, 850 F.Supp. 1227, 1232-33 (S.D.N.Y.1994)).
DISCUSSION
Bruce argues that Permanens' breach of contract claims are defective for several reasons: (1) Permanens cannot enforce the Agreement against Bruce because Permanens materially breached the Agreement by failing to pay Bruce as required by the Agreement; (2) the non-compete and non-solicitation provisions are overbroad; and (3) the Transition Compensation provision is overbroad and an unenforceable penalty. Bruce also offers several arguments why Permanens' tortious interference with business relations claim fails: (1) it is duplicative of the breach of contract claim; (2) Permanens does not adequately identify the third parties or business relations affected; and (3) Permanens fails to allege an intent to harm or use of wrongful means. The Court addresses each argument in turn.
A. Breach Of Contract
The Agreement is governed by New York law. (EA at § 21.) “To prevail on a breach of contract claim under New York law, a plaintiff must prove (1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages.” Terwilliger v. Terwilliger, 206 F.3d 240, 245-46 (2d Cir. 2000) (internal quotation marks omitted). “Plaintiffs bear the burden of proof as to all elements of a breach of contract claim.” Choquette v. Motor Information Systems, Inc., No. 15-CV-9338, 2017 WL 3309730, at *3 (S.D.N.Y. Aug. 2, 2017). Bruce argues that Permanens fails to set forth a prima facie breach of contract claim because Permanens failed to perform its obligation to pay Bruce a service bonus and did not adequately plead damages. Neither argument survives scrutiny.
1. Whether Permanens Failed To Fully Pay Bruce, And If So, Its Effect On Permanens' Claim, Cannot Be Determined On This Motion
Relying on his own resignation letter referenced in and attached to the Complaint as an exhibit, Bruce argues that Permanens materially breached the Agreement and thus cannot enforce the Agreement's restrictive covenants against him. (Def. Mem. at 9.) Permanens counters that even if Bruce's ‘unsubstantiated' claims set forth in his letter of resignation were true, they would not establish a material breach permitting Bruce to violate the restrictions to which he agreed. See Process America, Inc. v. Cynergy Holdings, LLC, 839 F.3d 125, 136 (2d Cir. 2016) (“Under New York law, a party's performance under a contract is excused where the other party has substantially failed to perform its side of the bargain or, synonymously, where that party has committed a material breach.”)
“Def. Mem.” refers to Defendant's Memorandum Of Law In Support Of Defendant's Motion To Dismiss Plaintiff's First Amended Complaint (Dkt. 23.).
Bruce's argument eschews the applicable standards on a motion to dismiss and, at best, raises disputed issues of fact that cannot be the basis for granting him dismissal of Permanens' claims. In his resignation letter, Bruce asserted that Permanens breached the Agreement by failing to pay him a Service Bonus as required under Section 5(a) if certain conditions are met. Bruce states that he met the requirements for receiving the Service Bonus on June 22, 2021, but by July 22, 2021, was still not paid.
Section 5(a) states “[o]nce Net Fees ... from Existing PWM Clients ... and New PWM Clients ... in a year exceed Fifty Thousand Dollars ($50,000) (the “Hurdle Amount”), [Bruce] shall be eligible to receive for such year (payable quarterly) a bonus on Net Fees a bonus on Net Fees actually received from the Company from Existing PWM Clients and New PWM Clients that exceed the Hurdle Amount as follows (the "Service Bonus").”
Bruce's resignation letter asserted a second breach by Permanens; specifically, that Permanens failed to timely file agency paperwork, which resulted in Bruce's being forced to take a registration exam in a short amount of time. (Compl. Ex. 4.) Bruce does not invoke that alleged breach as a reason why Permanens cannot enforce the Agreement against him. That makes sense; not only would such a breach likely not be material, but the Agreement does not on its face have the requirement that Bruce alleges. While the Agreement requires Bruce to maintain and keep current and in good standing his state and federal securities licenses, the Agreement does not make any reference to Permanens' responsibility to file paperwork, let alone by a specific time. (See EA § 17(b), (d) (Representations and Warranties).)
Bruce's “Permanens-breached-first” theory is based on accepting Bruce's hearsay allegations rather than, or in addition to, those made by Permanens. The non-moving party, however, is Permanens, and its well-pled allegations, not those made by Bruce, must be accepted as true. Bruce's reliance on his own unsubstantiated allegations as a basis for dismissal is contrary to what the law requires. See Lotes, 753 F.3d at 403; Xie v. JPMorgan Chase Short-Term Disability Plan, No. 15-CV-4546, 2016 WL 3963113, at *2 (S.D.N.Y. July 20, 2016) (holding Defendants' factual assertions that were contrary to allegations in the complaint were “inappropriate at the motion to dismiss stage”); Taub v. Big M, Inc., 719 F.Supp.2d 325, 326-27 (S.D.N.Y. 2010) (stating that defendant's factual assertions contained in its motion papers that were not supported by the pleadings or documents attached to the parties' agreements “do not form a proper basis for a motion to dismiss pursuant to Rule 12(b)(6)”).
Moreover, even if the Court accepted Bruce's assertions as true in addition to those made by Permanens, his argument is flawed. Under Permanens theory of breach, Bruce was in breach of the Agreement from the time Bruce formed Bison Creek on January 13, 2021. (See Compl. ¶¶ 41, 116.) In other words, at the time Bruce submitted his resignation letter, he was already in material breach of the Agreement for more than six months. Permanens would have owed no Service Bonus payments while Bruce was in breach, and Bruce forfeited any claims to them by resigning when he did. (Pl. Mem. at 19.) At best, Bruce raises competing factual allegations that cannot justify dismissal. See Anderson News, L.L.C. v. American Media, Inc., 680 F.3d 162, 185 (2d Cir. 2012) (“The choice between two plausible inferences that may be drawn from factual allegations is not a choice to be made by the court on a Rule 12(b)(6) motion”).
“Pl. Mem.” refers to Plaintiff Permanens' Opposition To Defendant's Motion To Dismiss First Amended Complaint (Dkt. 26.)
B. Enforceability Of The Agreement's Restrictive Covenants
Bruces' other arguments fare better and warrant dismissal of much of Permanens' claims. Bruce contends that the restrictive covenants he is alleged to have violated are not enforceable. The Court finds that all but one of the provisions are unenforceable.
1. Legal Standards Governing Restrictive Covenants
“As a general rule, ‘New York courts adhere to a strict approach to enforcement of restrictive covenants because their enforcement conflicts with the general public policy favoring robust and uninhibited competition, and powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood.'” Poller v. BioScrip, Inc., 974 F.Supp.2d 204, 214 (S.D.N.Y. 2013) (quoting Kelly v. Evolution Markets, Inc., 626 F.Supp.2d 364, 371 (S.D.N.Y. 2009)). The New York Court of Appeals has held that “specific enforcement of a restrictive covenant is appropriate only if the covenant is: (1) necessary to protect the employer's legitimate interests; (2) reasonable in time and area; (3) not unreasonably burdensome to the employee; and (4) not harmful to the general public.” Silipos, Inc v. Bickel, No. 06-CV-2205, 2019 WL 2265055, *3 (S.D.N.Y. Aug. 8, 2006) (citing BDO Seidman v. Hirschberg, 93 N.Y.2d 382, 388-89, 690 N.Y.S.2d 854, 856-57 (1999)); see also Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307, 386 N.Y.S.2d 677, 679 (1976) (“a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee”).
“Employer interests that may justify specific enforcement of a restrictive covenant are limited to: (1) protection of trade secrets; (2) protection of confidential customer information; (3) protection of an employer's client base; and (4) protection against irreparable harm where an employee's services are unique or extraordinary.” Locke v. Tom James Co., No. 11-CV-2961, 2013 WL 1340841, at *7 (S.D.N.Y. March 25, 2013); Silipos, 2006 WL 2265055 at *3 (listing same four “legitimate interests"); Markets Group, Inc. v. Oliveira, No. 18-CV-2089, 2020 WL 820654, at *11 (S.D.N.Y. Feb. 3, 2020), R. & R. adopted, 2020 WL 815732 (S.D.N.Y. Feb. 19, 2020) (same). Indeed, courts have held that the “law of [New York], as enunciated by its highest court, is that a nonsolicitation covenant will not be enforced absent trade secrets or other special circumstance.” Greenwich Mills Co. v. Barrie House Coffee Co., 91 A.D.2d 398, 404, 459 N.Y.S. 454, 458 (2d Dep't 1983) (citing Reed, Roberts Associates, 40 N.Y.2d at 308, 386 N.Y.S.2d at 680).
Even if legitimate employer interests are present, “[i]t is axiomatic ... that noncompete clauses and non-solicitation provisions ... must be reasonably limited both temporally and geographically in order to withstand judicial scrutiny, as reasonableness will not be found where restrictive covenants act to unreasonably limit trade and burden an individual's livelihood.” Poller, 974 F.Supp.2d at 220; see also Ticor Title Insurance Co. v. Cohen, 173 F.3d 63, 69 (2d Cir. 1999) (“The issue of whether a restrictive covenant not to compete is enforceable by way of an injunction depends in the first place upon whether the covenant is reasonable in time and geographic area”); Reed, Roberts Associates, 40 N.Y.2d at 307, 386 N.Y.S.2d at 679 (restrictive covenants will be enforced only if “reasonable in time and area”). “Review of the temporal and geographic reasonableness of restrictive covenants generally ‘focuses on the particular facts and circumstances giving context to the agreement.'” Silipos, 2006 WL 2265055 at *6 (quoting BDO Seidman, 93 N.Y.2d at 390, 690 N.Y.S.2d at 858).
The Court now discusses the relevant restrictive covenants of the Agreement: Section 12(a) (non-compete); Section 12(b) (non-solicitation and non-disruption); and Section 13 (Transition Compensation).
2. Section 12(a): Non-Compete Provision
The Complaint alleges that Bruce violated the non-compete provision set forth in Section 12(a) of the Agreement. That section provides in relevant part that Bruce:
shall not, directly or indirectly, without prior written consent of the Company, at any time during your employment hereunder and for a period of one (1) year, provide consultative services to, own, manage, operate, join, control, participate in, be engaged in, employed by or be connected with, any business, individual, partner, firm, corporation, or other entity that, directly or indirectly, provides private or institutional wealth management, investment advisory, financial planning, or investment management services within a geographic radius of twenty (20) miles of any Company office with which you had dealings or where you met with clients.(EA at § 12(a) (emphasis added).) More succinctly stated, while employed at Permanens and for one year after, Bruce was prohibited from owning, managing, or operating a firm that provided financial services, including investment management services, within a twenty-mile radius of any Permanens office with which he had had dealings or in which he met with clients.
As an initial matter, the Court finds that Section 12(a) of the Agreement is enforceable. It protects Permanens' legitimate interest in protecting its client base. And it is reasonable in temporal and geographic scope. See Reed Elsevier Inc. v. Transunion Holding Co., No. 13-CV-8739, 2014 WL 97317, at *8 (S.D.N.Y. Jan. 9, 2014) (“New York courts routinely find one-year restrictions to be reasonable”); Crown IT Services, Inc. v. Koval-Olsen, 11 A.D.3d 263, 264, 782 N.Y.S.2d 708, 710 (1st Dep't 2004) (finding one year restriction prohibiting defendants from servicing Plaintiff's former clients at the client location reasonable in time and area); Battenkill Veterinary Equine P.C. v. Cangelosi, 1 A.D.3d 856, 858, 768 N.Y.S.2d 504, 506 (3rd Dep't 2003) (finding reasonable a restrictive covenant prohibiting veterinarian from competing in practice within 35 miles of clinic for three years).
Additionally, the 20-mile restriction is far from overly burdensome, nor harmful to the public. There is no evidence to indicate that Permanens has offices other than in New York City and at Liberty University. (See Compl. ¶¶ 16, 42.) There thus are only two offices that Bruce cannot work within twenty miles of. See Natsource LLC v. Paribello, 151 F.Supp.2d 465, 471 (S.D.N.Y. 2001) (stating that New York courts, as well as those in the Second Circuit, have enforced restrictive covenants with much broader geographic restrictions than 75 miles); Maltby v. Harlow Meyer Savage, Inc., 166 Misc.2d 481, 633 N.Y.S.2d 926 (Sup. Ct. 1995), aff'd, 223 A.D.2d 516, 637 N.Y.S.2d 110 (1996) (enforcing six month ban on employment with a competitor within the New York Metropolitan Area, the Los Angeles greater Metropolitan Area, the greater Toronto Metropolitan area, the greater London Metropolitan Area, and Continental Europe). Accordingly, Section 12(a) is enforceable.
Even though Section 12(a) is enforceable, Bruce disputes that the Complaint plausibly alleges that Bruce violated the provision. The Court disagrees. It is undisputed that on January 13, 2021, Bruce incorporated Bison Creek Wealth Management LLC listing Bruce's home address as the LLC's Principal Office Address. (Compl. ¶ 41 and Ex. 2; Def. Mem. at 4.) It is also undisputed that while Bruce was employed at Permanens he worked out of an “offsite” office provided by Permanens located at Liberty University in Lynchburg, VA and defined as such in the Agreement. (See Def. Mem. at 10; Pl. Mem. at 17; EA § 3.) Third, it is undisputed that Bruce's home address is within 20 miles of Liberty University. (See Compl. ¶ 42; Def. Mem. at 4.)
Section 3 of the Agreement states “You will be based in Lynchburg, VA, initially at an offsite office at Liberty University, subject to such travel as may be required or necessary in connection with the performance of your duties hereunder.”
Bruce nonetheless offers three arguments as to why the Complaint fails to state a breach of Section 12(a). First, he argues that even if enforceable, Section 12(a) does not prohibit mere incorporation. Certainly, “[u]nder ... New York law, a former employee may prepare to compete during the term of a non-competition provision, because restraining such acts would have the effect of extending the term of the covenant.” In re Document Technologies Litigation, 275 F.Supp.3d 454, 464 (S.D.N.Y. 2017) (internal quotation marks omitted).
Bruce, however, overlooks relevant allegations of the Complaint. Permanens alleges that Bruce took affirmative steps to compete with Permanens and build out Bison Creek's business both while still employed at the firm and within the year thereafter. For instance, days before submitting his resignation letter, Bruce contacted Permanens' Custodian Account Representative at Charles Schwab to ask for advice on how to de-link client investment accounts so that they could be moved to Bison Creek. (Compl. ¶¶ 9, 68.) Also prior to his resignation, Bruce actively solicited clients to encourage them to move their accounts from Permanens to Bison Creek for competing investment services. (Compl. ¶ 10.) On July 19, 2021, Bruce told Permanens' CIO that he was planning to leave the Company and that he intended to take Liberty with him as a client. (Compl. ¶ 60.) Once he resigned, certain clients whose accounts were advised by Bruce began to de-link their investment accounts from Permanens, indicating that they no longer intended to engage Permanens to manage their assets. (Compl. ¶ 70.) Thus, Bruce did far more to compete with Permanens, both before and after leaving Permanens, than merely incorporate Bison Creek prior to his departure.
Citing a regulatory filing not referenced in the Complaint, Permanens also asserts that a month before he resigned, Bruce registered his new firm as a Registered Investment Advisor with the SEC effective June 25, 2021. (Pl. Mem. at 15 (citing Investment Advisor Public Disclosure (June 7, 2022), https://adviserinfo.sec.gov/firm/summary/314991).)
For similar reasons, Bruce's assertion - in a single sentence - that Permanens failed to plead any damages deriving from Bruce's incorporation of Bison Creek falls flat. (See Def. Mem. at 10.) Again, Permanens alleges damages not merely from Bruce's incorporation of Bison Creek, but from what he did before, after, and in connection with Bison Creek. (See Compl. ¶¶ 12-15, 70-78.) In particular, if not for Bruce forming and pursuing business through Bison Creek, Permanens would not have lost an aggregate of $17 million in assets. (Compl. ¶ 77.) And even if incorporation alone may not have caused harm without additional acts by Bruce (such as actually doing business through the corporate entity), Permanens would be entitled to at least nominal damages upon establishing breach. See Accent Delight International Ltd. v. Sotheby's, 394 F.Supp.3d 399, 415 (S.D.N.Y. 2019) (“‘nominal damages are always available in breach of contract actions' under New York law, so even if [Plaintiff's] proposed damages are ‘too speculative to support [their] claims'” it is not grounds to dismiss complaint) (quoting Luitpold Pharmaceuticals, Inc. v. Ed. Geistlich Sohne A.G. Fur Chemische Industrie, 784 F.3d 78, 87 (2d Cir. 2015)). In any event, “recent decisions in this District have ... declined to dismiss breach of contract claims for failure to adequately plead damages.” Town & Country Linen Corp. v. Ingenious Designs LLC, No. 18-CV-5075, 2020 WL 3472597, at *8 (S.D.N.Y. June 25, 2020) (collecting cases).
Second, Bruce argues he did not violate Section 12(a) because Permanens “does not have a ‘Company office' in Lynchburg, Virginia.” (Def. Mem. at 10.) That argument is premised on Bruce's contention that despite being provided for by Permanens and located at one of Permanens' largest clients, the offsite office at Liberty University was not a “Company office.” The Agreement does not define the term “Company office.” But it defines the Company as Permanens, and Permanens provided and paid for the office space at Liberty University as a place for Bruce to conduct investment services and meet clients. Bruce also contends that Permanens has no legitimate interest in the Virginia market. Given that Liberty University is located in Lynchburg, Virginia, Permanens employed Bruce to work at Liberty University, and Permanens managed nearly $2 billion of Liberty University's assets, the Court is not persuaded by Bruce's argument. It is entirely plausible that the Liberty University location was a Company office at relevant times before and after Bruce resigned.
Bruce next argues that he did not breach Section 12(a) because Bison Creek's office is outside the restricted 20-mile geographic radius. (See Def. Mem. at 11.) He relies on the fact that Bison Creek's website lists an address in Charlottesville, Virginia that is 65 miles from the offsite office at Liberty University. (Def. Mem. at 4; see Compl. Ex. 3 at 6.) There are at least three problems with Bruce's argument. First, Bruce states that he leased the Charlottesville office for Bison Creek after his departure from Permanens (Def. Mem. at 4); any competing business he conducted before then would still violate the geographical restriction as it would have taken place at the Liberty University offsite office. Second, Bison Creek's Articles of Incorporation listed its address as that of Bruce's home, which is only ten miles from the Liberty University offsite office. Third, Bruce again eschews the legal standards on a motion to dismiss. The Court cannot draw an inference in Bruce's favor that because Bison Creek's website lists a Charlottesville address, Bruce did not violate the geographic restriction. For instance, it is perfectly plausible that Bruce conducted competing business out of more than one location.
In short, Section 12(a) is enforceable, and the Complaint plausibly alleges Bruce's breach of that restriction.
3. Section 12(b)(B): Non-Solicitation Of Employees
The Complaint alleges Bruce violated Section 12(b)(B) of the Agreement following his resignation by contacting and soliciting Permanens employees. (Compl. ¶¶ 97, 98.)
Section 12(b)(B) provides in relevant part that:
during the course of your employment with the Company and for a period of twenty-four (24) months following ... your termination of employment, you shall not, directly or indirectly, for your benefit or for the benefit of any other person (including, without limitation, an individual or entity), or knowingly assist any other person, in any manner, directly or indirectly .
(B) Solicit or otherwise attempt to induce or encourage any person who is an employee of the Company or any of its affiliates to terminate his or her employment or engagement with the Company or such affiliate or to apply for or accept employment with any entity or person that provides private or institutional wealth management, investment advisory, financial planning, or investment management services.(EA at § 12(b)(B) (emphasis added).)
Permanens alleges Bruce breached this provision when he contacted “a number of Permanens employees and encouraged them to resign from Permanens,” three of whom actually did from Permanens. (Compl. ¶¶ 98-99.) While neither Bruce nor Permanens adequately addresses Section 12(b)(B) in their motions, instead couching Bruce's actions related to soliciting employees under Section 12(b)(D) (discussed below), the Court nonetheless finds the provision to be unenforceable.
“[C]ovenants prohibiting former employees from recruiting workers of a former employer do not violate public policy per se.” Kelly v. Evolution Markets, Inc., 626 F.Supp.2d 364, 374 (S.D.N.Y. 2009). In evaluating the reasonableness of a nonrecruitment post-employment covenant, New York courts apply the BDO Seidman test in that the “restraint must (1) be no greater than is required for the protection of the legitimate interest of the employer, (2) not impose undue hardship on the employee, and (3) not injure the public.” Renaissance Nutrition, Inc. v. Jarrett, No. 08-CV-800S, 2012 WL 42171, at *3 (W.D.N.Y. Jan. 9, 2012); QBE Americas, Inc. v. Allen, No. 22-CV-756, 2022 WL 889838, at *10 (S.D.N.Y. March 25, 2022) (stating common law reasonableness standard from BDO Seidman applies to a covenant prohibiting direct or indirect solicitation of employees to leave the employer).
In In re Document Technologies Litigation, the Court held unenforceable a nonrecruitment provision, similar to the one in the Agreement, which prohibited employees during their employment and for a twelve-month period after termination from “attempt[ing] to hire, solicit, induce, recruit or encourage any other employees or agents of [the company] to terminate their employment.” 275 F.Supp.3d at 466. As the court explained, a restrictive covenant is “unenforceable insofar as it purports to prohibit at-will employees, who have yet to accept an offer of new employment, from ‘inducing' or even ‘encouraging' their coworkers to leave their present employer.” Id. The Court held that “harm to a company's operations arising [even] from the coordinated en masse resignation of several employees ... is not a legally cognizable interest for the purposes of a restrictive covenant.” Id.; see also id., 275 F.Supp.3d at 467 (“the New York Court of Appeals has ‘limited the cognizable employer interests under the first prong of the common-law rule to the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary'”) (quoting BDO Seidman, 93 N.Y.2d at 389, 690 N.Y.S.2d at 857).
In QBE Americas, Inc. v. Allen, the court reaffirmed the analysis of In re Document Technologies Litigation. The non-recruit covenant at issue prohibited employees during their employment and for a twelve-month period after termination from “recruit[ing], hir[ing], or attempt[ing] to recruit or hire, directly or by assisting others, any then-current employee of the Company for employment with an entity other than the Company; or entice or attempt to persuade the Company's then-current employees to leave employment with the Company.” 2022 WL 889838 at *10 n.6. The Court found that the plaintiff was not likely to succeed on its claim that employees breached their employment agreements because it did not sufficiently allege that the covenant protected a legitimate interest. See id. at *11 (“QBE does not articulate any special investments that it has made in these employees' skills, nor how their continued employment is an ‘asset' when the company declined to secure their continued services through employment agreements of fixed terms”).
Here, Section 12(b)(B) is similarly unenforceable as it is nearly identical to the non-recruitment covenants in In re Document Technologies Litigation and QBE. The “legitimate interest of the employer must protect against unfair competition, not simply to avoid competition in a general sense.” In re Document Technologies Litigation, 275 F.Supp. at 466-67 (emphasis in original). Section 12(b)(B) of the Agreement does not protect a legitimate interest of the employer but rather prohibits Bruce from communicating with any Permanens' employee about other job opportunities. It applies to every person employed by Permanens or an affiliate of Permanens, without regard to what type of role the employee holds, what type of skills they possess, or their value to Permanens. Moreover, the provision has a temporal limitation that is double the prohibition struck down in In re Document Technologies Litigation and QBE and includes no geographic limits. Section 12(b)(B) thus cannot be enforced by Permanens.
4. Section 12(b)(C): Non-Solicitation Of Clients
The Complaint alleges that Bruce violated Section 12(b)(C) of the Agreement by soliciting Permanens' clients. That provision prohibits Bruce while employed by Permanens, and for a period of two years thereafter, from soliciting clients of Permanens or inducing them to terminate their relationship with Permanens. In relevant part, Section 12(b)(C) provides that:
during the course of your employment with the Company and for a period of twenty-four (24) months following ... your termination of employment, you shall not, directly or indirectly, for your benefit or for the benefit of any other person (including, without limitation, an individual or entity), or knowingly assist any other person, in any manner, directly or indirectly .
(C) Solicit or otherwise attempt to induce or encourage any entity or person who is a client (including any investor in a fund advised by the Company), client or potential client of the Company to cease to engage, not to engage, or to reduce the services of the Company in order to use the services of any entity or person that provides private or institutional wealth management, investment advisory, financial planning, or investment management services, where you interacted with the client or potential client during your employment with the Company or for whom you possess Confidential Information (as defined above) or whose identity became known to you as a result of Confidential Information.(EA at § 12(b)(C) (emphasis added).) Bruce correctly argues that 12(b)(C) is overly broad and unenforceable for several reasons.
“A covenant will be rejected as overly broad ... if it seeks to bar the employee from soliciting or providing services to clients with whom the employee never acquired a relationship through his or her employment or if the covenant extends to personal clients recruited through the employee's independent efforts.” Scott, Stackrow & Co., C.P.A.s, P.C. v. Skavina, 9 A.D.3d 805, 806, 780 N.Y.S.2d 675, 677 (2004); see also Nebraskaland, Inc. v. Brody, No. 09-CV-9155, 2010 WL 157496, at *3 (S.D.N.Y. Jan. 13, 2010) (declining to enforce restrictive covenant regarding non-solicitation to the extent defendant had pre-existing relationship with customers). The broad scope of Section 12(b)(C) impermissibly sweeps in such clients.
The provision also is overly broad because it encompasses prospective, dormant, and occasional clients. Courts in this District have declined to enforce restrictive covenants as to “potential” clients - expressly the term employed twice in Section 12(b)(C) - because they are inconsistent with “New York Court's practice of enforcing restrictive covenants only to the extent necessary to protect the employer's legitimate interests.” Johnson Controls, Inc. v. A.P.T. Critical Systems, Inc., 323 F.Supp.2d 525, 540 (S.D.N.Y. 2004); see also Mercer Health & Benefits LLC v. DiGregorio, 307 F.Supp.3d 326, 350 (S.D.N.Y. 2018) (“The protection of client relationships does not justify enforcement of the portions of the non-compete clauses relating to potential clients of the employer who are merely solicited at the direction of the employee”) (cleaned up); Marsh USA Inc. v. Karasaki, No. 08-CV-4195, 2008 WL 4778239, at *17 (S.D.N.Y. Oct. 31, 2008) (“An employer does not forge a protectible client relationship with a prospective customer simply by sending the company a business proposal or making a pitch for its business in a sales meeting”); Johnson Controls, Inc., 323 F.Supp.2d at 540 (stating plaintiff has no significant or special relationship with potential clients to whom they may have sent business proposals but who did not elect to use plaintiff's services).
This opinion uses a “(cleaned up)” parenthetical to indicate that internal quotation marks, brackets, citations, emphases, or combinations thereof have been omitted from the quoted source. Any further alterations or emphases added to the quoted source by this Court are noted in a separate parenthetical.
The provision also impermissibly prohibits more than the active solicitation or diversion of clients. Contending otherwise, Permanens points to the plain language of Section 12(a), which prohibits Bruce from “‘interfere[ing] with, disrupt[ing] or attempt[ing] to disrupt[]' Permanens' relationships and ‘inviting, advising, encouraging, or requesting' or ‘attempt[ing] to induce or encourage' a client from leaving or reducing its services with Permanens - i.e., active solicitation.” (Pl. Mem. at 9.) Likewise, Section 12(b)(C) prohibits Bruce from “solicit[ing] or otherwise attempt[ing] to induce or encourage any entity or person who is a client.” (EA § 12(b)(C).)
The plain language, however, must be read in context. While on its face section 12(b)(C) seems to address only active solicitation, Section 12(c) defines the term “Solicit” as “any direct or indirect communication of any kind whatsoever, regardless of by whom initiated, inviting, advising, encouraging or requesting any person or entity, in any manner, to take or refrain from taking any action.” (EA § 12(c) (emphasis added).) That definition means that, under Section 12(b)(C), Bruce would be prohibited from engaging with any person or entity that voluntarily initiated communication with him. The language of Section 12(b)(C) prohibiting Bruce from doing business with any client with whom he “interacted” is to the same effect. Such a provision is unenforceable. See Bijan Designer for Men, Inc. v. Katzman, No. 96-CV-7345, 1997 WL 65717, at *6 n. 9 (S.D.N.Y. Feb. 7, 1997) (finding that enjoining Defendant from engaging in contact with any of Plaintiff's customers even without solicitation on his part would be void as against public policy); Deloitte & Touche, LLP v. Chiampou, 222 A.D.2d 1026, 1027, 636 N.Y.S.2d 679, 679 (1995) (holding that covenant not to compete cannot apply to “plaintiff's former clients who had voluntarily and without solicitation sought out defendants after defendants left plaintiff's employ”).
Nor is there any way to salvage the non-solicitation restriction through court-imposed refinements to it. “In appropriate circumstances, courts may ‘blue pencil' an overbroad restrictive covenant to enforce only its reasonable provisions.” Webcraft Technologies, Inc. v. McCaw, 674 F.Supp. 1039, 1047 (S.D.N.Y. 1987); see also Heartland Securities Corp. v. Gerstenblatt, No. 99-CV-3694, 2000 WL 303274, at *10 (S.D.N.Y. March 22, 2000) (“A court has judicial power to sever and grant partial enforcement for an overbroad employee restrictive covenant”); Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364, 370-71, 12 N.Y.S.3d 606, 611 (2015) (holding non-solicitation provision was partially enforceable because it was overbroad to the extent that it prohibited defendant from working with “any of plaintiffs' New York customers, even those [defendant] had never met, did not know about and for whom she had done no work”). But “a court should not attempt to partially enforce a non-compete provision where its infirmities are so numerous that the court would be required to rewrite the entire provision.” Mister Softee, Inc. v. Tsirkos, No. 14-CV-1975, 2014 WL 2535114, at *9 (S.D.N.Y. June 5, 2014). That is precisely the situation here. Section 12(b)(C) is irredeemably overbroad and should not be enforced.
5. Section 12(b)(D): Non-Disruption Provision
Section 12(b)(D) of the Agreement provides that during the course of Bruce's employment and for a period of twenty-four months following the expiration of the Notice Period he will not:
(D) interfere with, disrupt or attempt to disrupt any relationship, contractual or otherwise, between the Company and any of its respective officers, directors, shareholders, clients (including any investor in a fund advised by the Company), potential clients, investors, counterparties, executives, employees or other persons or entities with whom the Company deals.
Thus, Section 12(b)(D) acts as a catchall that includes conduct already covered by Sections 12(b)(B) and (b)(C). Bruce argues Section 12(b)(D) is similarly overbroad for the same reasons that 12(b)(C) is overbroad and fails to meet the BDO Seidman test. As Bruce asserts, such a “restrictive covenant is unenforceable” because “it indiscriminately ‘purports to prohibit [an employee] from dealing with [the employer's] entire client base' and as a result, ‘effectively excludes defendant from continued employment in the industry.'” (Def. Mem. at 16-17 (quoting Good Energy, L.P. v. Kosachuk, 49 A.D.3d 331, 332, 853 N.Y.S.2d 75, 77 (2008).) The Court agrees.
Section 12(b)(D) broadly prohibits “interference” and “disruption” of any relationship between Permanens and anyone who does business - i.e., “deals” - with Permanens. For the same reasons as Sections 12(b)(B) and (b)(C), the non-disruption provision is overbroad, unreasonably burdensome on Bruce, and unenforceable. Section 12(b)(D) even goes beyond the non-solicitation provisions in Sections 12(b)(B) and (b)(C) - already determined to be overbroad as explained above - by prohibiting interference of any kind with any client, potential client, investors, counterparties, or employees. The provision contains no qualifications as to the type of relationship at issue or the interests being protected. The provision therefore fails the BDO Seidman test in multiple respects and is unenforceable.
6. Section 13: Transition Compensation Provision
Permanens also claims that Bruce violated Section 13 of the Agreement by failing to pay Permanens a “Transition Compensation” fee for clients that terminated or reduced their relationship with Permanens and engaged Bruce. Section 13 of the Agreement provides:
(a) In the event that: (1) any Existing PWM Client or any New PWM Client terminates or reduces their relationship with the Company (a "Former Client"), and (2) the Former Client engages you (or any company, partnership, firm, association with which you are associated ...), to render private wealth management (including investment advisory or any financial planning services), the Company shall have the option to require you to pay to the Company an amount equal to Two and One Half (2.5) times the Annual Former Client Revenue. . . (the "Transition Compensation").(EA § 13 (emphasis added).) In other words, Bruce must pay Permanens, for an indefinite amount of time, two-and-one-half times the gross revenue received by Permanens from a former client for the one year preceding the client's termination of their relationship with Permanens. Bruce advances several reasons why the Transition Compensation provision is unenforceable, including overbreadth (such as the extent the provision purports to apply to clients with whom Permanens terminated the relationship and clients that were not developed through Permanens' resources during Bruce's employment there), lack of a reasonable temporal limitation, and the provision's being an invalid liquidated damages provision.
Section 13(b) provides “For purposes of this Paragraph 13, "Annual Former Client Revenue" shall mean the total gross revenue received from, or due by, the Former Client to the Company for the one (1) year period immediately preceding the earlier of the Former Client's (x) termination of their relationship with the Company or (y) engagement of the Successor Provider, provided, however, that for clients with less than one (1) full calendar year of total gross revenue, the revenue received shall be computed on an annualized basis.
It is not immediately apparent to the Court that Section 13 is a restrictive covenant constrained by the BDO Seidman limitations. The provision does not restrict Bruce from competing or working for existing or former Permanens clients. A reasonable argument can be made that extracting payment from Bruce for working for Permanens' clients unduly constrains his ability or incentive to do so and therefore is a restrictive covenant governed by the principles of BDO Seidman. To that extent, Bruce is correct that the provision is overbroad and impermissibly unbounded by time.
Permanens offers an anemic response to the provision's overbreadth. Permanens argues that the parties “specifically negotiated that Section 13's Termination Compensation clause would apply to an enumerated list of clients that Bruce brought with him to the Firm, as well as client relationships that he developed after joining.” (Pl. Mem. at 11-12.) Therefore, Permanens argues, the provision does not cover any and all persons with whom Bruce had a prior relationship, or clients he developed an independent relationship with prior to his employment at Permanens. (Pl. Mem. at 12.) Indeed, affixed to the Agreement is ‘Schedule B - Existing PWM Clients' which includes the names of 30 clients in Permanens' Private Wealth Management practice as of June 30, 2019. (See EA at 19.) Section 13, however, covers not only “Existing PWM Clients” but also “New PWM Clients.” (EA § 13(a).) The Agreement defines New PWM Clients as “private wealth management clients for whom [Bruce] provide[s] private wealth management services as an investment advisor representative of the Company that are not included on Schedule B.” (EA § 5(b) (emphasis added).) “New PWM Clients” thus acts as a catch all to encompass every client Bruce provided services to. Moreover, Permanens' argument does not account for Section 13's lack of any temporal limitation, let alone a reasonable one.
Regardless of whether Section 13 is properly considered a restrictive covenant, it is an unenforceable liquidated damages provision. The “well established” New York rule is that “a contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.” 136 Field Point Circle Holding Co., LLC v. Invar International Holding, Inc., 644 Fed.Appx. 10, 12 (2d Cir. 2016); see also Multi Communication Media Inc. v. AT&T Corp., No. 96-CV-2679, 1997 WL 188938, at *14 (S.D.N.Y. April 18, 1997) (“Liquidated damages provisions are enforceable, under New York law, when (1) actual damages would be difficult to quantify, or are not readily ascertainable, and (2) the sum is a reasonable estimate of potential damages - in other words, the sum is not plainly disproportionate to the possible loss”) (internal quotation marks omitted).
Accordingly, “[w]hile the New York Court of Appeals has cautioned that courts should be reluctant to interfere with liquidated damages provisions, if the clause in question does not satisfy one or both of these factors then it is considered an impermissible penalty and will not be enforced by the courts”. 136 Union Cap. LLC v. Vape Holdings Inc., No. 16-CV-1343, 2017 WL 1406278, at *7 (S.D.N.Y. March 31,2017) (cleaned up); see also American E Group LLC v. Livewire Ergogenics Inc., No. 18-CV-3969, 2020 WL 469312, at *11 (S.D.N.Y. Jan. 28, 2020) (stating standard and finding liquidated damages clause a penalty because it was “clearly disproportionate to the potential loss”). Section 13 fails both prongs required for an enforceable liquidated damages provision. It is an impermissible penalty both because potential actual damages suffered by Permanens are readily ascertainable, and because the amount Bruce would be obligated to pay is disproportionate to such damages.
While not stated in the Agreement, Permanens alleges in the Complaint that Section 13 is designed to “compensate Permanens for the loss of [the] client accounts and to reimburse the Firm for its up-front expenses in the event of [Bruce's] departure.” (Compl. ¶ 82.) Those figures can readily be determined. The value of accounts taken by Bruce can be calculated by analyzing whatever work Bruce obtained from the client and the amount Permanens would have charged for and profited from that work had it stayed with and been performed by Permanens. And the up-front expenses associated with Bruce can be ascertained because Bruce had already been employed by Permanens for almost a year before signing the Agreement. (See Compl. ¶¶ 34-35.)
Even if such damages were not readily ascertainable, the payment imposed under Section 13 is not permissible because it does not have any direct correlation to the possible losses suffered by Permanens. Requiring Bruce to pay two and a half times the amount Permanens annually grossed from a client is arbitrary, uncorrelated to Permanens' actual damages (consisting of lost profits), and, in many scenarios (such as where a client remained with Bruce for only a couple years) would be excessive and would not “put [Permanens] in the position it would have been in had there been no breach.” Wells Fargo Trust Co., N.A. v. Synergy Group Corp., 465 F.Supp.3d 355, 363 (S.D.N.Y. 2020). Instead, it arbitrarily would compensate Permanens by 250% and “would transfer to [Permanens] substantially more income than it recently earned from the particular client.” Leon M. Reimer & Co., P.C. v. Cipolla, 929 F.Supp. 154, 160 (S.D.N.Y. 1996). Such a feature “mark[s] the agreement as a penalty clause.” Id. at 15960 (rejecting clause that would require employee to pay former employer one and a half times its annual fees for the last 12 months it serviced a client because the clause “is so exceptionally aggressive as to have lost the requisite reasonable relationship to legitimate business interests [Plaintiff] is entitled to protect”).
Further, Section 13 does not bear any reasonable relationship to the amount of money any client may have under management after engaging Bruce in addition to or in place of Permanens. For example, as Section 13 contemplates, a client could move to Bruce only a portion of its assets under management at Permanens, which would only partly reduce Permanens' revenue from that client. Yet, pursuant to Section 13, Bruce would be required to pay a disproportionate penalty based on the entirety of the client's previous gross annual revenue at Permanens. Quite clearly, Section 13 is an unenforceable penalty and cannot support a claim for breach of contract.
To sum up, Section 12(a) of the Agreement is enforceable. Sections 12(b)(B), (C), and (D) and Section 13 are not enforceable, and Permanens' claims should be dismissed to the extent they seek relief pursuant to those provisions.
C. The Tortious Interference Claims Should Be Dismissed
In addition to its breach of contract claim, Permanens alleges that Bruce tortiously engaged in “a campaign to interfere with Permanens' business relationships, including Permanens' relationships with current and former employees and current and potential clients.” (Compl. ¶ 90.) Permanens alleges such interference took place when Bruce solicited current and former Permanens employees to join him in a proposed lawsuit against Permanens (Compl. ¶ 91); requested Permanens' then-CFO to serve as a witness in the proposed lawsuit (Compl. ¶ 93); contacted Permanens employees seeking confidential employee and client information (Compl. ¶¶ 95-97); and encouraged Permanens employees to resign. (Compl. ¶ 98-99.) Bruce argues the tortious interference claim is precluded because it is duplicative of the breach of contract claim. In response, Permanens asserts Bruce's misconduct went beyond a simple breach of his Agreement because the Agreement does not cover former employees and because Bruce attempted to induce employees to breach their confidentiality obligations to the Company. Those arguments do not save Permanens' claim.
To state a claim for tortious interference with business relations under New York law, a plaintiff must show that “(1) the plaintiff had business relations with a third party; (2) the defendant interfered with those business relations; (3) the defendant acted for a wrongful purpose or used dishonest, unfair, or improper means; and (4) the defendant's acts injured the relationship.” 16 Casa Duse, LLC v. Merkin, 791 F.3d 247, 261 (2d Cir. 2015); Campeggi v. Arche Inc., No. 15-CV-1097, 2016 WL 4939539, at *9 (S.D.N.Y. Sept. 14, 2016) (same). “As a general rule, tortious interference claims that are duplicative of contract claims are precluded.” Lavazza Premium Coffees Corp. v. Prime Line Distributors Inc., No. 20-CV-9993, 2021 WL 5909976, at *15 (S.D.N.Y. Dec. 10, 2021) (quoting Choquette v. Motor Information Systems, Inc., No. 15-CV-9338, 2017 WL 3309730, at *6 (S.D.N.Y. Aug. 2, 2017)); see also Uitz v. Lustigman Firm, P.C., No. 13-CV-6040, 2014 WL 3767056, at *2 (S.D.N.Y. July 28, 2014) (“[A] simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated”) (quoting Clark-Fitzpatrick, Inc. v. Long Island Rail Road Co., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 656 (1987)). Accordingly, to adequately state a claim of tortious interference, Permanens' complaint must show that Bruce breached “a duty that springs from circumstances extraneous to and not constituting elements of, the parties' contract.” Lavazza, 2021 WL 5909976 at *15 (cleaned up).
With one possible exception, the Complaint fails to do so. Permanens' tortious interference claim is predicated on Bruce's “campaign to interfere with Permanens' business relationships” such as those with current employees and current and potential clients. That is the same behavior Permanens claims breached the Agreement. For instance, Permanens asserts Bruce called its then-CFO to ask him to serve as a witness in a proposed lawsuit against the Company. (Compl. ¶ 93.) That conduct falls directly under Section 12(b)(D) of the Agreement as it constitutes Bruce attempting to disrupt a relationship between a Permanens employee and the Company. (See EA § 12(b)(D).) Another example Permanens provides is that Bruce “contacted current Permanens employees seeking confidential employee and client information.” (Compl. ¶ 95.) Permanens asserts the reason for Bruce seeking such information was to solicit Permanens' employees and clients and readily admits that this is conduct covered by the Agreement. (See Pl. Mem. at 21-22); see generally § 12(b)(B) (prohibiting solicitation or encouragement of any employee to terminate his of employment); § 12(b)(D) (prohibiting interference and disruption of any relationship between the Company and employees).) The Complaint does not identify “circumstances extraneous to and not constituting elements” of the Agreement. Permanens' tortious interference claim thus cannot stand. See Uitz, 2014 WL 3767056 at *3 (dismissing tortious interference claim that relied on same facts as contract claim, where plaintiff did not identify any independent duty); Clark-Fitzpatrick, Inc., 70 N.Y.2d at 389, 521 N.Y.S.2d at 656 (“a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated”).
The sole example the Complaint provides of Permanens' allegedly contacting employees to solicit confidential information is an email Bruce sent to a Permanens employee asking for the address of two other employees because “I would really like to send them something for the holidays.” (Compl. ¶ 96, Ex. 10.) Such a request conceivably could be a guise for soliciting confidential employee information but is a thin reed on which to base Permanens' claim.
The only collateral allegations unrelated to the Agreement, and the focus of Permanens' argument, are alleged attempts by Bruce to solicit former, rather than current, Permanens' employees to join a lawsuit against Permanens and to induce them to breach their confidentiality obligations to the Firm. Even those allegations, however, fail to state a claim for tortious interference because they do not satisfy the wrongful means requirement. “A plaintiff cannot prevail [on a tortious interference claim] unless it demonstrates both wrongful means and that the wrongful acts were the proximate cause of the rejection of the plaintiff's proposed contractual relations.” Insight Global, LLC v. Wenzel, No. 17-CV-8323, 2018 WL 11318728, at *3 (S.D.N.Y. Aug. 27, 2018) (cleaned up). “The wrongful means requirement makes alleging and proving a tortious interference claim with business relations ‘more demanding' than proving a tortious interference with contract claim.” Catskill Development, L.L.C. v. Park Place Entertainment Corp., 547 F.3d 115, 132 (2d Cir. 2008) (quoting Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp., 50 N.Y.2d 183, 191, 428 N.Y.S.2d 628, 632 (1980)).
Permanens merely states “Former employees have valuable confidential information about Permanens' business and clients, and have an obligation to Permanens to protect this information. Further, the Amended Complaint alleges that Bruce's contact with current and former employees sought to induce them to breach their confidentiality obligations to the Firm and its clients.” (Pl. Mem. at 21.) Permanens provides no plausible examples of how Bruce attempted to induce former employees to breach any confidentiality agreements or obligations. Instead, the sole example is the request of the current Permanens employee for the addresses of two former colleagues for the purpose of mailing a holiday card. (Compl. ¶¶ 95-97.)
The conduct alleged in the Complaint does not rise to the level of wrongful means. The Complaint alleges that Bruce solicited former Permanens employees to join him in a proposed lawsuit alleging frivolous and unfounded claims against Permanens. (Compl. ¶ 91, Ex. 9.) “Litigation or the threat of litigation is a wrongful means if (1) the claimant has no belief in the merit of the litigation or, (2) having some belief in the merit of the suit, the claimant nevertheless institutes or threatens to institute litigation in bad faith, intending only to harass the third parties and not to bring his claim to definitive adjudication.” RFP LLC v. SCVNGR, Inc., 788 F.Supp.2d 191, 197 (S.D.N.Y. 2011) (cleaned up).
Permanens does not allege any non-conclusory facts to support the requirement that the proposed lawsuit would be instituted in bad faith or that Bruce believed the litigation had no merit. The Complaint thus fails to plead a plausible claim that Defendant used wrongful means to interfere with Permanens business relations with third parties. See Global Packaging Services, LLC v. Global Printing & Packaging, 248 F.Supp.3d 487, 495 (S.D.N.Y. 2017) (“even on a motion to dismiss, [the Court] is not required to accept conclusory allegations - particularly allegations ... characterizing or attributing a state of mind of another person”)
CONCLUSION
For the foregoing reasons, I recommend that Defendant's motion to dismiss be GRANTED with respect to claims arising from Sections 12(b)(B), 12(b)(C), 12(b)(D), and 13 of the Agreement, and with respect to Permanens' tortious inference claim. The motion should be denied in all other respects, specifically with respect to claims arising from Section 12(a) of the Agreement. To the extent not discussed above, the Court has considered the parties' arguments and finds them to be without merit.
Procedures For Filing Objections And Preserving Appeal
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of Court, with extra copies delivered to the Chambers of the Honorable Jed S. Rakoff, U.S.D.J., United States Courthouse, 500 Pearl Street, New York, NY 10007, and to the Chambers of the undersigned, United States Courthouse, 500 Pearl Street, New York, NY 10007. Failure to file timely objections will result in a waiver of objections and will preclude appellate review.