Opinion
No. CV02 0813972 S
April 17, 2003
MEMORANDUM OF DECISION
This is an action for damages and injunctive relief brought by John Hoffnagle, the owner of a tax preparation business, against a former employee, Nancy Henderson. Hoffnagle claims that Henderson, who now operates an accounting business which competes to some extent with the plaintiff's enterprise, has violated both a non-compete agreement and standards imposed by statutory and common law.
The business relationship between Hoffnagle and Henderson was marked by a degree of informality. The informality may be expected in a small business and there is nothing inherently wrong with it. It does lead, however, to some murkiness in the precise workings of the transactions and the understandings of the parties and some necessary reliance of burdens of proof in parsing out resulting conclusions.
The background underlying the dispute is generally not disputed and appears in this court's ruling on the plaintiff's motion for a temporary injunction, which ruling is dated March 21, 2002 [ 31 Conn.L.Rptr. 644].
That ruling granted the plaintiff's motion for temporary injunctive relief in part, and specifically left open several issues which now must be addressed.
John Hoffnagle has worked in and owned a tax preparation business for many decades in the Bristol area; his father apparently began the business. By 1995, the business was a sole proprietorship operating under the name of "Hoffnagle Associates" and was located in Bristol. Because of the highly seasonal nature of the tax preparation business, Hoffnagle hired tax preparers typically from January to April; after April, the need for help understandably plummeted.
In 1995, Hoffnagle hired the defendant Nancy Henderson, an accountant. She was allowed to continue to work on accounts of existing clients and bill them, provided that she did not use Hoffnagle facilities or attribute her time spent on those accounts to Hoffnagle. In January 1996, she and Hoffnagle signed an "employment agreement," which included a non-compete clause, allowed Henderson, the employee, to service five returns for free, and required Henderson to process all returns which she worked on through the "company," except for returns of "clients that specifically belong to the employee." The non-compete clause prohibited the employee for five years from working on any returns within a five mile radius of the city (Bristol) for any client whose last return had been prepared by the company, in addition to other provisions.
At approximately the same time as the employment contract was signed, Henderson, apparently along with other employees, received a pay increase from fifteen dollars per hour to twenty dollars per hour. The signing was also contemporaneous with the beginning of the 1996 tax season. At the conclusion of the 1996 tax season, her pay was reduced to fifteen dollars per hour, and, of course, there was less work for her to do for Hoffnagle. The business customarily increased pay during tax season and decreased pay at the conclusion of tax season.
Henderson worked in the Bristol office of Hoffnagle Associates until 1997, at which time she transferred to a newly established satellite office of Hoffnagle Associates in Terryville, Connecticut. The branch office was known variously as the "Terryville Tax and Business Center" or "Hoffnagle Associates — Terryville Tax Business Center." The branch was owned by Hoffnagle and was essentially another office location of the same business.
By 2001, however, the structure of the businesses changed palpably. ConnTax Corporation, a Chapter S corporation owned by Hoffnagle family members, assumed ownership of the Terryville Tax office, and the defendant Henderson became an employee of ConnTax. Clients were designated to "belong" to one office or the other. Hoffnagle Associates remained a sole proprietorship owned by the plaintiff and maintained its business location in Bristol. The reason for the segregation of the businesses was that Hoffnagle, anticipating retirement, planned to sell the Terryville Tax business to Henderson and to Jessica Gerrick Rogers ("Gerrick"), another employee who now apparently is Hoffnagle's relative by marriage. He also entered into negotiations with one Jeffrey Massicotte, the managing partner of Tax Offices of America, LLC, to sell the sole proprietorship to Tax Offices of America. That sale was closed in October 2001; part of the agreement involved a clause by which Hoffnagle agreed not to compete with Tax Offices.
The plan to sell the Terryville Tax operation fell through, however. There is some dispute between the parties as to just what happened. Suffice it to say for present purposes that the defendant Henderson terminated her relationship with Terryville Tax and in approximately December of 2001 she established her own business across the street from Terryville Tax. Some Hoffnagle clients took their business to Henderson: there is considerable dispute as to the propriety and the circumstances under which the clients went to Henderson. More facts will be stated with respect to the specific claims of the parties.
Hoffnagle instituted an action early in 2002 and sought ex parte relief and a temporary injunction. After several days of hearings, I granted some of the requested injunctive relief in a decision dated March 21, 2002. The parties subsequently framed the substantive issues through the pleadings and then deposed each other. Transcripts of the depositions have been introduced by agreement as exhibits in the action. I heard other testimony, which was rather brief, and the issues were thoroughly briefed.
The first count of Hoffnagle's complaint alleges that Henderson breached the employment agreement in a number of ways. As will be recalled, the agreement was executed in January 1996. Henderson claims that there was no consideration for the agreement. For an employment agreement, or, for that matter, any contract, to be enforceable, it must be supported by adequate consideration. Dick v. Dick, 167 Conn. 210 (1974). It is well established that continued employment, as opposed to new employment, is not adequate consideration. Dick v. Dick, supra, 224; see also Thermoglaze, Inc. v. Morning Side Gardens Co., 23 Conn. App. 741, 745 (1991).
Henderson argues that the pay increase which was roughly contemporaneous with the signing of the agreement had no connection with the employment contract but rather was bestowed solely as consideration for work during tax season. She relies primarily on the undisputed evidence that after tax season the pay rate, following the custom of the business, decreased to that existing just prior to the granting of the increase; of some relevance as well is the language in the agreement stating that the agreement was made "[i]n consideration of employment . . ." The plaintiff's position is that a pay increase did accompany, at least temporally, the employment contract and there thus was consideration.
I find that the plaintiff has not satisfied his burden of proof on the issue of consideration. First, of course, the agreement does not accurately state that it was made in consideration of a pay increase. This consideration is not, of course, dispositive or perhaps even compelling in itself, but it does illustrate the imprecision with which business was conducted. Hoffnagle had returned from a seminar at which he heard that employment agreements were a good idea, and he had a copy of a sample agreement with him. Employees signed the agreements after they had been slightly edited. More importantly, they received pay increases, but they always received pay increases during the highly concentrated tax season and always received pay decreases at its conclusion. The fluctuations have nothing to do with employment agreements and everything to do with the very uneven pace of work and revenues. The plaintiff cannot prevail, then, on the first count.
I do not find the agreement to be substantively unreasonable and therefore unenforceable; see generally Robert S. Weiss Associates v. Wiederlight, 208 Conn. 525, 529 (1988); subject to the restriction of the meaning of "company" as ordered in my decision regarding the temporary injunction. I do not reach the issue raised by AFC Cable Systems, Inc. v. Clisham, 62 F. Sup.2d 167 (D.Mass. 1999).
The second count realleges that Henderson breached the written employment agreement and adds that the breach was accomplished with reckless indifference to Hoffnagle's contractual rights and the implied covenant of good faith and fair dealing.
There is a natural temptation to expand the clarion call of "good faith and fair dealing" into a catch all cause of action. The covenant of good faith and fair dealing is, however, typically not an independent cause of action but rather is a rule of construction which emphasizes faithfulness to the agreed common purpose and consistency with justified expectations of the parties. See Magnan v. Anaconda Enterprises, Inc., 210 Conn. 150 (1989); Restatement (Second) Contracts § 205 Comment a. The covenant logically does not create new contractual obligations, but rather suggests that if several alternative constructions of a contract are possible, the one consistent with fair dealing and the reasonable expectations of the parties ought to be adopted.
"It is axiomatic that the . . . duty of good faith and fair dealing is a covenant implied into a contract or a contractual relationship. See Magnan v. Anaconda Industries, Inc., 193 Conn. 558, 566, 479 A.2d 781 (1984); see also 2 Restatement (Second), Contracts § 205 (1979) (`[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement'). `The covenant of good faith and fair dealing presupposes that the terms and purpose of the contract are agreed upon by the parties and that what is in dispute is a party's discretionary application or interpretation of a contract term.' Neiditz v. Housing Authority, 43 Conn. Sup. 283, 294, 654 A.2d 812 (1994), aff'd., 231 Conn. 598, 651 A.2d 1295 (1995). In accordance with these authorities, the existence of a contract between the parties is a necessary antecedent to any claim of breach of the duty of good faith and fair dealing." (Emphasis added.) Hoskins v. Titan Value Equities Group, Inc., 252 Conn. 789, 793, 749 A.2d 1144 (2000).
Macomber v. Travelers Property Casualty Corp., 261 Conn. 620, 638 (2002).
"Every contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement . . . Essentially it is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended . . . Conversely, [b]ad faith means more than mere negligence; it involves a dishonest purpose." (Citations omitted; internal quotation marks omitted.) Middletown Commercial Associates Ltd. Partnership v. Middletown, 53 Conn. App. 432, 437, 730 A.2d 1201, cert. denied, 250 Conn. 919, 738 A.2d 657 (1999).
Barber v. Jacobs, 58 Conn. App. 330, 338, 753 A.2d 430 (2000).
Because I do not find the specific employment agreement enforceable, I do not reach whether any specific provision ought to be accorded a specific application consistent with the implied covenant of good faith and fair dealing. To the extent that the claim alleges that the entire employment relationship is permeated with the implied covenant, I will reach specific claims of misconduct and bad faith in due course. Suffice it to say at this point that I do not find that the second count affords independent relief.
The third count claims unjust enrichment, in that Henderson acquired access to confidential information, specifically identities of customers, while employed by Hoffnagle and that she misappropriated the knowledge for her own gain. The elements of recovery for unjust enrichment include: a) benefit to the defendant; b) an unjust failure to pay the plaintiff for the benefit; and c) resulting detriment to the plaintiff. See, e.g., Barbara Weisman, Trustee v. Kaspar, 233 Conn. 531 (1995).
Although I have found the employment agreement to be unenforceable for lack of consideration, the employee Henderson nonetheless owed several duties to her employer, under both the common law and, at a minimum, § 35-51 et seq. of the General Statutes. It is elemental that pursuant to both the common and statutory law an employee has the duty not to use an employer's customer lists for personal advantage; an employee similarly has an obligation not to gain personal advantage from employment activities. See, e.g., Town Country House Homes Service v. Evans, 150 Conn. 314 (1963).
With the foregoing principles in mind, I reach the following findings. Regardless of the specific requirements of the employment contract, the parties both generally understood that the defendant was permitted to service and to bill privately pre-existing clients of the defendant and that she also had the ability to process five tax returns through Hoffnagle for free. Henderson interpreted the general agreement to mean that people who came to her at Hoffnagle Associates or Terryville Tax because of a personal or social relationship were "personal clients" and thus could be billed privately. The facts presented at the hearings and through the depositions were not clear, but I find that Ms. Henderson's interpretation of her obligation was incorrect. If a customer patronizes a particular business because a favorite employee works there, the customer is still a customer of the business and not of the employee. Although I find that the analysis is somewhat more precise under the count alleging breach of fiduciary duty, several observations are germane to the discussion of this count.
Various customer lists were presented as exhibits. Exhibits showing the twenty-eight customers who Ms. Henderson considered to be "personal clients" were most germane to this inquiry. Several of those were pre-existing clients, and thus properly "exempt." The remainder apparently came to Hoffnagle or Terryville Tax specifically because of Ms. Henderson. Those ought to be considered clients of the plaintiff — at least those arriving prior to or distinct from the affiliation of Terryville Tax with ConnTax.
I do find in theory that some degree of unjust enrichment more likely than not occurred. I find that Ms. Henderson received some benefit from servicing tax returns of customers "belonging to" the plaintiff, that she did not pay for the benefit, and that the failure to pay was of some detriment to Hoffnagle. I find, however, that damages have not been proven to any degree of reasonable probability, which is the appropriate standard. See, e.g., Beverly Hills Concepts, Inc. v. Schatz and Schatz, 247 Conn. 48 (1998). With the possible exception of the Skye Cable account, which will be addressed subsequently, there has been little quantitative evidence of the benefit to Henderson and, perhaps more starkly, the resulting detriment to Hoffnagle. There has been no evidence of Hoffnagle's costs and almost no evidence on the question of whether Henderson billed Hoffnagle for her time on accounts for which she then accepted payment to herself personally. I find, then, that there have been no damages proven pursuant to the unjust enrichment count, other than the Skye Cable matter, which I shall consider under the analysis of the breach of fiduciary duty.
There was no specific, persuasive evidence presented as to Henderson's work or practice regarding any specific client's account, with the exception of Skye Cable.
The fourth count alleges that Henderson intentionally interfered with business relationships. Elements of the claim of tortious interference include: a) the existence of business relationships between the plaintiff and another; b) knowing of the relationship, the defendant intentionally interfered with it; and c) as a result, the plaintiff suffered actual loss. Dinapoli v. Cooke, 43 Conn. App. 419, 426 (1996). The interference must be tortious, that is, the defendant must have acted by means of fraud, misrepresentation, intimidation, or with malicious intent:
"This court has long recognized a cause of action for tortious interference with contract rights or other business relations. (Citations omitted.) Blake v. Levy, 191 Conn. 257, 260, 464 A.2d 52 (1983)." Solomon v. Aberman, 196 Conn. 359, 364, 493 A.2d 193 (1985). Nevertheless, "not every act that disturbs a contract or business expectancy is actionable. Jones v. O'Connell, [ 189 Conn. 648, 660-61, 458 A.2d 355 (1983)]." Blake v. Levy, supra, 260-61. "`[F]or a plaintiff successfully to prosecute such an action it must prove that the defendant's conduct was in fact tortious. This element may be satisfied by proof that the defendant was guilty of fraud, misrepresentation, intimidation or molestation . . . or that the defendant acted maliciously.' (Citations omitted.)" Id., 261, quoting Kecko Piping Co. v. Monroe, 172 Conn. 197, 201-02, 374 A.2d 179 (1977). "[A]n action for intentional interference with business relations . . . requires the plaintiff to plead and prove at least some improper motive or improper means . . . `[A] claim is made out [only] when interference resulting in injury to another is wrongful by some measure beyond the fact of the interference itself.'" (Citations omitted.) Blake v. Levy, supra, 262; Kakadelis v. DeFabritis, 191 Conn. 276, 279-80, 464 A.2d 57 (1983); see also Sportsmen's Boating Corporation v. Hensley, 192 Conn. 747, 753, 755, 474 A.2d 780 (1984) (liability in tort imposed only if defendant acted maliciously).
Robert S. Weiss Associates, Inc. v. Wiederlight, 208 Conn. 525, 535-36 (1988).
I find that Henderson probably did interfere with the business relations between Hoffnagle and some of the "personal clients"; I do not find in the circumstances that the interference was tortious as defined in Robert S. Weiss. As noted above, the business relationship between Hoffnagle and Henderson was not notably well defined, and I find that Henderson thought that she was within her rights. I do not find that she has intentionally solicited any of the Hoffnagle or ConnTax clients, nor that she intentionally misled Hoffnagle or Gerrick in the discussions regarding the sale of the Terryville Tax business. The plaintiff has not proved the fourth count.
Hoffnagle presented circumstantial evidence purporting to support inferences that customers were solicited and that she intentionally reneged on the contract of sale of Terryville Tax. I do not find the inferences strong enough to have been proved. Additionally, there was no evidence from any customer one way or the other.
The fifth count alleges violations of the Connecticut Uniform Trade Secrets Act, §§ 35-51 et seq. of the General Statutes, in that Henderson willfully and maliciously misappropriated Hoffnagle's customer list. A customer list is a trade secret. Section 35-51 (d). Hoffnagle claims that Henderson must have appropriated customer lists from the business because files were missing and some of the business's customers landed with Henderson. I find that the burden of proof has not been satisfied as to any intentional appropriation of any trade secret, and that there is no credible evidence that Henderson willfully solicited business. As noted previously, she did improperly take with her a number of customers, who she thought were rightfully hers, but this is a different proposition.
The sixth count alleges a breach of fiduciary duty. As stated above, Henderson was the tax preparer in charge of what was first the Terryville branch and later the separate Terryville Tax business. As an employee, she owed a duty of loyalty and trust; conversely, Hoffnagle was entitled to rely on faithful performance. Henderson urges that the employer-employee relationship does not create any fiduciary duties and cites several cases in which such relations are listed, and "employee" does not appear on the list.
But in some employer-employee relationships a fiduciary duty is created. A fiduciary duty is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to recognize the interests of another. Beverly Hills Concepts, supra, 56-57. In Town Country House Homes Service v. Evans, 150 Conn. 314, 317 (1963), in which a claim was made that an employee had obtained customer lists while employed by the plaintiff, and then branched out into his own business and used the customer lists, our Supreme Court stated:
The defendant, as an agent of the plaintiff, was a fiduciary with respect to matters within the scope of his agency. Taylor v. Hamden Hall School, Inc., 149 Conn. 545, 552, 182 A.2d 615; Santangelo v. Middlesex Theatre, Inc., 125 Conn. 572, 578, 7 A.2d 430; Restatement (Second), 1 Agency 13. The very relationship implies that the principal has reposed some trust or confidence in the agent and that the agent or employee is obligated to exercise the utmost good faith, loyalty and honesty toward his principal or employer. 3 Am.Jur.2d, Agency, 199. In the absence of clear consent or waiver by the principal, an agent, during the term of the agency, is subject to a duty not to compete with the principal concerning the subject matter of the agency. 3 C.J.S., Agency, 143; Restatement (Second), 2 Agency 393.
The existence of a fiduciary duty is largely a factual determination and the extent of the duty and the resulting obligations may vary according to the nature of the relationship: the obligations do not arise as a result of labeling, but rather by analysis of each case. See Konover Development Corp. v. Zeller, 228 Conn. 206 (1994). I find that in this case Henderson was working reasonably independently as an employee of Hoffnagle. Although Hoffnagle reviewed the branch from time to time, he relied on her to act in his interest. Henderson in turn had superior knowledge of the business transacted at the branch facility and had the usual duties to be faithful to her employer. A limited fiduciary duty surely existed during the time of employment.
A fiduciary duty did not, of course, outlive the employment relationship.
Once a fiduciary duty is found to exist, a shifting of burdens occurs:
Proof of a fiduciary relationship imposes a twofold burden on the fiduciary. First, the burden of proof shifts to the fiduciary; and second, the standard of proof is clear and convincing evidence. "Once a fiduciary relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary . . . Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of proof of fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear, and satisfactory evidence or clear, convincing and unequivocal evidence." (Citations omitted; internal quotation marks omitted.) Dunham v. Dunham, supra, 322-23; Oakhill Associates v. D'Amato, 30 Conn. App. 356, 358, 620 A.2d 1294, cert. granted, 225 Conn. 926, 625 A.2d 826 (1993).
Konover Development Corp. v. Zeller, 228 Conn. 206, 229-30 (1994).
Henderson, then, has the duty to show by clear and convincing evidence that while she was an employee of Henderson or of ConnTax she acted with an appropriate regard for the interests of Hoffnagle (or ConnTax). I find that she did so act, with the exception of several of the "personal clients." As stated previously, she acted under the erroneous assumption that at least some of the clients coming to the business because of her presence were "personal clients," and thus could be taken with her and, apparently could be billed privately while she was working for Hoffnagle or ConnTax. I believe it is appropriate to assess damages in the amount of billings received by Henderson which should have been allocated to her employer.
Credible evidence has been introduced only as to the Skye Cable account. Henderson has billed $3,950.00. I find in the circumstances of this account that there is no credible reason to deduct from that amount any costs of producing the billing. I find damages, then, to be $3,950.00.
In his brief, Hoffnagle refers repeatedly to billings of $10,975 on the Skye Cable account, which amount is reportedly supported by Exhibit 7 to Henderson's deposition. I can find only $3,950 in that exhibit.
The seventh count alleges violations of the Connecticut Unfair Trade Practices Act ("CUTPA"), §§ 42-110a et seq. of the General Statutes. The count seems to incorporate virtually all of the allegations of the prior counts, and concludes that the defendant's "failure to honor her obligations to the plaintiff, as aforesaid, constitutes an unfair act . . . in that it was immoral, unscrupulous or unethical" and that the plaintiff has suffered an ascertainable loss of money as a result.
Having thoroughly reviewed the evidence, I do not find that Hoffnagle has proved that Henderson violated the so-called "cigarette rule" established in cases such as Cheshire Mortgage Service, Inc. v. Montes, 223 Conn. 80, 105-06 (1992):
It is well settled that in determining whether a practice violates CUTPA we have "adopted the criteria set out in the `cigarette rule' by the federal trade commission for determining when a practice is unfair: `(1) [W]hether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise — whether, in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers [competitors or other businessmen].' Conaway v. Prestia, [ 191 Conn. 484, 492-93, 464 A.2d 847 (1983)], quoting FTC v. Sperry Hutchinson Co., 405 U.S. 233, 244-45 n. 5, 92 S.Ct. 898, 31 L.Ed.2d 170 (1972) [Sperry] . . ." McLaughlin Ford, Inc. v. Ford Motor Co., 192 Conn. 558, 567-68, 473 A.2d 1185 (1984).
"All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three. Statement of Basis and Purpose, Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, 43 Fed. Reg. 59,614, [and] 59,635 (1978)." (Internal quotation marks omitted.) Id., 569 n. 15. "Thus a violation of CUTPA may be established by showing either an actual deceptive practice; see, e.g., Sprayfoam, Inc. v. Durant's Rental Centers, Inc., 39 Conn. Sup. 78, 468 A.2d 951 (1983); or a practice amounting to a violation of public policy. See, e.g., Sportsmen's Boating Corporation v. Hensley, [ 192 Conn. 747, 474 A.2d 780 (1984)]." Web Press Services Corporation v. New London Motors, Inc., 203 Conn. 342, 355, 525 A.2d 57 (1987). Furthermore, a party need not prove an intent to deceive to prevail under CUTPA. See id., 363 (knowledge of falsity, either constructive or actual, need not be proven to establish CUTPA violation).
It is a close call as to whether CUTPA was violated. I do not find that there is a significant effect on consumers, nor was there an intent to deceive. There is no criminal violation or express statutory violation. There has been no flagrantly deceptive practice: although I found an improper practice, the difficulty was caused to a significant degree by the marked imprecision of the business relationship. I have not found the breach of fiduciary duty to be malicious or intentional or, for that matter, especially significant. Of the list of twenty-eight clients, several were truly pre-existing clients and several were strictly pro bono. Although I do not find the observation especially telling, it is true that the ordinary turnover of business is most probably greater than the number of "personal clients" of Henderson. On a consideration of all the appropriate factors, I do not find proved a violation of CUTPA.
I have not found a significant knowing or malicious violation of the Trade Secrets Act.
The eighth, ninth, tenth and eleventh counts are brought specifically on behalf of Tax Offices of America and allege, respectively, breach of the employment agreement, breach of the covenant of good faith and fair dealing, interference with business relationships and violations of CUTPA. Tax Offices of America, it will be recalled, purchased Hoffnagle Associates after the separation of the two businesses. I have treated the evidence as it affected both plaintiffs, and further delineation is unnecessary at this point, especially in light of the invalidity of the written employment contract, which had previously been ruled to have been applicable only as to clients of Hoffnagle Associates, now Tax Offices of America. The relief as to damages, i.e., the Skye Cable billings, may be apportioned among the plaintiffs as the two plaintiffs see fit. If they have difficulty in doing so, they may seek additional relief from the court. Injunctive relief, which will be granted, is in favor of both plaintiffs.
The plaintiffs are entitled to injunctive relief as to the proven counts. She is ordered not to solicit any of the former clients of either of the plaintiffs and she is ordered to return to Terryville Tax files of the "personal clients" who were not preexisting clients. This group presumably includes Skye Cable. If the parties agree to another arrangement, the court will likely approve.
So ordered.
Beach, J.