Opinion
INDEX No. 62740-13
02-11-2014
PEOPLE'S UNITED INSURANCE AGENCY, INC., Plaintiff, v. JOANNE BENTIVEGNA, JOHN K. MULVEY and WLF CONSULTING, LLC, Defendants.
JACKSON LEWIS LLP Atty. For Plaintiff LEEDS BROWN, PC Attys. For Defendants
MEMO DECISION & ORDER
PRESENT:
Hon. THOMAS F. WHELAN
Justice of the Supreme Court
MOTION DATE 9/20/13
ADJ. DATES 1/10/14
Mot. Seq. # 001 - MG
PC Scheduled: 3/14/14
CDISP Y ___ N x
JACKSON LEWIS LLP
Atty. For Plaintiff
LEEDS BROWN, PC
Attys. For Defendants
Upon the following papers numbered 1 to 8 read on this motion for preliminary injunctive relief ; Notice of Motion/Order to Show Cause and supporting papers 1-2; ; Notice of Cross Motion and supporting papers _____________; Opposing papers 3 ; Reply papers 4; 7 ; Other 5 (reply memorandum); 6 (plaintiff's memorandum); 8 (affirmation of notice) ; (and after hearing counsel in support and opposed to the motion) it is,
ORDERED that this motion (#001) by the plaintiff for preliminary injunctive relief is considered under CPLR 6311 and is granted subject to the conditions set forth below; and it is further
ORDERED that a preliminary conference shall be held herein on Friday, March 14, 2014 at 9:30 a.m. in the courtroom of the undersigned located in the Supreme Court Annex Building in the Supreme Court at One Court Street, Riverhead, New York 11901.
The plaintiff is a full service insurance agency that is the successor to four previously operated insurance agencies including the Bank of Smithtown Insurance Agents & Brokers [hereinafter "BSIAB"]. Prior to the plaintiff's 2011 acquisition of BSIAB, it acquired, by purchase, the Seigerman-Mulvey Company, Inc., an insurance agency owned by the individual defendants, Joanne Bentivegna and John K. Mulvey [hereinafter defendants]. In connection therewith, the defendants and BSIAB executed a Stock Purchase and Sale Agreement in April of 2004. Under the terms thereof, the defendants derived cash payouts commensurate with their ownership interests in the Seigerman-Mulvey Company and became employees of BSIAB in accordance with the terms of written Employment Agreements. The Purchase Agreement and the Employment Agreements contained two restrictive covenants whereby the defendants promised not to solicit BSIAB customers who were such at the time of the defendants' employment termination and not to compete with BSIAB for a period of three years from the date of such termination in the downstate counties of Suffok, Nassau, Queens, Kings, New York and Staten Island (see Complaint ¶¶ 13-21; Purchase Agreement Article VIII ¶¶ 8.2; 8.3; Employment Agreements ¶6). Both the Purchase Agreement and the Employment Agreements also contained restrictions against competing with BSIAB directly or indirectly while the defendants were employed by the company (BSIAB).
Following the plaintiff's acquisition by merger of the the business and assets of BSIAB in January of 2011, all of the rights and obligations owing by the defendants to BSIAB are alleged to have been owed to the plaintiff, who continued to employ the defendants although their written employment agreements with BSIAB had expired by their terms in 2007. In addition, the plaintiff claims that the defendants were bound by the plaintiff's Code of Conduct not to disclose or utilize the plaintiff's confidential and/or proprietary information regarding its operations and its customers for the defendants' own benefit or the benefit of any others (see Complaint ¶¶ 23-26). The plaintiff also alleges that the defendants, as employees, owed the plaintiff a duty of loyalty in the discharge of their employment duties (see Complaint ¶31) which, in addition to the sale of insurance products, included consulting services to certain clients who paid for such services by the remittance of fees (see Complaint ¶¶ 29; 33-35).
On August 19, 2013, the defendants were terminated from their employment by the plaintiff following an investigation into their conduct by the plaintiff who suspected that the defendants were interfacing with customers for purposes other than the business of the plaintiff. In the complaint served herein, the defendants are charged with diverting consulting opportunities and misappropriating other aspects of the plaintiff s business away from it and with using confidential information belonging to the plaintiff. In addition, the defendants are charged with the formation of the corporate defendant, WLF Consulting, LLC, in December of 2012 and or assisting its insurance sales and consulting business which allegedly competes with the business of the plaintiff (see Complaint ¶¶ 37-48). Further, defendant Mulvey is alleged to have removed a computer containing confidential and proprietary information belonging to the plaintiff following his termination.
By the instant motion (#001), the plaintiff seeks the following injunctive relief restraining the defendants from directly or indirectly: (a) breaching their obligations under the agreements; (b) engaging as an agent, broker, independent contractor, employee or consultant in a company that sells insurance products and/or insurance consulting services or become a director, officer, member or partner in a corporation, limited liability company, partnership, or other type of entity which is in the business of selling insurance products and services and/or offering mutual fund investment services for a period of three (3) years, from the date of separation from employment, August 19, 2013, in the following counties in New York State: Suffolk, Nassau, Queens, Kings, New York or Richmond; (c) for a period of three (3) years, from the date of separation from employment, August 19, 2013, refraining from soliciting the business of any person or entity that was a client of PUIA as of August 19, 2013; (d) using, disclosing and/or misappropriating any of PUIA's confidential, proprietary and secret information, including, without limitation, customer and client contact information, customer and client lists, renewal dates for policies purchased by PUIA customers and clients, any information related to insurance products and services purchased by PUIA customers and clients, sensitive personnel information relating to PUIA's insurance salespeople at the Hauppauge office, such as salespeople's commission splits, compensation and incentive arrangements; information regarding the abilities, productivity, performance, strengths and weaknesses of personnel; marketing plans and selling strategies; as well as financial and business information and PUIA's strategies and methods with respect to the insurance business operated by PUIA out of its Hauppauge office.
The plaintiff further seeks injunctive relief restraining all defendants, their employees, agents, companies and all others acting in concert from inducing breaches or otherwise interfering with the defendants' obligations under the contracts and all other relief identified in subparagraphs (b), (c) and (d) listed above.
For the reasons stated, the instant motion is granted, conditionally, to the extent set forth below.
As recently stated by the Court of Appeals, a seller of the goodwill of his or her business has an "implied covenant" or a "duty to refrain from soliciting former customers, which arises upon the sale of the 'good will' of an established business" ( Bessemer Trust Co. v Branin, 16 NY3d 549, 556, 925 NYS2d 371 [2011]; quoting Mohawk Maintenance Co. vKessler, 52 NY2d 276, 437 NYS2d 646 [1981]). Upon the sale of "good will," a "purchaser acquires the right to expect that the firm's established customers will continue to patronize the business" (id., citing People ex rel. Johnson Co. v Roberts, 159 NY 70, 80-84, 53 NE 685 [1899]). This expectation is rooted in the essence of the purchase transaction which is, in effect, an attempt to transfer the loyalties of the business' customers from the seller who cultivated and created them to the new proprietor (see Bessemer Trust Co. v Branin, 16 NY3d 549, supra). Because this "implied covenant" restricts the economic freedom of the seller only insofar as it precludes him from approaching, by solicitation, his former customers and attempting to regain their patronage after the transfer their "good will" to his purchaser, it imposes a much narrower duty than do express covenants purporting to restrict the seller's right to compete in a particular geographical area or field of endeavor (see Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 284, supra). A seller's "implied covenant" not to solicit his former customers has thus been found to be '"a permanent one that is not subject to divestiture upon the passage of a reasonable period of time'" ( Bessemer Trust Co. v Branin, 16 NY3d 549, 551, supra; quoting Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 285, supra).
The parties to a sale of the business that includes its goodwill remain free, however, to expressly contract for restraints against solicitation by the seller. Where the parties to the sale of a business so choose and they negotiate and expressly define the reach of the limitation imposed upon the seller with respect to its solicitation of its former customers, the more general implied covenant is lost (see MGM Ct. Reporting Serv., Inc. v Greenberg, 74 NY2d 691, 543 NYS2d 376 [ 1989]; First Am. Title Ins. Co. of New York, Inc. v Benchmark Title, 48 AD3d 327, 851 NYS2d 523 [1st Dept 2008]). In such cases, the enforceability of express agreements or covenants imposing restriction upon the seller's solicitation of the purchaser's customers is dependent upon a finding that they are reasonable in scope and not unduly burdensome (see Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 284, supra).
The parties to such a sale are likewise free to negotiate an express covenant that reasonably restricts other forms of competition like the "seller's right to compete in a particular geographical area or field of endeavor" ( Bessemer Trust Co., N.A. v Branin, 16 NY3d 549, 557, supra; quoting Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 284-85, supra). In such cases, agreements restricting the seller's right to compete directly or indirectly for the business of the purchaser's customers and to engage in other competing activities (all of which are beyond the scope of the implied covenant against solicitation) are enforceable but only to the extent that they are found to be "reasonable" in scope and not unduly burdensome (see Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 284, supra; Reed, Roberts Assoc. vStrauman, 40 NY2d 303, 307, 386 NYS2d 677 [1976]). "The sole limitation on the enforcebility of such a restrictive covenant is that the restraint imposed be 'reasonable,' that is, not more extensive, in terms of time and space, than is reasonably necessary to the buyer for the protection of his legitimate interest in the enjoyment of the asset bought" ( Purchasing Assoc. v Weitz, 13 NY2d 267, 271, 246 NYS2d 600[1963]; Weiser LLP v Cooper smith, 74 AD3d 465, 902 NYS2d 74 [1st Dept 2010]; Shearson Lehman Bros. Holdings, Inc. v Schmertzler, 116 AD2d 216, 500 NYS2d 512 [1st Dept 1986]).
Here, the rights and obligations of the parties originated from the sale of an insurance business by the individual defendants to BSIAB, a predecessor-in-interest of the plaintiff. The terms of the Purchase Agreement included a covenant from the individual defendants not to compete with BSIAB while such defendants were employed by BSIAB. As indicated above, two additional covenants were set forth in the Purchase Agreement (see Purchase Agreement ¶8.2). In the first, the defendants agreed not to compete with the plaintiff in the six downstate counties for the three year period following termination of their employment. In the second, the defendants agreed not to solicit its customers for a period of three years following termination of the defendants' employment in those defined downstate counties. By virtue of the inclusion of this second express covenant restraining solicitation, BSIAB and the plaintiff, as its successor, lost the benefit of the common law implied covenant described above (see MGM Ct. Reporting Serv., Inc. v Greenberg, 74 NY2d 691, supra; First Am. Title Ins. Co. of New York, Inc. v Benchmark Title, 48 AD3d 327, supra).
Also lost, at least for purposes of determining the plaintiff's entitlement to the preliminary injunctive relief requested on this motion, are the covenants not to compete set forth in both the Purchase and Employment Agreements that were applicable to the defendants solely while in the employ of the plaintiff (see Purchase Agreement¶ 8.1; Employment Agreement ¶ 6[a]). As such, these covenants expired upon the termination of the defendants' employment with the plaintiff in August of 2013 (see First Am. Title Ins. Co. of New York, Inc. v Benchmark Title, 48 AD3d 327, supra). Since the defendants are no longer bound by them, breaches thereof, if any, are relevant for purposes of this motion, only to the extent that they constitute a violation of the post-termination covenants. They do, however, remain viable with respect to the plaintiff's claims for the recovery of damages caused by such breaches, if any.
For the same reasons, the plaintiff's reliance on the covenants in the Employment Agreements is misplaced for purposes of this motion. The restraints imposed by this covenant are identical to those set forth in ¶ 8.1 of the Purchase Agreement as they restricted the defendants from competing while in the employ of BSIAB. In addition, as noted by the defendants, the Employment Agreements expired by their express terms in 2007 and the post-termination covenants contained therein expired with them. Although the plaintiff contends that the Employment Agreements were automatically renewed for successive one year terms due to the continuation of the defendants' employment beyond the 2007 expiration date of the employment contract (see plaintiff's Reply Memorandum of Law, p. 10), such contention is without merit. The common law doctrine of renewal, which recognizes that an inference that parties intend to renew an employment agreement for an additional year where the employee continues to work on the same terms as set forth in the original agreement, is at odds with the more recent well-established rule that, "absent an agreement establishing a fixed duration, an employment relationship is presumed to be a hiring at will, terminable at any time by either party" ( Goldman v White Plains Ctr. for Nursing Care, LLC, 11 NY3d 173, 867 NYS2d 27 [2008]). To the extent that the renewal doctrine remains viable, it is applicable only where the continued employment was on the same terms as that specified in the original contract of employment (see Curren v Carbonic Sys., Inc., 58 AD3d 1104, 872 NYS2d 240 [3d Dept 2009]) and where such contract did not otherwise provide a mechanism for renewal (see Wood v Long Is. Pipe Supply, Inc., 82 AD3d 1088, 19 NYS2d 183 [2d Dept 2011]). As there is evidence in the record here that the defendants' continued employment by the plaintiff was not on the same terms as that set forth in the 2004 Employment Agreements with BSIAB, the covenants contained in such agreements expired with them in 2007.
Procedurally, the plaintiff's entitlement to some or all of the preliminary inujunctive relief sought is dependent upon its demonstration, by clear and convincing evidence, of the following: (1) a likelihood of success on the merits, (2) irreparable injury absent a preliminary injunction, and (3) a balancing of the equities in the movant's favor (see CPLR 6301; Nobu Next Door, LLC v Fine Arts Hous., Inc., 4 NY3d 839, 840, 800 NYS2d 48 [2005]; Greystone Staffing, Inc. v Warner, 106 AD3d 954, 965 NYS2d 599 [2d Dept 2013]; Yedlin vLieberman, 102 AD3d 769, 961 NYS2d 186 [2d Dept 2013]). Factors militating against the granting of preliminary injunctive relief include: 1) that the movant can be fully recompensed by a monetary award or other adequate remedy at law (see 306 Rutledge, LLC v City of New York, 90 AD3d 1026, 935 NYS2d 619 [2d Dept 2011]; DiFabio v Omnipoint Communications, Inc., 66 AD3d 635, 636-637, 887 NYS2d 168 [2d Dept 2009]; Mar v Liquid Mgt. Partners, LLC, 62 AD3d 762, 880 NYS2d 647 [2d Dept 2009]); 2) that the granting of the requested injunctive relief would confer upon the plaintiff the ultimate relief requested in the action (see Wheaton/TMW Fourth Ave., LP v New York City Dept. of Bldgs., 65 AD3d 1051, 886 NYS2d 41 [2d Dept 2009]; SHS Baisley, LLC v Res Land, Inc., 18 AD3d 727, 795 NYS2d 690 [2d Dept 2005]).
Where a plaintiff seeks preliminary injunctive relief in a suit to enforce a restrictive covenant that was given ancillary to the sale of a business, some courts have held that the plaintiff need not demonstrate actual loss of customers since irreparable harm is presumed to have occurred upon the plaintiff's demonstration of a likelihood of success on the merits (see Manhattan Real Estate Equities Group, LLC v Pine Equity, 16 AD3d 292, 791 NYS2d 418 [1st Dept 2005]; Frank May Assoc. Inc. v Boughton, 281 AD2d 673, 721 NYS2d 154 [3d Dept 2001]). In any event, where, as here, the parties expressly agree in writing that either may obtain injunctive relief for a breach of the covenant and that irreparable harm is agreed to, due to the insufficiency of money damages (see Purchase Agreement, ¶ 8.4), a showing of irreparable harm is not required (see New York Real Estate Inst., Inc. v Edelman, 42 AD3d 321, 839 NYS2d 488 [1st Dept 2007]).
Determination of whether a plaintiff has demonstrated a likelihood of success on the merits necessarily requires a review of the substantive elements of the plaintiff's pleaded claims for relief. Here, the plaintiff's complaint includes the following claims: damages for breach of contract and enforcement of the restrictive covenants by way of injunction; conversion of the plaintiff's property and a return and/or cessation of use of all such by the defendants by way of injunction; damages for breach of common law fiduciary duties and an injunction restraining the misappropriation of confidential and proprietary information; damages for tortious interference with business relations and injunction restraining same; damages for breaches of fiduciary duties and the disgorgement of profits under the faithless servant doctrine; damages incurred by defendant WLF's tortious interference with the plaintiff's contracts with the defendants.
The plaintiff's entitlement to preliminary injunctive relief rests upon the enforceability of the two post-employment restrictive covenants set forth in the Purchase Agreement that preclude the defendants from soliciting and competing with the plaintiff. As indicated above, these covenants are subject to the test of reason and will thus be enforced if found to be "reasonable" in geographic, scope and duration and not unduly burdensome (see Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 284, supra; Reed, Roberts Assoc. v Strauman, 40 NY2d 303, 307, supra). They are not subject to the stricter measures employed where a non-seller employee agrees, as a condition of his or her employment, not to compete with his employer after the employment relation is severed (see Purchasing Assoc., Inc. v Weitz 13 NY2d 267, 272, supra; Good Energy, L.P. v Kosachuk, 49 AD3d 331, 853 NYS2d 75 [1st Dept 2008]; Town Line Repairs v Anderson, 90 AD2d 517, 455 NYS2d 28 [2d Dept 1982]). These non-seller employee covenants, which are also subject to reasonable time and geographical measures are "enforced only to the extent necessary to prevent the employee's use or disclosure of his former employer's trade secrets, processes or formulae or his solicitation of, or disclosure of any information concerning, the other's customers" ( Purchasing Assoc., Inc. v Weitz 13 NY2d 267, 272, supra). Where, however, the employee's services are unique or extraordinary, the covenant may also be enforced by injunctive relief, if reasonable, even though the employment did not involve trade secrets or confidential customer lists (see id., at 273; Shearson Lehman Bros. Holdings, Inc. v Schmertzler, 116 AD2d 216, supra).
Whether a covenant is reasonable depends on the circumstances of each case (see Karpinski v Ingrasci, 28 NY2d 45, 49, 320 NYS2d 1 [1971]). Appellate case authorities have instructed that "[a] covenant will not be declared invalid merely because it is unlimited in duration if the other restrictions on geographic area and scope are limited and reasonable" ( Town Line Repairs v Anderson, 90 AD2d 517, 518, supra). In addition, if a particular restriction is found to be unreasonable, "it can be pared or severed and the covenant in its corrected form can be enforced" (id.; see also BDO Seidman v Hirshberg. 93 NY2d 382, 690 NYS2d 854 [1999]).
Upon its review of the record and the application of the foregoing principles of law, this court finds that the plaintiff is entitled to preliminary injunctive relief, albeit of more limited nature than that demanded. In so finding, the court declares that the post-termination covenants set forth in ¶¶ 8.2 and 8.3 of the Purchase Agreement are reasonable in its scope and not unduly burdensome to the defendants (see FTI Consulting, Inc. v PriceWaterhouseCoopers, LLP, 8 AD3d 145, 779 NYS2d 56, 57-58 [1st Dept 2004] [three-year, nationwide, restrictive covenant barring any competition in business recovery services reasonable]; Hadari v Leshchinsky, 242 AD2d 85,662 NYS2d 85, 86 [2d Dept 1997] [five-year New York City-wide restriction for intercom installation business was reasonable]; Brintec Corp. v Akzo N.V., 129 AD3d447, 514NYS2d 18, 19 [1st Dept 1987] [five-year, worldwide scope in circuit board business was reasonable]). That the sale of insurance products and services may be successfully completed electronically without face to face meetings between the seller and purchaser is clear. The defendants' complaints about the geographic scope of the post-termination restraints are thus rejected as unmeritorious.
The court further finds sufficient evidence in the record to support a finding that the plaintiff established a likelihood of success on the merits of its claims that one or more of the defendants formed defendant WLF, that competes with the business in which the plaintiff is engaged and that WLF, through the efforts of the individual defendants, sold insurance to at least one of the plaintiff's clients (see p. 9, ¶ 51 of defendant Bentivegna's affidavit in opposition and p. 6, ¶ 18 of the affidavit in opposition by defendant Mulvey). Other instances of self-initiated interfaces on the part of the defendants with customers of the plaintiff for purposes of obtaining direct and personal remuneration for consulting services and such defendants' continued maintenance of private client accounts generated thereby is evident from the defendants' opposing papers (see p. 10, ¶ 56- 59; p. 6 ¶ 19 of the affidavits in opposition by defendants Bentivegna & Mulvey). The moving papers also established that the harm caused to the plaintiff by this and like conduct may not be sufficiently and fully recompensed by an award of monetary damages and that a balance of the equities tips in favor of the plaintiff to maintain the status quo pending resolution of the claims interposed herein.
However, there was insufficient proof that either of the defendants secreted, utilized or divulged information of a confidential and proprietary nature belonging to the plaintiff in violation of any enforceable restraint against use or divulgement thereof. The plaintiff's reliance upon the Code of Conduct to establish these claims is unavailing in light of the existence of the express covenants since "[r]outinely issued employee manuals, handbooks and policy statements should not lightly be converted into binding employment agreements" ( Lobosco v New York Tel. Co./NYNEX, 96 NY2d 312, 317, 727 NYS2d 383 [2001 ]). Nor was there sufficient proof that defendant Mulvey removed and/or converted a computer or its parts or boxes containing proprietary information about the plaintiff or its customers before or after the termination of his employ and that any such information is in use by defendant Mulvey or his company, defendant WLF.
In addition, while there is evidence that the plaintiff, through its employees, such as the defendants, rendered consulting services to the plaintiff's customers as part of their employment duties, the nature of these consulting services were neither described nor established by due proof. The court is thus left with the description of the four types of consulting services performed by the plaintiff that is set forth in the opposing papers of the defendants which they took from the plaintiff's website (see Mulvey opposing affidavit, p.4, ¶ 15). This limited nature of the consulting services performed by the plaintiff was not controverted in the plaintiff's reply papers (see reply affidavit of Michael Collier p. 4, ¶¶ 12-15). Therefore, the consulting services provided by the plaintiff may differ from those which may be provided by the defendants without running afoul of the post-termination covenants with which they are bound (see Mulvey opposing affidavit, p.6, ¶¶ 16-17)). These circumstances, coupled with those set forth above, warrant a finding that the plaintiff's demands for preliminary injunctive relief are overly broad and thus should not be granted in their entirety.
Under these circumstances, the court grants the instant motion by the plaintiff, provisionally and conditionally, only to the following limited extent: that defendants, Bentivegna and Mulvey, are hereby restrained and enjoined, pending further order of the court, as follows: 1) from soliciting any clients of the plaintiff that were clients on August 19, 2013 in any of the six downstate counties of Suffolk, Nassau, Queens, Kings, New York and Richmond (Staten Island); and 2) from engaging in those same six downstate counties, as agent, broker, independent contractor, employee or consultant or from serving as director, officer, member or partner to a company that sells insurance products of the type sold by the plaintiff or that renders consulting services of the types engaged in by the plaintiff, namely, claims management consulting; workers compensation experience modification analysis consulting; insurance premium audit consulting; and safety loss control consulting in connection with the reduction of workplace injuries. All other injunctive relief demanded by the plaintiff on this motion is denied due to the absence of proof sufficient to establish an entitlement to such relief. All prior restraints set forth in the temporary restraining order of September 4, 2013 are hereby lifted.
While effective immediately, the limited preliminary injunctive relief granted to the plaintiff is expressly conditioned upon the plaintiff's posting of an undertaking of the type contemplated by CPLR 6311(b) and 2512, in the amount of $400,000.00, within thirty-five (35) days of the date of this order and the service upon the defendants' counsel, by facsimile, of due proof of the posting of such undertaking within two (2) days thereof. The failure on the part of the plaintiff to timely post such undertaking and to serve notice thereof as directed herein shall result in the immediate termination of the preliminary injunction herein granted and all restraints imposed thereby upon the defendants.
__________________________
THOMAS F. WHELAN, J.S.C.