Opinion
08 Civ. 6314 (WHP).
October 10, 2008
Stephen M. Nickelsburg, Esq., Clifford Chance US LLP, Washington, DC, Edmund S. Aronowitz, Esq., Daryl W. Fairbairn, Esq., Clifford Chance US LLP, New York, NY, Counsel for Plaintiff.
Steven Cooper, Esq., John Doyle, Esq., Lawrence J. Reina, Esq., Reed Smith LLP, New York, NY, Counsel for Defendants.
MEMORANDUM ORDER
Plaintiff Scott Pontone ("Pontone") moves for a preliminary injunction barring Defendants The York Group, Inc. ("York"), Milso Industries Corporation ("New Milso"), and Matthews International Corporation ("Matthews") from enforcing certain restrictive covenants and suspending his severance payments. For the following reasons, Pontone's motion for preliminary relief is denied.
BACKGROUND
I. The Sale of the Pontone Family Business
For nearly eighty years, the Pontone family was in the business of manufacturing and selling caskets and other products to licensed funeral homes through family-owned companies collectively known as Milso Industries ("Old Milso"). (Undated Declaration of Scott Pontone ("Pontone Decl.") ¶¶ 1-2; Transcript of the Deposition of Scott Pontone dated Jul. 31, 2008 ("Pontone Tr.") 6-15.) Old Milso had a strong reputation in an industry where goodwill is critical to a business's success. (Declaration of Joseph C. Bartolacci dated Aug. 18, 2008 ("Bartolacci Decl.") ¶¶ 10-13; Pontone Tr. 38-39, 46-49, 58.)
In 1988, Pontone joined the family business and worked in managerial and sales positions. By 2005, Pontone was a minority shareholder of Old Milso and assisted his father in running the business. (Pontone Decl. ¶ 4; Pontone Tr. 41-45; 112-113.)
On May 28, 2005, Pontone and six other members of the Pontone family sold Old Milso to York, a competitor, for $110 million. (Bartolacci Decl. Ex. A: Asset Purchase Agreement dated May 28, 2005 (the "Asset Purchase Agreement").) More than half of the acquired assets represented the goodwill of Old Milso. (Bartolacci Decl. ¶ 18.) Simultaneous with the sale, Pontone entered into a five-year employment agreement (the "2005 Employment Agreement") in which he agreed to serve as executive vice president of York. As part of the 2005 Employment Agreement, Pontone covenanted not to compete with York in the casket selling business for three years after the expiration of the agreement. (Bartolacci Decl. ¶¶ 24-25, Ex. F: 2005 Employment Agreement §§ 4.06-4.08.) The 2005 Employment Agreement referenced the Asset Purchase Agreement, which included similar restrictive covenants. (2005 Employment Agreement at p. 1, § 6.02; Asset Purchase Agreement § 12.3.)
Pontone received $2.7 million of the $95 million tendered at closing. (Bartolacci Decl. Ex. C: Scott Pontone K-1 dated 2005; Pontone Tr. 92.) Aside from that direct payment, Pontone stands to receive an additional $19 million of the purchase price through a family trust. (Pontone Tr. 94-95; Cooper Decl. Ex. B: Harry Pontone 2005 Family Trust Agreement dated Mar. 4, 2005.)
Under the Asset Purchase Agreement, York also agreed to pay $15 million in two equal annual installments if the company met certain profit targets in each of the first two years of operation. While York missed the first-year target, it nevertheless paid the Pontone family $7 million in December 2006. (Bartolacci Decl. ¶ 40.) In April 2007, Pontone and his father sued York and York's parent, Matthews, for breach of contract alleging that Matthews had unreasonably interfered with the Pontone family's ability to run the casket business in violation of the Asset Purchase Agreement and 2005 Employment Agreement. (Bartolacci Decl. ¶ 42; Pontone Decl. ¶ 19.)
In May 2007, Pontone and his father settled that lawsuit. (Bartolacci Decl. ¶ 43; Pontone Decl. ¶ 20; Pontone Tr. 98-99.) As part of the settlement, Pontone agreed to resign as executive vice president, and York agreed to pay him $300,000 per year for three years. (Pontone Decl. ¶ 24; Bartolacci Decl. ¶ 50.) York also agreed to pay the Pontone family the $8 million balance of the $15 million earn out. Pontone's father exercised his discretion under the Asset Purchase Agreement to pay the entire $8 million to Pontone. (Bartolacci Decl. ¶ 43; Pontone Tr. 96-97.) The settlement amended the restrictive covenants in the 2005 Employment Agreement and Asset Purchase Agreement (the "Amended Covenants"). (Pontone Decl. ¶¶ 21-22; Bartolacci Decl. ¶¶ 45-49, Ex. L: 2007 Amendments to 2005 Employment Agreement and Asset Purchase Agreement.)
The Amended Covenants, which are the subject of this litigation, provide as follows:
4.06. Restrictions on Competition Employee covenants and agrees that during the period of Employee's employment hereunder and for three (3) years following the effective date of Employee's resignation from the Company, Employee shall not engage, directly or indirectly, whether as a principal or as agent, officer, director, employee consultant, shareholder, investor, financer, or otherwise, alone or in association with any other person, corporation, or other entity in the manufacture or sale of caskets or any other product of the type presently manufactured, marketed or sold by The York Group, Inc. or [New Milso]. ***
4.07. Non-Solicitation of Customer and Suppliers. Employee covenants and agrees that during the period of Employee's employment hereunder and for three (3) years following the effective date of Employee's resignation from the Company, Employee shall not directly or indirectly solicit the trade of, or trade with, any customer of The York Group, Inc. or [New Milso] with respect to the manufacture, marketing or sale of caskets or any other product of the type presently manufactured, marketed or sold by The York Group, Inc. or Milso.
(Bartolacci Decl. Ex. L at 2.)
II. Pontone's Current Business
Following his departure from York, Pontone started a new business selling insurance to funeral homes. (Pontone Decl. ¶ 28; Supplemental Declaration of Scott Pontone dated Aug. 25, 2008 ("Pontone Supp. Decl.") ¶¶ 2-3.) Pontone currently operates in eight states, at least five of which York competes in. (Pontone Decl. ¶ 32.) Pontone plans to expand his business's geographic scope. (Pontone Decl. ¶ 33.) In addition to insurance, he now wants to sell caskets to take advantage of synergies of one-stop shopping. (Pontone Decl. ¶ 14, 30, 34; Pontone Supp. Decl. ¶ 4, 11; Pontone Tr. 119-120.) Pontone asserts casket suppliers are interested in his new business model, but only after the covenants expire. (Pontone Supp. Decl. ¶ 13; Pontone Decl. ¶ 30.)
DISCUSSION
A party seeking a preliminary injunction must show: "(1) a likelihood of irreparable harm in the absence of the injunction; and (2) either [(a)] a likelihood of success on the merits or [(b)] sufficiently serious questions going to the merits to make them a fair ground for litigation, with a balance of hardships tipping decidedly in the movant's favor." Doninger v. Niehoff, 527 F.3d 41, 47 (2d Cir. 2008) (citing Sunward Elecs., Inc. v. McDonald, 362 F.3d 17, 24 (2d Cir. 2004)).
I. Irreparable Harm
A showing of irreparable harm is the "single most important prerequisite for the issuance of a preliminary injunction." Bell Howell v. Masel Supply Co., 719 F.2d 42, 45 (2d Cir. 1983). The mere possibility of harm is not sufficient; the harm must be imminent and the movant must show it is likely to suffer irreparable harm if equitable relief is denied. JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 79 (2d Cir. 1990). "The movant must demonstrate an injury that is neither remote nor speculative, but actual and imminent and that cannot be remedied by an award of monetary damages." Shaprio v. Cadman Towers, Inc., 51 F.3d 328, 332 (2d Cir. 1995).
The loss of "prospective goodwill", that is, the potential benefits to a business from selling an essential or unique product, can be irreparable harm. Tom Doherty Assocs., Inc. v. Saban Entm't, Inc., 60 F.3d 27, 38 (2d Cir. 1995). "Although . . . a loss of prospective goodwill can constitute irreparable harm, . . . there must be a clear showing that a product that a plaintiff has not yet marketed is a truly unique opportunity for a company." Tom Doherty, 60 F.3d at 38. "Products that are successful but have reasonable substitutes" do not qualify as unique opportunities under this standard. Tom Doherty, 60 F.3d at 38.
While Pontone has shown that some casket manufacturers would be interested in working with him if he were freed of the Amended Covenants, the bundling of caskets with insurance does not appear to be the type of "unique opportunity" that would qualify as prospective loss of goodwill. One casket supplier acknowledged that if it could not work with Pontone, it would look for other partners to distribute its caskets, either alone or with other products such as insurance. (Declaration of William Kirk dated Aug. 14, 2008 ("Kirk Decl.") ¶ 4.) Such a concession points more to an interest in a distribution network than combining insurance with other funeral products. The record does not reveal any factual support for the idea that bundling caskets with insurance products creates any synergy or compelling combination in the marketplace. In short, Pontone cannot meet the "clear showing" required under Tom Doherty because the harm is too speculative.
II. Likelihood of Success
"Generally negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness." Reed, Roberts Assocs., Inc. v. Straumann, 353 N.E.2d 590, 592 (N.Y. 1976). "Whether a covenant is reasonable depends on the circumstances of each case."Karpinski v. Ingrasci, 268 N.E.2d 751, 753 (N.Y. 1971). "Where, for instance, there is a sale of a business, involving . . . the transfer of its goodwill as a going concern, the courts will enforce an incidental covenant by the seller not to compete with the buyer after the sale." Purchasing Assocs., Inc. v. Weitz, 196 N.E.2d 245, 247 (N.Y. 1963). "The sole limitations on the enforceability 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 Assocs., 196 N.E.2d at 247.
Reasonableness also applies to employee agreements not to compete against employers, but "since . . . goodwill . . . is not involved and since there are powerful considerations of public policy which militate against sanctioning the loss of [an individual's] livelihood, the courts have generally displayed a stricter attitude [to these types of agreements]." Purchasing Assocs., 196 N.E.2d at 247. In New York, such an agreement will only be enforced "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." BDO Seidman v. Hirschberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (quoting Reed, Roberts Assocs., 353 N.E.2d at 593).
To determine whether a covenant is related to the sale of a business involving a transfer of goodwill or an employment agreement, a court "must look behind and beyond the label to ascertain the true nature of the transaction."Purchasing Assocs., 196 N.E.2d at 248. Simply because the seller only has a minority stake in the business is not enough to find that a covenant with the seller was not related to the sale of a business. See Payment Alliance Int'l, Inc. v. Ferreira, 530 F. Supp. 2d 477, 483 (S.D.N.Y. 2007); Weiser LLP v. Coopersmith, 859 N.Y.S.2d 634, 635 (N.Y.App.Div. 1st Dep't 2008) (covenant related to sale of business despite minority stake); see also Delta Res., Inc. v. Harkin, 506 N.Y.S.2d 695, 696 (N.Y.App. Div. 1st Dep't 1986).
The 2005 Employment Agreement was signed simultaneously with the Asset Purchase Agreement and each refers to the other. See Weiser LLP, 859 N.Y.S.2d at 635 (finding covenant ancillary to a merger agreement where the partnership agreement that included the covenant explicitly referred to the merger agreement, and was signed simultaneously with the merger agreement). Simply because the duration of the covenants was amended as part of a settlement does not alter the nature of the original transaction. Because the Amended Covenants are ancillary to the sale of the business, and were negotiated between sophisticated parties represented by counsel, this Court will uphold them if they are reasonable.
III. Reasonableness of the Amended Covenants
In assessing the reasonableness of a restrictive covenant, courts "focus[] on the particular facts and circumstances giving context to the agreement," the type of business involved, the circumstances underlying the sale, including whether the party subject to the restrictive covenant was represented by counsel.See BDO Seidman, 712 N.E.2d at 1224; Town Line Repairs, Inc. v. Anderson, 455 N.Y.S.2d 28, 29 (N.Y.App.Div. 2d Dep't 1982); see also Chernoff Diamond v. Fitzmaurice, Inc., 651 N.Y.S.2d 504, 505 (N.Y.App.Div. 1st Dep't 1996) (citing Maltby v. Harlow Meyer Savage, Inc., 637 N.Y.S.2d 110, 111 (N.Y.App.Div. 1st Dep't 1996)). A factor weighing in favor of reasonableness is whether the individual received compensation during the time he was restrained from competing. Where the person receives consideration, the policy concern that non-compete clauses prohibit earning a livelihood is diminished. See Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 73 (2d Cir. 1999); see also Bradford v. N.Y. Times Co., 501 F.2d 51, 58 (2d Cir. 1974).
New York courts have found three to five year restrictions reasonable in the context of the sale of a business. See FTI Consulting, Inc. v. Price Waterhouse Coopers, LLP, 779 N.Y.S.2d 56, 57-58 (N.Y.App.Div. 1st Dep't 2004) (three-year, nationwide, restrictive covenant barring any competition in business recovery services reasonable); Hadari v. Leshchinsky, 662 N.Y.S.2d 85, 86 (N.Y.App.Div. 2d Dep't 1997) (five-year New York City-wide restriction for intercom installation business was reasonable); Brintec Corp. v. Akzo N.V., 514 N.Y.S.2d 18, 19 (N.Y.App.Div. 1st Dep't 1987) (five-year, worldwide scope in circuit board business was reasonable).
The circumstances regarding the sale of the Pontone family business — Old Milso — and the subsequent settlement of litigation between the Pontones and York suggest that the Amended Covenants are reasonable. York paid a significant amount of money to purchase the goodwill of Old Milso in an industry where reputation is critical to an enterprise's success. Pontone was intimately involved in the operations of the family business and customers likely associated him with Old Milso's reputation. He was also represented by counsel in the negotiations leading to the sale of the Pontone family business and the subsequent settlement of his lawsuit against York. Moreover, he benefited significantly from the sale of Old Milso and the negotiated settlement. Pontone received $8 million at the time the lawsuit was resolved and York agreed to pay him $300,000 per year for the three-year duration of the Amended Covenants. While the settlement required him to resign as the executive vice president of York, it also shortened the duration of his obligations to that firm. In sum, the three-year duration is well within the range New York courts have held to be reasonable and the circumstances here suggest that it is.
Because Pontone is not pursuing any opportunities outside the United States, this Court declines to reach the question of the validity of the unlimited geographic reach of the Amended Covenants. As for the opportunities Pontone wishes to pursue in the United States, his insurance sales force currently services clients in eight states, and he plans to expand into other states. York markets caskets to funeral home customers in at least five of the eight states where Pontone currently operates his insurance business. Moreover, there is evidence that regional casket manufacturers, like Old Milso, are being acquired by nation-wide enterprises such as Matthews. While Defendants have never objected to Pontone's insurance business, they certainly sought to protect themselves from competition by Pontone in the funeral casket business so that they could establish their reputation for reliability and service.
Because Pontone fails to establish a likelihood of success on the merits, as well as irreparable harm, Pontone's motion for a preliminary injunction barring enforcement of the Amended Covenants is denied.
IV. Preliminary Injunction Regarding Payments
Pontone has not submitted any evidence supporting his belief that the Defendants intend to stop making severance payments. In fact, York continues to make those payments, which is an important factor in this Court's preliminary determination that the Amended Covenants are enforceable. Because Pontone has not shown imminent or irreparable harm, that branch of his preliminary injunction motion seeking to bar Defendants from withholding payment is also denied.
CONCLUSIONS
For the foregoing reasons, Plaintiff Scott Pontone's motion for a preliminary injunction barring the enforcement of certain restrictive covenants or the suspension of his severance payments is denied. This Court will hold a status conference on October 31, 2008, at 10:00 a.m.
SO ORDERED.