Opinion
No. X06 CV 07 4016194 S
March 24, 2009
MEMORANDUM OF DECISION ON THE DEFENDANT'S MOTION FOR SUMMARY JUDGMENT (#148)
STATEMENT OF THE CASE
This action was instituted by the plaintiffs Webster Financial Corporation and USI Insurance Services of Connecticut, Inc. (USI), against the defendants Gerald U. Levine and Beecher Carlson Insurance Services, LLC (Beecher Carlson). Pending before the court is the defendants' motion for summary judgment. Because the bench trial of this case is scheduled to commence on April 30, 2009, the court will address the facts and issues of the motion in a manner that is more summary than detailed. For the following reasons, the defendants' motion for summary judgment is denied.
In February 2000, Levine and other shareholders of a company named LLIA, Inc., sold their shares in LLIA to Webster Financial Corporation and a wholly owned subsidiary, now known as USI. (For convenience, these purchasing entities will be collectively referred to as the plaintiffs.) There is no dispute between the parties about this transaction. This transaction was consummated by the parties executing a Stock Purchase Agreement, an Employment Agreement and a Non-Solicitation Agreement (NSA). Levine left his employment with the plaintiffs in June 2007 and went to work for Beecher Carlson. The gravamen of the plaintiffs' complaint concerns Levine's termination and subsequent employment with Beecher Carlson.
The third amended verified complaint is in four counts. The first two counts are against Levine for breach of contract and breach of fiduciary duty. More specifically, in the first two counts the plaintiffs allege that Levine breached the NSA by soliciting and taking the plaintiffs' clients and employees, thereby breaching his fiduciary responsibilities to the plaintiffs. The third count is against Beecher Carlson for tortious interference with the plaintiffs' contractual and business relations. The last count is against both defendants for violation of the Connecticut Unfair Trade Practices Act, General Statutes, § 42-110a (CUTPA).
DISCUSSION
The procedures governing motions for summary judgment are found in Practice Book §§ 17-44 through 17-51. The standards governing the court's consideration of a motion for summary judgment are well established and will not be restated here. See Weber v. U.S. Sterling Securities, 282 Conn. 722, 728, 924 A.2d 816 (2007). Section 17-49 of the Practice Book provides that summary judgment shall be "rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
I BREACH OF CONTRACT
Relying on the Restatement (Second) of Contracts, Levine's first argument is that the plaintiffs' breach of contract claim must fail because the non-solicitation covenants of the NSA were procured solely by a grant of stock. See Restatement (Second) of Contracts § 187, comment b. ("[O]ne cannot merely pay another to restrict competition. An agreement between two strangers in which a covenant not to compete was supported merely by a payment of money was unenforceable.") The court agrees with the plaintiffs that such an argument can only be achieved through a strained and tortured construction of the language of the parties' agreement. The NSA, the stock purchase agreement and the employment agreement were not only all executed on the same day as part of the sales transaction, but they also refer to each other. The NSA and the employment agreement were attached as exhibits and incorporated as part of the stock purchase agreement. The applicable provision of the NSA states that Levine's covenants are "(i)n consideration of the issuance of the Stock and of his employment by the company pursuant to the Employment Agreement and the closing transactions contemplated by the Stock Purchase Agreement . . ." Non-Solicitation Agreement, § 2(a). "When there are multiple writings regarding the same transaction, the writings should be considered together to determine the intent of the parties." Mongillo v. Comm'r of Transp., 214 Conn. 225, 229, 571 A.2d 112 (1990). These documents clearly and unambiguously indicate that Levine's covenants in the NSA were in consideration for the sale of LLIA, his employment with Webster Insurance, and the shares of stock.
Levine's next argument is that the NSA restrictions are overly broad and unenforceable as a matter of public policy. Under Connecticut law, anti-solicitation provisions are treated similarly to anti-competition covenants to the extent that they are enforceable if the restrictions are reasonable. Our Supreme Court has specified five areas in which the reasonableness of a restrictive covenant must be evaluated: (1) the length of time the restriction is to be in effect; (2) the geographical area covered by the restriction; (3) the degree of protection afforded to the interest of the party in whose favor the covenant is made; (4) the restrictions imposed on the employee's ability to pursue his occupation; and (5) the potential for undue interference with the interests of the public. Scott v. General Iron Welding Co., 171 Conn. 132, 137, 368 A.2d 111 (1976). This five-prong test "should be viewed as disjunctive rather than conjunctive. A finding of unreasonability in any one of the factors will be enough to hold the covenant unenforceable." New Haven Tobacco Co. v. Perrelli, 11 Conn.App. 636, 639 n. 2, 528 A.2d 865 (1987).
In this case, the operative provision of the NSA provides that for a period of two years after Levine's termination, he could not solicit or accept any brokerage business from anyone who had been a client of either LLIA or Webster Insurance during the defendant's employment and who had remained a client within one year before his termination. This provision does not provide an express geographic limitation, but this deficiency alone is not necessarily fatal because according to its terms, the covenant is limited to the area where the business' customers are located. Robert S. Weiss Associates, Inc. v. Wiederlight, 208 Conn. 525, 531, 546 A.2d 216 (1988); New Haven Tobacco Co. v. Perrelli, 18 Conn.App. 531, 535, 559 A.2d 715 (1989).
Section 2(a)(2) of the NSA provides in relevant part that Levine "will not . . . directly or indirectly solicit or accept insurance agency brokerage business from, or perform any of the services included within [the company's] or its insurance affiliates' business for any Client with whom [Levine] has had business relations or who was a Client of [the company], or its insurance affiliates during any period in which [Levine] worked for [the company] and, in each case, who was a Client on the date of termination of [Levine's] employment with the company] or within one (1) year before such date."
Levine focuses on the third and fifth factors, arguing that the protections of the NSA are broader than the plaintiffs' legitimate business interests and that they place undue restrictions on the public's interests. There is no earnest dispute that the NSA concerns legitimate business interests of the plaintiffs. The NSA was executed as part of the purchase of the LLIA stock, and therefore, the covenants not only added value to the purchase, but they also advanced the future financial viability of the new business.
The defendant emphasizes that the NSA is broad because it not only precludes him from soliciting plaintiffs' clients that he serviced during his employment, but also precludes him from working with anyone who was a client of the plaintiffs during his employment, even if he does not solicit these clients and they voluntarily choose to retain his services. Although the defendant is correct that this provision is broad, the restriction fairly compares with similar provisions that have received favorable review. See, e.g., Robert S. Weiss Associates, Inc. v. Wiederlight, supra, 208 Conn. 525 (upholding a two-year provision precluding the employee from soliciting any accounts of the employer existing at the time of the employee's termination for two years); May v. Young, 125 Conn. 1, 2 A.2d 385 (1938) (sustaining a two-year provision precluding a former employee from "entering into the employ" of the employer's clients for two years); New Haven Tobacco Co. v. Perrelli, supra, 18 Conn.App. 531 (upholding a provision precluding the former employee from selling similar products to any customers he dealt with or "became aware of" during the course of his employment for two years); Uniform Rental Division, Inc. v. Moreno, 83 App.Div.2d 629, 441 N.Y.S.2d 538 (1981) (upholding a covenant stating that for a period of two years, the salesman would not "directly or indirectly solicit or serve any of the customers served by the [employer] during his employment"); Tuttle v. Riggs-Warfield-Roloson, Inc., 251 Md. 45, 49, 246 A.2d 588 (1968) (upholding an agreement between insurance agency and employee barring employee from "engaging, directly or indirectly, in any insurance activities with customers" of insurance agency for two years); Hebb v. Stump, Harver Cook, Inc., 25 Md.App. 478, 334 A.2d 563 (1975) (upholding a two-year covenant prohibiting insurance agent from writing renewal business of former employer's customers for two years).
To the extent that Judge Meadow's interlocutory decision in this case on the plaintiffs' application for a temporary injunction conflicts with this case law, the court respectfully declines to follow that decision and deviates from the law of the case doctrine. See generally Breen v. Phelps, 186 Conn. 86, 98-99, 439 A.2d 1066 (1982) ("one judge may, in a proper case, vacate, modify or depart from an interlocutory order or ruling of another judge in the same case, upon a question of law").
In regard to the fifth consideration concerning undue interference with the interests of the public, three factors are relevant to this issue: "(1) the scope and severity of the covenant's effect on the public interest; (2) the probability of the restriction creating or maintaining an unfair monopoly in the area of trade; and (3) the interest sought to be protected by the employer." New Haven Tobacco Co. v. Perrelli, 11 Conn.App. 636, 640-41, 528 A.2d 865 (1987). As to the third factor of this evaluation, the fact that legitimate interests of the plaintiffs were protected by the NSA has been previously addressed. As to the second factor, neither party has presented or offered any evidence about the extent to which the NSA restrictions actually impose a monopoly in the area of trade. As to the first factor, the defendant contends that the NSA severely impacts the public interest because it restricts the ability of the plaintiffs' clients to choose their own insurance broker. The defendant emphasizes that this particular restriction is onerous in this case because the plaintiffs were without anyone available to service the needs of certain clients after Levine's departure, although the record is unclear whether this is the case as to all the clients that Levine ultimately acquired contrary to the terms of the NSA. Additionally, there is nothing in the record indicating that no one else in the field could have been hired by the plaintiffs or retained by the particular clients to service their insurance needs other than the Levine.
It also may be noted that even if the plaintiffs were left without another employee with the expertise to service some of the firm's clients after Levine's departure, his compliance with the NSA would nevertheless have served an apparent goal of the agreement itself — that the plaintiffs would not have to compete with Levine for the clients' business for the two-year period after his termination. In this respect, the proscription in this case is similar to the covenant upheld in New Haven Tobacco Co. v. Perrelli, supra, 18 Conn.App. 531, where the former employee was precluded from entering into any business dealings with customers whom the employee knew were customers of the employer during his employ. "This would be true whether or not the customers unilaterally and voluntarily chose to transfer their business to the defendant." New Haven Tobacco Co. v. Perrelli, supra, 11 Conn.App. 637 n. 1.
Furthermore, the Appellate Court has explained that "some degree of interference with the public's rights to an accessible market place and a multifarious workforce is allowed . . ." New Haven Tobacco Co. v. Perrelli, supra, 11 Conn.App. 640, n. 3. "Clearly, the public does not have an inherent right to do business with whomever it chooses when the individual of its choice has contracted away his ability to do business with the public." Id.
Moreover, an additional "consideration which must be taken into account is the public interest in requiring those who have freely entered into an agreement, and who have received a benefit for doing so, to abide by the terms of the agreement. The principle that agreements contrary to public policy are void should be applied with caution and only in cases plainly within the reasons on which that doctrine rests; and it is the general rule that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts . . ." (Citations omitted; internal quotation marks omitted.) Id., 643.
The ultimate determination of the enforceability of the NSA turns on the issue of reasonableness and that issue requires a consideration, and in some cases, a balancing of all five factors bearing on this question. See generally New Haven Tobacco Co. v. Perrelli, supra, 11 Conn.App. 639 n. 2. The parties have not squarely addressed all of these factors. Moreover, because this inquiry is fact specific, the Supreme Court has cautioned that such determinations ordinarily require a trial, where the facts may be produced and weighed as a whole. See Deming v. Nationwide Mutual Ins. Co., 279 Conn. 745, 759 n. 15, 905 A.2d 623 (2006). "In the vast majority of cases . . . whether a covenant is reasonable is a question of fact . . . Consequently, the actual impact of particular arrangements on competition must be examined to determine whether they have a pernicious effect on competition and lack . . . any redeeming virtue . . ." (Citation omitted; internal quotation marks omitted.) Id. Thus, the court concludes that the issues raised by the defendant concerning the breadth and enforceability of the NSA should await trial and should not be resolved through summary judgment.
Levine also contends that the plaintiffs cannot prove any "recoverable" damages. On this issue, the defendant first argues that the liquidated damages provision of the NSA is an unenforceable penalty because it is based on a calculation of two times the annual revenue generated by his book of business. According to the defendant, this calculation results in a figure that is grossly disproportionate to any actual loss suffered by the plaintiffs. The defendant has the burden of pleading and proving that the liquidated damages provision of the parties' contract constitutes an unenforceable penalty. American Car Rental, Inc. v. Commissioner of Consumer Protection, 273 Conn. 296, 314, 869 A.2d 1198 (2005) ("A breaching party . . . bears the burden of proving that the agreed upon amount so far exceeds any actual damages as to be in the nature of a penalty."); Norwalk Door Closer Co. v. Eagle Lock Screw Co., 153 Conn. 681, 686, 220 A.2d 263 (1966) (a defense that a liquidated damages provision constitutes an illegal penalty must be specially alleged). The criteria used to evaluate whether a liquidated damages provision is an unenforceable penalty are whether: "(1) The damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract . . ." (Citation omitted.) Berger v. Shanahan, 142 Conn. 726, 731, 732, 118 A.2d 311 (1955); accord, Norwalk Door Closer Co. v. Eagle Lock Screw Co., supra, 152 Conn. 681.
Summary judgment is unavailable on the question whether the liquidated damages provision of the parties' contract represents a penalty because material issues of disputed fact exist concerning these factors. Moreover, Levine has not pleaded illegality of the liquidated damages provision as a special defense. Consequently, whether the defendant can assert and prove the facts necessary to establish that this provision is a penalty is a burden he must address at trial.
Levine next argues that the plaintiffs cannot show any recoverable damages because the plaintiffs cannot prove that they could have serviced or retained any of the clients lost to him. The court agrees with the defendant that "[t]he proper measure of damages for breach of a covenant not to compete is the nonbreaching party's losses rather than the breaching party's gains . . ." (Citations omitted Robert S. Weiss Associates, Inc. v. Wiederlight, supra, 208 Conn. 542. The court, however, cannot conclude that the evidence of this record clearly or undisputedly establishes that the plaintiffs cannot meet their burden of proof on the issue of damages. Furthermore, even if the plaintiffs fail to prove compensatory damages with sufficient certainty, nominal damages may be available. See Letsch v. Slady, 145 Conn. 401, 402-03, 143 A.2d 642 (1958) ("[i]n a case where a [claimant's] clear legal right has been invaded he is entitled to at least nominal damages"); see also, Lyons v. Nichols, Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV 94-0312019 S (March 30, 1998) (Stevens, J.), aff'd, 63 Conn.App. 761, 778 A.2d 246, cert. denied, 258 Conn. 906, 782 A.2d 244 (2001).
In response to the plaintiffs' contention that their expert witnesses will testify about a diminution in the value of their business caused by Levine's violations of the NSA, the defendant points to case law indicating that loss of business value is not an element of recovery for breach of non-competition or non-solicitation covenants. Turbines, Inc. v. Thompson, 684 N.E.2d 254, 258 (Ind.App. 1997). On the other hand, other cases recognize that at least when the non-compete or non-solicitation covenants are associated with the purchase of a business, the new business' relationships with its clients may be such an important, valuable asset that an element of damages for breaching the covenants should include loss of good will. See, e.g., Dunn v. Ward, 105 Idaho 354, 356, 670 P.2d 59 (App. 1983) ("The measure of damage for the breach of an anti-competition clause is the amount that the plaintiff lost by reason of the breach. The loss may include an amount for impairment of goodwill"); The Vendo Co. v. Stoner, 105 Ill.App.2d 261, 290, 245 N.E.2d 263 (1969) (damages for breach of non-competition covenants may include "the diminution of [the plaintiffs] business at the end of the period covered by the covenants"). The parties have not cited any Connecticut case law on whether diminution of a business' value is an appropriate component of damages under these circumstances. The court is disinclined to resolve this issue on this record because the parties have not fully or sufficiently addressed the question in their present submissions. The court will allow the parties to be heard further on this issue during the trial proceedings.
Cf Mattis v. Lally, 138 Conn. 51, 54, 82 A.2d 155 (1951): "The plaintiff bought all the equipment in the defendant's shop `together with all good will.' Good will in the sense here used means an established business at a given place with the patronage that attaches to the name and the location. It is the probability that old customers will resort to the old place . . . Having paid for `good will,' the plaintiff was entitled to have reasonable limitations placed upon the activities of the defendant to protect his purchase." (Citation omitted). Id.
Levine also has raised other arguments contesting the legal sufficiency of the plaintiffs' breach of contract claim, namely, that he did not engage in any "preventable" competitive activities and did not in fact solicit any clients or employees as alleged by the plaintiffs. These issues too raise genuine issues of disputed fact not amenable to summary disposition.
II Breach of Fiduciary Duty, Tortious Interference and CUTPA
The defendants' remaining claims require little discussion. For various reasons, the defendants contend that the facts establish that the plaintiffs cannot meet their burden of proof on their claims alleging breach of fiduciary duty, tortious interference with contractual relations and violation of CUTPA. However, the court cannot look solely to the defendants' version of the facts. In ruling on a motion for summary judgment, the court must examine the entire record, not to decide the facts, but to determine whether material disputed facts exist. Field v. Kearns, 43 Conn.App. 265, 270, 682 A.2d 148, cert. denied, 239 Conn. 942, 684 A.2d 711 (1996) ("the trial court's function is not to decide issues of material fact, but rather to determine whether any such issues exist"). "Because litigants ordinarily have a constitutional right to have issues of fact decided by the finder of fact, the party moving for summary judgment is held to a strict standard, He must make a showing that it is quite clear what the truth is, and that excludes any real doubt as to the existence of any genuine issue of material fact." (Citation omitted; internal quotation marks omitted.) Barasso v. Rear Still Hill Road, LLC, 81 Conn.App. 798, 802, 842 A.2d 1134 (2004). The defendants have failed to meet their burden of showing that there are no disputed material facts and that they are entitled to judgment as a matter of law.
CONCLUSION
Therefore, the defendants' motion for summary judgment is denied.
So ordered this 24th day of March 2009.