It should come as no surprise that this has increasingly become one of the most common – if not the most common – form of breach of contract as the economy has continued to falter. Some customers have professed their desire to pay your bills, but “they just don’t have the money right now.” More often, these non-paying customers will duck your calls altogether.

This leaves you in a really awkward position: if you aggressively pursue the money you’re owed, you are likely going to alienate someone who may have been a loyal customer for many years; on the other hand, you need to get paid as well.

There is also another important point to consider: if you decide to try to recover your fee through a breach of contract lawsuit, it is imperative that you assess beforehand whether a judgment against the defendant (your former client) will ultimately be collectible. Stated differently, if you win your case outright, and the court finds that you are owed your entire fee, you may be left with a truly Pyrrhic  victory, for an uncollectible judgment is essentially worthless.

And in that event, you will be worse off than before.

“How is that?” you ask.

Because you will have spent time, aggravation, and thrown good money (on lawyers) after bad.

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Nearly one year ago, we wrote in general terms about how good faith is implied in New York contracts. This article, however, will focus on the underlying factors that New York’s courts will consider when applying this doctrine to non-solicitation agreements.

Fortunately, a hot-off-the-presses decision from New York State’s highest court offers some guidance – and some instructive language:

“Under New York common law, a seller has an “implied covenant” or “duty to refrain from soliciting former customers, which arises upon the sale of the ‘good will’ of an established business” (Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 283 [1981]) … A seller’s “implied covenant” not to solicit his former customers is ‘a permanent one that is not subject to divestiture upon the passage of a reasonable period of time … This is so because “[t]he essence of [these types of] transaction[s] 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” (id.) …

“Notwithstanding this “implied covenant,” a buyer assumes certain risks when he purchases an existing business and attempts to transfer the loyalties or “good will” of that business as his own. For example, the customers of the acquired business, “as a consequence of the change in ownership,” may choose to take their patronage elsewhere (id.). Indeed, “the occurrence of a certain amount of attrition is one of the risks that the purchaser must assume when he acquires an established business” (id.). Moreover, the seller of a business is free to subsequently compete with the purchaser and even “accept the trade of his former customers, provided that he does not actively solicit such trade …  [such as by] sending targeted mailings or making individualized telephone calls to his former customers informing them of his new business ventures … On the other hand … so long advertisements [are] general in nature — and not specifically aimed at the seller’s former customers — [they are] permissible under New York law.

“While the “implied covenant” places certain barriers on a seller’s conduct, it in no way prohibits a former customer or client from gathering information about that seller. In the free market, consumers of goods and services have the right to make informed choices …Thus, a seller of “good will” may answer the factual inquiries of a former client, so long as such responses do not go beyond the scope of the specific information sought …[but may not] explain, for example, why he believes his products or services are superior …

For additional information on this topic, please see “New York Court Clarifies Standard For “Improper Solicitation of Old Clients.”

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In a fascinating – and significant – April 28 decision, New York State’s highest court answered the following question:

How far can you go to help your new employer solicit your former clients under New York law?

Here are some of the salient facts in the breach of contract and breach of fiduciary duty case of Bessemer Trust Co., N.A. v. Branin:

In this case, Branin was a former executive of Brundage, who sold its assets, including its good will, to Bessemer for $75 million in August, 2000, with $50 million of the purchase price being payable up front, and the remaining $25 million being contingent on Bessemer and its principals meeting certain performance benchmarks. Branin, who was Brundage’s largest individual shareholder, received just over $9 million as his share of the sale. Branin continued to work for Brundage for just under 2 years, at which point he sought different employment.

Although Branin did not have any written non-compete agreement barring solicitation of former clients (which, given the magnitude of the asset purchase agreement is, to say the least, rather puzzling), he went out of his way not to actively solicit any of his former clients that were part of the asset purchase agreement when he finally left in June, 2002. In fact, he didn’t even tell any of those clients he was leaving; rather, when these clients contacted Branin privately, he informed them that he was pursuing work with a different firm in the field because this new firm’s operating philosophy “was more appropriate for him.”

Some clients, including his largest one, went out of their way to follow him, and left Bessemer. And this lawsuit followed.

In response to a question posed by a federal appeals court, New York State’s highest court concluded its opinion as follows:

“The issue in which the Second Circuit seeks our guidance is to what degree a seller may assist his new employer in responding to inquiries made by a former client. Since the seller of “good will,” absent a restrictive covenant, may compete with a purchaser, we conclude that certain activity within a new employer’s firm must be permissible …

“While a seller may not contact his former clients directly, he may, “in response to inquiries” made on a former client’s own initiative, answer factual questions … a seller’s “largely passive” role at [a client] meeting does not constitute improper solicitation in violation of the “implied covenant.”

To my thinking, this is a good and logical rule.

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Sometimes, uphill battles must be fought because there really isn’t a viable second option; the stakes are too high, and allowing the status quo to remain undisturbed without a fight can mean forfeiting your business. And that’s precisely what MGA Entertainment did in its prolonged fight over the proprietary intellectual property rights to the Bratz dolls. (It also appears that a central element to the case was a claim that a former Mattel employee who left to work for MGA Entertainment had breached his fiduciary duty to Mattel in bringing the Bratz concept to MGA).

As I noted nearly two years ago in  “Infingers Beware: Court Upholds $100 Million Verdict in Bratz Dolls Case,” appellate courts tend to give great deference to jury verdicts, and therefore, the likelihood of an appeals court throwing out a jury’s verdict was unlikely. But MGA really had no choice. Allowing this verdict to stand may have meant the ruination of their business.

So they fought. And, according to a news report from earlier today, not only did they get that jury’s verdict thrown out, but a second jury found in their favor, awarding MGA Entertainment $88.5 million in damages due to Mattel’s wrongful actions.

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Just over one year ago, I wrote about how a New York County trial court refused to dismiss two at-will employees that worked as placement professionals, and were promised both salary and commission did not forfeit their earned commissions – even though they never reduced their agreements to writing, in derogation of the Statute of Frauds. (See, “At Will Employees’ Breach of Oral Contract for Unpaid Bonuses Survives Dismissal“).

An appeals court across the river in Brooklyn has now followed suit.

In the breach of contract action of  Bauccio v. Aon Recovery, Inc., the plaintiff, a consultant, had earned certain unpaid commissions working for two companies that  were later acquired by the defendant. Seeking to recoup his unpaid commissions, the plaintiff purportedly entered into an oral agreement with the defendant whereby the defendant would pay him not only for his past unpaid commissions, but for future commissions with respect to those clients he had already referred to the defendant.

Although the appellate court agreed that the defendant’s alleged promise to pay for future commissions was barred by the Statute of Frauds (which requires that such an agreement be reduced to writing), it declined to dismiss that branch of the plaintiff’s claim seeking payment of his earned commissions, and cited to an exception to the Statute of Frauds, stating:

“Pursuant to General Obligations Law § 5-701(a)(2), a special promise to answer for the debt, default or miscarriage of another person’ must be in writing, and subscribed by the party to be charged therewith.’ Under a longstanding exception to this rule, however, the promise need not be in writing if it is supported by a new consideration moving to the promisor and beneficial to him’ and provided, further, that the promisor has become in the intention of the parties a principal debtor primarily liable …

‘T”he plaintiff raised triable issues of fact as to whether his continued efforts to secure a particular client, Adecco, on behalf of the defendant constituted new consideration running to the benefit of the defendant, and whether the parties intended the defendant to become primarily liable for the unpaid commissions [that defendant's predecessors in interest] owed to the plaintiff.”

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It is indeed rare that cases which hinge completely on jurisdictional or procedural grounds could have any interest at all for non-lawyers. But GS Plasticos Limitada v. Bureau Veritas, which was just decided last week, is one such case.

In this tortious interference with contract case, the plaintiff, a Brazilian company, claimed that it lost a contract with another Brazilian company after the defendant testing company falsely reported that its products contained excessive amounts of arsenic. In response, the plaintiff sued not only the testing company, but also sued the testing company’s French parent corporation.

Since the testing was done in New York, plaintiff brought the case in New York County. But there was one (seeming) problem:  the French parent company had filed a certificate of surrender to do business in New York before the action was commenced, in accordance with BCL §1314(b)].

In reversing the trial court’s Order, and dismissing the action against both of the defendants, the appellate court stated as follows:

“BV’s surrender of its authority to do business in New York does not insulate it from the court’s assertion of personal jurisdiction over it, because the liability in this case was “incurred by [BV] within this state before the filing of the certificate of surrender” (Business Corporation Law [BCL] § 1310[a][5].; see Antonana v Ore S.S. Corp., 144 F Supp 486, 491 [SD NY 1956]; Munn v Security Controls, 23 AD2d 813 [1965]).

“However, the court erred in finding that it had jurisdiction pursuant to BCL § 1314(b)(3), based on the tortious conduct’s having arisen out of the testing services performed in New York. For purposes of BCL § 1314(b)(3), the inquiry is not where the tortious conduct occurred but ‘[w]here the cause of action arose’ (see id.; see also Gonzalez v Industrial Bank [of Cuba], 12 NY2d 33 [1962]; Hibernia Natl. Bank v Lacombe, 84 NY 367, 384 [1881]).

“Plaintiff’s claim is one for interference with contractual relations. Although the faulty testing that led to the loss of the contract occurred in New York, plaintiff had no cause of action until the contract was actually lost, i.e., until it was cancelled, and that cancellation occurred in Brazil.”

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In a blog piece that was published in yesterday’s Wall Street Journal, it was reported that OfficeMax has sued A & P, the well-known supermarket chain, seeking a restraining order barring them from poaching key employees. Apparently, OfficeMax felt compelled to take this action after 3 of their key employees left, including their former chief operating officer and two of his subordinates.

As part of their claim, they have also charged the former COO, Sam Martin, with violating the non-compete clause of his employment agreement, with breach of contract and breach of fiduciary duty, claiming that his employment contract with OfficeMax explicitly barred him from soliciting, or poaching, employees away OfficeMax’s ranks.

There’s just one big fly in this particular ointment, however.

Since A & P has filed for bankruptcy protection, certain legal actions against A & P are prohibited, such as pursuing litigation against the bankruptcy debtor’s property. (For additional information on this, please see Bankruptcy Code Section 362).

The question is whether this particular claim would also be subject to bankruptcy protection. A & P’s argument that forcing it to defend this lawsuit would effectively deprive it of one of the chief benefits of bankruptcy protection – i.e., immunity from lawsuits – definitely has some merit.

But I don’t think that it is the better policy in cases of this nature. While I understand shielding a bankruptcy debtor from money judgments, that protection should not be without limits; it should not allow them to act deliberately and intentionally raid other companies’ leadership without consequence.

My guess is that OfficeMax will attack A & P’s response as follows: a restraining order is inherently equitable in nature -  it does not seek damages, and therefore is not the type of claim insulated from suit by the Bankruptcy Code. In addition, to the extent any damages are sought, it would appear that they are targeted at the individual defendant, Mr. Martin, rather than at A & P.

For now, we’ll just have to wait and see how this case shakes out.

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Back in August, I wrote about the Most Formidable Defense to a Tortious Interference Claim in New York: justification. In other words, as long as a defendant can show that they induced Company A to break their agreement with Company B for legitimate economic reasons, the tortious interference claim will likely fail.

But, as pointed out in Omni Consulting Group, Inc. v. Marina Consulting Group, a New York Federal Court decision from tomorrow’s New York Law Journal, there is another defense to a tortious interference claim that is perhaps equally lethal: the plaintiff’s inability to prove that the defendant intentionally procured the breach of contract, and that if not for the defendant’s actions, the contract would not have been breached.

In dismissing the tortious interference claim, the Omni Court stated as follows:

“[The third party with whom plaintiff had the contract] came up with the idea of breaking the Master Agreement on his own. He told [defendant], without any prompting, that he would “work things out” with plaintiff to allow for a direct relationship with [defendant]. The very fact that [the third party] had to tell [defendant] that he would “work things out” implies that [the third party] hesitated to hire [plaintiff]. [Defendant] thus never suggested or encouraged any contractual breaches; it merely took advantage of an idea that [the third party] carried forward on his own.”

Somewhat ironically, as suggested in the title of this post, this claim was dismissed despite the fact that the defendant had defaulted, and not opposed the claim at trial. That result should underscore some of the difficulty inherent in proving all of the necessary elements of a tortious interference claim under New York law.

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No one likes being subpoenaed. No one. And non-party (i.e., you’re not one of the parties named in the case, which means you’re neither a plaintiff nor a defendant) subpoenas that are issued in the context of a business litigation or commercial litigation matter can be quite disruptive because the documents that may be sought can be quite voluminous.

So when are subpoenas legitimate, and when aren’t they legitimate? Or, in legalese, when will the court “quash the subpoena?”

The answer is that it depends on which part of New York you’re in. “How can that be?”, you ask. There’s a difference of opinion among the different appellate courts in New York. And while the courts have conceded that there isn’t a bright line test to determine the propriety of a non-party subpoena, here are some guidelines that one of New York’s appellate courts recently provided:

“[T]he party seeking discovery must first satisfy the threshold requirement that the disclosure sought is “material and necessary,” whether the request is directed to a party (see CPLR 3101 [a] [1]) or a nonparty (see CPLR 3101 [a] [4]). Entitlement to discovery of matter satisfying the threshold requirement is, however, tempered by the trial court’s authority to impose, in its discretion, appropriate restrictions on demands which are “unduly burdensome” (Scalone v Phelps Mem. Hosp. Ctr., 184 AD2d 65, 70 [1992]; see Kaye v Kaye, 102 AD2d 682, 691 [1984]) and to prevent abuse by issuing a protective order where the discovery request may cause “unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person or the courts” (CPLR 3103 [a]).

In addition, and particularly when considering whether to enforce a subpoena against a non-party, the courts have considered whether the party issuing the subpoena has shown “that the disclosure sought cannot be obtained from sources other than the non-party.” Some examples of this might include where there is a discrepancy or inconsistency in a party’s statements, and the discovery sought from the non-party may help clarify the issue.

In the final analysis, if you are inclined to fight a subpoena, the decision as to whether you will have to comply with it will be left up to the discretion of a trial judge, and so long as that judge does not exhibit a clear abuse of discretion, an appellate court will not disturb that ruling.

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As a corollary to our blog article “When You Can Incur Personal Liability for a Debt in New York,” the question arises as to what New York’s courts will do when a claimant tries to hold a corporate officer personally liable in either breach of contract or fraud.

To that end, in a November 18 decision in Liang v. Sollecito, a Civil Court in New York County held that “The officers of a corporation may be held personally liable for torts committed on behalf of the corporation, but cannot be held personally liable on contracts provided that they did not bind themselves individually.” Thus, where there are no allegations that the officer had any direct involvement in the contract, or that he personally made any fraudulent misrepresentations with regard to the contract, then the complaint should be dismissed – even before formal discovery begins.

Which is precisely what happened in Liang.

And this should come as no surprise; After all, how often do you think corporate officers stick out their necks to render themselves personally liable? Even more challenging, of those times that it may have actually occurred, how easy do you think it will be to prove it?

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