Case Title: Lamorte Burns and Co., Inc. v. Walters

Citation: 

Docket Number: a-26-00

State: new-jersey

Court: New Jersey Supreme Court

Date: 2001-05-14T00:00:00Z

Document:
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). LaVECCHIA, J., writing for a unanimous Court. This appeal concerns a grant of summary judgment on tort claims filed against two former employees of a company for their activities in establishing a business to compete directly with the company that had employed them. The company, Lamorte Burns & Co., Inc. (Lamorte) has been in the business of investigating and adjusting claims for marine and nonmarine liability insurers, their associations, and owners since 1938. Lamorte's office in Clark, New Jersey, which opened in 1986, handled mainly marine protection and indemnity claims (P&I claims). The two Lamorte employees, Michael Walters and Nancy Nixon, worked at the Clark office. Walters, an attorney who had P&I and admiralty experience, had been recruited by Lamorte to manage the Clark office, handle P&I claims, and to supervise employees. About one month after he arrived at Lamorte in 1990, Walters signed an employment agreement that provided, among other things, that he would maintain in confidence all proprietary and confidential information about Lamorte, its clients, and their cases and that were he to leave Lamorte, for a one-year period he would not solicit or accept any claims or matters being handled by Lamorte. Although he signed the agreement, Walters did not believe it was enforceable against him. In the Spring of 1996, after Lamorte announced a plan to scale back its P&I business, Walters first thought about leaving Lamorte to start a competing business. Walters approached Nixon and another employee, John Treubig, about starting a competing business with him. Shortly after Walters lost interest in Treubig as a business partner, Walters was told to fire Treubig because of allegations that Treubig had tried to solicit a Lamorte client for his private benefit. Walters and Nixon proceeded with their plan, incorporating the new business as the Walters Nixon Group (WNG) and secretly compiling a target solicitation list consisting of approximately thirty Lamorte clients, all but one or two of the P&I clients. Client data, including names, telephone numbers, and information about claim incidents, was taken from Lamorte's records and transferred to Walters's home computer. By October 1997, Walters and Nixon had signed a three-year lease for office space, purchased office equipment, leased computers and arranged for phone and fax lines. In accordance with their plan, Walters and Nixon cleaned out their offices and faxed their resignations to the private Connecticut office of Lamorte's president on Saturday, December 20, 1997. Their departure left Lamorte without a P&I adjuster in the Clark office. The next morning, Walters and Nixon began to fax solicitation letters and transfer authorization forms to all but one of Lamorte's thirty-four clients. By January 7, 1998, all thirty- three of the solicited clients had moved to WNG. Ultimately, 153 of Lamorte's 350 active P&I claim files were transferred to WNG. Lamorte filed suit against Walters, Nixon, and WNG, charging that Walters had breached the restrictive covenants in the employment agreement, and that both Walters and Nixon had breached their duty of loyalty, tortiously interfered with Lamorte's economic advantage, misappropriated confidential and proprietary information, and competed unfairly. The trial court granted summary judgment in favor of Lamorte on liability on each ground asserted, concluding that the information taken by Walters and Nixon was confidential and that they were not at liberty to take it for their own business purposes. Compensatory and punitive damages were awarded. The Supreme Court granted Lamorte's petition for certification. HELD: By secretly collecting confidential and proprietary client information while employed by Lamorte Burns & Co., Inc. and using the data to solicit and take away Lamorte's clients immediately after resigning, Michael Walters and Nancy Nixon breached their duty of loyalty, tortiously interfered with Lamorte's economic advantage, misappropriated confidential and proprietary information, and competed unfairly. 1. The client information gathered from Lamorte's files by Walters and Nixon was not generally available to the public, would not have been known to defendants but for their employment by Lamorte, went beyond mere client names, and gave defendants an advantage in soliciting clients after they resigned. Walters and Nixon knew Lamorte had an interest in protecting the information. The client information was confidential and proprietary. ( pp.14-20 ) 2. An employee may prepare to start a competing business while employed by the entity he will compete with, but may not breach the undivided duty of loyalty owed the employer while still employed by soliciting the employer's customers or engaging in other acts of secret competition. Walters and Nixon breached the duty of loyalty by collecting protected information while employed by Lamorte for the sole purpose of gaining an advantage over Lamorte as soon as they resigned. ( pp. 20-25 ) 3. Walters and Nixon acted with malice and in a manner contrary to the notion of free and fair competition by using the secretly gathered confidential client data to effect a weekend coup, knowing that the delay in Lamorte's discovery of their resignation and solicitation would work to their economic advantage. ( pp. 25-31 ) Judgment of the Superior Court, Appellate Division, is REVERSED IN PART and the judgment of the Chancery Division sustaining plaintiff's tort claims is REINSTATED. CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO, and ZAZZALI join in JUSTICE LA VECCHIA's opinion. LAMORTE BURNS & CO., INC., a Delaware corporation, Plaintiff-Appellant, v. MICHAEL A. WALTERS, NANCY NIXON and THE WALTERS NIXON GROUP, INC., a New Jersey corporation, Defendants-Respondents. _____________________________ Argued March 12, 2001 -- Decided May 14, 2001 On certification to the Superior Court, Appellate Division. Stephen H. Roth argued the cause for appellant (Mr. Roth, attorney; Mr. Roth and Michele M. DeSantis, on the briefs). Bruce D. Greenberg argued the cause for respondents (Lite DePalma Greenberg & Rivas, attorneys). The opinion of the Court was delivered by LaVECCHIA, J. In this case, we consider whether an employee has incurred liability for activities undertaken to plan and prepare for future employment in a newly created business entity established by the employee to compete directly with his current employer. Plaintiff, Lamorte Burns & Co. (Lamorte), filed suit against two of its former employees, Michael Walters and Nancy Nixon, in connection with their conduct in establishing a competing business. Plaintiff's complaint charged that Walters breached the restrictive covenant clauses of his employment agreement, and that both Walters and Nixon breached their duty of loyalty, tortiously interfered with Lamorte's economic advantage, misappropriated its confidential and proprietary information, and competed unfairly. The trial court granted plaintiff's motion for summary judgment as to liability only. After a hearing, the trial court awarded $232,684 in compensatory damages and an additional $62,816.23 in punitive damages covering counsel fees and costs. In an unpublished opinion, the Appellate Division agreed that Walters had breached his employment contract, but reversed that part of the decision that granted plaintiff summary judgment on its tort claims. The court reasoned that there were disputed facts concerning the confidential and proprietary nature of the information defendants had taken from plaintiff, as well as issues concerning whether defendants' conduct was acceptable competitive behavior or malicious and in violation of the rules of the game of the parties' business. We granted certification, 165 N.J. 605 (2000), and now reverse, in part, and reinstate the trial court's judgment sustaining plaintiff's tort claims. 4. You agree to maintain in confidence all proprietary data and other confidential information (whether concerning the Company, or any of its affiliated companies, or any of their respective clients or cases being handled for clients) obtained or developed by you in the course of your employment with the Company. Such information and data shall include, but not be limited to, all information covering clients and cases being handled for clients. All such information and data is and shall remain the exclusive property of the Company and/or affiliated companies. In addition you assign to the Company all right, title, and interest in and to any and all ideas, inventions, discoveries, trademarks, trade names, copyrights, patents and all other information and data of any kind developed by you during the entire period of your employment with the Company and related to the work performed by you for the Company. You covenant and agree that upon termination of this Agreement for whatever reason, you will immediately return to the Company any and all files, documents, records, books, agreements or other written material belonging to or relating to the Company or its affiliated companies and any of their respective clients, together with all copies thereof in your possession or control . . . . Your obligation under this paragraph shall survive any termination of your employment. 5. Employee agrees that so long as you are an employee of the Company, and for a period of twelve (12) month after your termination, whether voluntary or involuntary, you will not solicit or accept any claim, case or dispute which is being handled or directed by the Company or any of its affiliated companies during the term of your employment with the Company. You agree that you will not solicit or accept any such claim, case or dispute directly in your individual capacity, nor indirectly as a partner of a partnership, and as an employee of any other entity nor as an officer, director, or stockholder of a corporation, a joint venturer, a principal or in any other capacity. You further agree not to solicit or induce any employee of the Company or any of its affiliated companies to leave its employ, nor to hire or attempt to hire any such employee . . . . Walters signed the contract, but he never believed it was enforceable against him. He reasoned that because he was an at-will employee, the employment contract lacked consideration for its restrictive covenant clauses. Also, the agreement was never signed by Lamorte. A Florida attorney privately corroborated his view. Walters never expressed his beliefs to anyone at Lamorte, however, out of fear that he would be fired. In the Spring of 1996, Walters quietly began entertaining the idea of resigning and starting a competing business. By that time, Halpin had informed defendants that Lamorte would be de-emphasizing P & I work and increasing the workers' compensation area of the practice. For Walters, that constituted the impetus for his decision to start a competing business. Also about that time, two other employees departed the P & I department because there was not enough work to support the staff. Walters spoke only with co-employees Nixon and John Treubig about his idea of starting a competing business. Walters showed Nixon some financial estimates he had developed, suggesting that she would improve her position if she were to join in his enterprise. Eventually, Walters lost interest in Treubig. Soon after, Halpin directed Walters to fire Treubig based on allegations that Treubig had tried to solicit a Lamorte client for his private benefit. In September 1996, Halpin confronted defendants concerning rumors that they were thinking of leaving to start a competing business. They reassured Halpin the rumors were untrue. Walters testified that he feared he would be fired if Halpin knew the truth. The truth was that Walters and Nixon were well on their way to establishing a competing business. By October 1997, they signed a three-year lease to commence December 1, 1997 for office space in Cranford, New Jersey. As December approached, they purchased office equipment, leased computers, and obtained telephone and fax lines for the new WNG office. They agreed that they would resign on the weekend of December 20-21, 1997, a date selected so that each would be eligible to collect Christmas bonuses from Lamorte. They planned that over the same weekend they would send to Lamorte's clients solicitation letters and forms directing the transfer of claim files. Just prior to resigning, Walters was asked by Halpin to sign a new and more restrictive employment agreement. The proposed agreement included a clause prohibiting him from working for any of plaintiff's customers for a full year, no longer just prohibiting him from working on claim files with which he was actively involved at Lamorte. Nixon also was asked to sign a corresponding employment agreement. Defendants avoided signing those agreements before their resignations. On Thursday and Friday, December 18 and 19, 1997, Walters called in sick. In fact, Walters was at WNG's office installing computers, setting up furniture, and preparing to activate the business solicitation plan over the coming weekend. Telephone records showed that on December 19, 1997, calls were placed to several of Lamorte's clients from WNG's office. Walters, however, denies that during those conversations he informed Lamorte's clients that he was about to resign and denies that he attempted to solicit any of them. At 9 a.m. on Saturday, December 20, Walters and Nixon telephoned Lamorte's Clark office and received no answer. They then drove to that empty office and spent two or three hours putting away files and removing their personal belongings. At 2:56 p.m., Walters and Nixon faxed their respective resignation letters to Halpin's private office in Wilton, Connecticut. Because they thought that Halpin often worked Saturdays, they believed there was a possibility that the letters would be received that day. They also knew that once they resigned, Lamorte would be without a P & I claims adjuster in its Clark office. On Sunday morning, December 21, Walters and Nixon began to fax solicitation letters and transfer authorization forms to all but one of Lamorte's P & I clients, thirty-three in all. On that first day, defendants exclusively targeted Lamorte's clients from whose files they had taken the client information noted earlier. A typical letter notified the client that defendants, who had been handling that client's claim file, had resigned from Lamorte and started a new business. It stated Our fee structure will be less than Lamorte Burns' fee structure for 1998. The client was told that it had absolute discretion in deciding whether to continue with Lamorte or to have its claim files in progress transferred to WNG or to any other firm. The letter was accompanied by a transfer request form. The form included a list of open files we have been handling for you. (emphasis added). In addition to the client's file number, the transfer form included the client's name, the name of the injured person, and the accident date. The client was instructed simply to mark an X next to each listed file that it wished to have transferred from Lamorte to WNG. By Monday, December 22, 1997, ten of Lamorte's clients returned to WNG signed transfer authorization forms instructing Lamorte to transfer their active P & I claims to WNG. By January 7, 1998, all forms were returned and all thirty-three of Lamorte's P & I clients requested transfer of their active claim files to WNG, totaling a transfer of 116 individual Lamorte P & I claims. By the time the summary judgment motion was heard, 153 of Lamorte's 350 active P & I claim files had been transferred to WNG. According to Walters, the clients that had requested a transfer included clients he had brought into Lamorte, as well as clients that had been existing Lamorte clients when he arrived at the company. Walters conceded that [he] had people faxing from up and down the Eastern Seaboard and from overseas within an hour or less of getting his sudden announcement. Customers were sending their congratulations. The court noted that Walters admitted that the information gave him an advantage in soliciting the clients, that Halpin would not have authorized him to give the information to a competitor, and that he himself would fire any of his employees for divulging such information to a competitor. The court's conclusion that the information was confidential and proprietary led to its decision that defendants' use of it amounted to a breach of the duty of loyalty and tortious interference with plaintiff's economic advantage. Specifically, the court found that there was a deliberate plan on the part of defendants to cause damage to plaintiff through the diversion of its customers, through stealth and deceit, at a time when defendants caused plaintiff to be most vulnerable, by soliciting plaintiff's customers over the weekend, while plaintiff had no idea that defendants had resigned until, at the very earliest, the following Monday morning . . . In furtherance of that plan, defendants then systematically and admittedly took detailed information known only to plaintiff's company, which this court has deemed proprietary for such purposes. On appeal, the Appellate Division determined that there were material facts in dispute and reversed. The court emphasized the fact-sensitive nature of evaluating whether an employee's conduct in planning and preparing for future employment constitutes a breach of the duty of loyalty and whether the client claim information taken by defendant from Lamorte was confidential and proprietary. The Appellate Division's conclusion was founded on defendants' assertions that they were never told that the information was confidential and proprietary, and that although the information was not generally available, it could have been obtained simply by sending out letters of solicitation to all of Lamorte's clients asking permission to have all files transferred, not just those files defendants were working on. The Appellate Division panel thus concluded that a more fully developed record was needed to determine whether the information was proprietary, whether their manual copying of the customer account information while still employed was a violation of their duty or 'mere preparation,' and whether the manner in which they resigned and immediately undertook to solicit their employer's customers was impermissible competition in our current economic environment of 'free enterprise.' NO. A-26 LAMORTE BURNS & CO., INC., a Delaware corporation, Plaintiff-Appellant, v. MICHAEL A. WALTERS, NANCY NIXON and THE WALTERS NIXON GROUP, INC., a New Jersey corporation, Defendants-Respondents. DECIDED May 14, 2001 Chief Justice Poritz