Opinion ID: 173907
Heading Depth: 1
Heading Rank: 9

Heading: Improper Solicitation of Clients After Voluntary Sale of Good Will Under New York Law

Text: The Mohawk doctrine, derived from the New York Court of Appeals decisions in Von Bremen v. MacMonnies, 200 N.Y. 41, 93 N.E. 186 (1910) and Mohawk Maint. Co. v. Kessler, 52 N.Y.2d 276, 419 N.E.2d 324, 437 N.Y.S.2d 646 (1981), recognizes as part of the common law of New York a so-called `implied covenant' [by a seller] to refrain from soliciting former customers following the sale of the `good will' of a business, Mohawk, 52 N.Y.2d at 284, 419 N.E.2d at 328, 437 N.Y.S.2d at 650. This `implied covenant' . . . precludes [the seller] from approaching his former customers and attempting to regain their patronage after he has purported to transfer their `good will' to his purchaser. Id.; see also Von Bremen, 200 N.Y. at 52, 93 N.E. at 190 (finding that a voluntary assignor of the good will of a business may not solicit trade from [his] old customers). The basis for the rule was described by reference to English common law in Von Bremen: A man may not derogate from his own grant; the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant, on the sale of good will, that the vendor does not solicit the custom which he has parted with; it would be a fraud on the contract to do so. . . . It is not right to profess and to purport to sell that which you do not mean the purchaser to have; it is not an honest thing to pocket the price and then to recapture the subject of sale; to decoy it away or call it back before the purchaser has had time to attach it to himself and make it his very own. Von Bremen, 200 N.Y. at 50-51, 93 N.E. at 189 (quoting Lord MacNaghten's opinion in Trego v. Hunt, (1896) 21 App. Cas. 7). [T]he right acquired by the purchaser of the `good will' of a business by virtue of this `implied covenant' [is] a permanent one [and] is not subject to divestiture upon the passage of a reasonable period of time, since there is a continuing duty upon the seller imposed by law in order to prevent the seller from taking back that which he has purported to sell. Mohawk, 52 N.Y.2d at 284-85, 419 N.E.2d at 329, 437 N.Y.S.2d at 651; accord Borne Chem. Co., Inc. v. Dictrow, 85 A.D.2d 646, 650, 445 N.Y.S.2d 406, 413 (2d Dep't 1981) (A cause of action for wrongful diversion of good will previously sold to a plaintiff by a defendant sounds in breach of an implied covenant of the contract of sale that the seller will permanently refrain from soliciting his prior customers.). When the intangible asset of good will is sold along with the tangible assets of a business, the purchaser acquires the right to expect that the firm's established customers will continue to patronize the business. The essence of the transaction [of the sale of good will] 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. Mohawk, 52 N.Y.2d at 285, 419 N.E.2d at 329, 437 N.Y.S.2d at 651 (internal citations omitted). This duty of the seller not to solicit customers does not, however, include an obligation not to accept such of his former customers as may choose to follow him to his new employment. See id., 52 N.Y.2d at 287, 419 N.E.2d at 330, 437 N.Y.S.2d at 652 (recognizing that the seller may accept the patronage of those customers who were actively dealing with [the purchased company] on the date of the sale if such customers choose to leave [the purchased company] without prompting from [the seller]). The New York Court of Appeals has drawn an important distinction between the duty to refrain from soliciting customers on the one hand, which arises by operation of law upon the sale of good will, and the separate duty to refrain from competing with the purchaser, which may only arise out of an express agreement. Id., 52 N.Y.2d at 283, 419 N.E.2d at 328, 437 N.Y.S.2d at 650. [2] When a business is sold, the purchaser acquires no legal right to expect that the seller will refrain from engaging in a competing enterprise. Id. Rather, the seller remains free to pursue his own economic interests without restraint unless the purchaser has managed to extract from him an express promise to refrain from competing. Id. This includes the right to contract with the seller's former customers, provided that there is no improper solicitation, and, [i]ndeed, 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., 52 N.Y.2d at 285, 419 N.E.2d at 329, 437 N.Y.S.2d at 651. So long as the client's decision to follow the seller did not come about through improper solicitation, the implied covenant is not violated and the lost account should not be considered in ascertaining plaintiffs' damages. Hyde Park Prods. Corp. v. Maximilian Lerner Corp., 65 N.Y.2d 316, 322, 480 N.E.2d 1084, 1088, 491 N.Y.S.2d 302, 306 (1985). The difficulty lies, of course, in determining what actions constitute improper solicitation, an issue upon which New York courts offer somewhat limited guidance. In the case before us, Branin argues that he did not solicit any clients because he was simply responding to their inquiries. [3] Bessemer counters that even if a former customer made the initial contact, Branin was prohibited from taking any action that would tend in any way to exploit a client's established loyalties or to prompt or encourage the client to leave Bessemer, Appellee's Br. at 27-28, and that Branin could accept former clients' business only if they left Bessemer and joined him at Stein Roe `without prompting' or `any act' from Branin, id. at 28. The district court took a middle path, concluding that Bessemer had established that Branin's solicitation was improper as to the Palmer account, but that there was insufficient evidence to demonstrate solicitation of any other account, including the Glen Raven account, with whose representative Branin also met in person while at Stein Roe. [4] Bessemer I, 427 F.Supp.2d. at 395-98. We find no clear error in the district court's finding of fact that Branin intended to take his clients with him from Bessemer to Stein Roe. Id. at 393. Branin himself stated that he `had learned . . . the right way to transition clients from Bessemer to another firm.' Id. (quoting Trial Tr. at 597, 599-600). He expressed his desire to transfer $1.5 to $1.8 million in revenue from Bessemer to Stein Roe. Id. Once at Stein Roe, as noted above, Branin took actions both to help Stein Roe solicit his clients and to frustrate Bessemer's ability to retain them. Most prominently, he called a meeting for the express purpose of devising a strategy to solicit the Palmer family business, requested a new schedule of fees for his former clients so as to entice them to move, held in-depth discussions with employees at Stein Roe in which he described his clients at Bessemer and what would motivate them to move their business to Stein Roe, and participated in both phone and in-person meetings with his former clients during which he discussed his reasons for moving from Bessemer to Stein Roe. Branin's principal assistant at Bessemer, whose intimate knowledge of Branin's clients would likely have been of significant benefit to Bessemer in its effort to retain Branin's accountsa fact of which Branin testified he was aware, was hired by Stein Roe despite receiving thoroughly negative reviews during her interviews and without having submitted any references or recommendations, because the president of Stein Roe believed that she could help [Branin] transition as much of his client base to [Stein Roe] as possible. Id. at 394 (quotation marks and citation omitted, alteration in original). Indeed, this was part of the reason that Branin initially suggested that Stein Roe hire her, and her hiring was important enough to Branin that he offered to pay a portion of her salary at Stein Roe out of his own pocket. The district court's not-clearly-erroneous finding was that Branin's input helped Stein Roe's presenters [to] steer[] clear of topics in which Palmer had little interest and focus[] only on those things that were of interest to him. Bessemer I, 427 F.Supp.2d at 396. And Carleton Palmer, the family representative, testified that Branin occasionally amplif[ied] a point if he knew it was something I would be interested in from his relationship with me. Trial Tr. at 776. Branin then traveled to Ohio for a second meeting with Palmer, in which he presented the Palmer family with a proposed fee schedule and promised the CEO of Stein Roe as the number two on the account. Id. at 786-87. None of this behavior by Branin requires a conclusion under New York law as we understand it, however, that Branin solicited Palmer as a client. As the district court correctly noted, other than Palmer and Glen Raven, Bessemer has offered no proof about which clients spoke to Branin before they transferred their accounts, heard Branin's standard response, were familiar with Fuhrmann, or knew that their fees would be the same at Stein Roe. Bessemer I, 427 F.Supp.2d at 395. Even had all of the clients at issue [been] party to these actions by defendant, no evidence has been presented to show that these clients would not have joined Branin absent these inducements. Id. And inasmuch as the Palmer family transferred their account only after Stein Roe was able to demonstrate, in a meeting in which Branin took part, that the firm would be a superior investment manager in light of the family's investment needs, we think it relevant that New York law permits several steps Bessemer might have pursued to protect itself in this regard, including non-competition and non-solicitation agreements that could have been, but were not, entered into with the Brundage principals at the time of the sale of the firm to Bessemer. The district court implicitly recognized what we think to be so: The fact that Branin participated in the meetings relating to the departure of the Palmer family to Stein Roe does not necessarily demonstrate that he was engaged in improper solicitation because, as was the case with the Glen Raven account with respect to which Branin also held an in person meeting while at Stein Roe, there is no conclusive proof or finding of a causative link between what Branin did and the family's decision to change investment advisors. See id. (finding, despite the fact that Branin had participated in a meeting with Glen Raven discussing the moving of the account to Stein Roe, that there was no solicitation because Glen Raven was intent on following Branin regardless of any action or inaction on his part and therefore nothing Branin did caused the transfer of the Glen Raven account). Under the circumstances, the Palmer family may well have followed in any event. The district court found that, [t]aking all these actions together, it had no doubt that Branin stepped over the line and improperly induced the Palmers to leave Bessemer and join Stein Roe. Id. at 396. We recognize that these actions are far from passive acceptance of a client's inquiries, but we lack the clarity of conviction of the district court on this point. [5] The district court found the question of initiation irrelevant to its analysis. See id. at 396 n. 10 (finding that  Von Bremen and Mohawk Maintenance Co. place no significance on who initiates the communications between the seller of good will and his now-former clients). In the court's view, Von Bremen 's broader concern was that it would be bad faith for the seller to avail himself as against the [buyer] of any special knowledge or advantage derived by him from the business whose good will he has voluntarily sold. Id. at 396 (quoting Von Bremen, 200 N.Y. at 52, 93 N.E. at 190) (quotation marks and emphasis omitted). We read the New York case law differently. Inasmuch as Von Bremen relied on bad faith, the reliance on bad faith was not relevant to the solicitation analysis, but was instead part of a separate discussion of the basis for the distinction between voluntary and involuntary sales of good will and for applying the implied covenant in the former case to the exclusion of the latter. See Von Bremen, 200 N.Y. at 51-52, 93 N.E. at 190. And, contrary to the district court's suggestion that initiation is of no special significance, the identity of the initiator has been treated as both relevant and important for courts that have applied the implied covenant. They have characterized the forbidden action with words signifying direct initiation of communication, such as solicit, Von Bremen, 200 N.Y. at 48, 93 N.E. at 188; Mohawk, 52 N.Y.2d at 286, 419 N.E.2d at 329, 437 N.Y.S.2d at 651, approach[], Mohawk, 52 N.Y.2d at 284, 419 N.E.2d at 328, 437 N.Y.S.2d at 650; Slomin's, Inc. v. Gray, 176 A.D.2d 934, 936, 575 N.Y.S.2d 545, 547 (2d Dep't 1991); Kraft Agency, Inc. v. Delmonico, 110 A.D.2d 177, 181, 494 N.Y.S.2d 77, 80 (4th Dep't 1985), apply, Von Bremen, 200 N.Y. at 48, 93 N.E. at 188, specifically and directly appeal[], id., 200 N.Y. at 50, 93 N.E. at 188, and drum up or circularize, In re Brown, 242 N.Y. 1, 10, 150 N.E. 581 (1926) (Cardozo, J.). In Von Bremen itself, the Court of Appeals recognized that a previous attempt to divorce solicitation from initiation that had been made by Lord Jessel in Leggott v. Barrett, (1880) 15 Ch.D. 306 had been rejected by the higher court. Von Bremen, 200 N.Y. at 48, 93 N.E. at 188. The language of Mohawk is perhaps the most suggestive of the importance of initiation in the application of the implied covenant, since the court described the implied covenant as restrict[ing] the economic freedom of the seller only insofar as it precludes him from approaching his former customers and attempting to regain their patronage after he has purported to transfer their `good will' to his purchaser. Mohawk, 52 N.Y.2d at 284, 419 N.E.2d at 328, 437 N.Y.S.2d at 650 (emphasis added). And in the case before us, it is entirely clear that the Palmer family, not Branin, initiated the contacts that led to the transfer of its account to Stein Roe. We might make the assessments as to whether Branin's efforts in following up on the Palmer family's initiation of contacts constituted improper solicitation. Or, insofar as factual questions as to initiation and causation are involved, we might return the case to the district court, asking it for a more specific examination of those issues. But we find it difficult for either us or a district court to make that determination in the absence of further explication as to the law of the State of New York as to improper solicitation under these circumstances. Especially in light of the importance of New York, and New York law, in the financial services industry, we think, and the New York Court of Appeals may agree, that it is that court which should make this determination in the first instance. Generalizing, we seek instruction as to whether two sets of actions, taken together, amount to improper solicitation under the law of the Mohawk doctrine: (1) the active development and participation by the seller, in response to inquiries from a former client whose good will the seller has voluntarily sold to a third party, of a plan whereby others at the seller's new company solicit a client, and (2) participation by the seller in solicitation meetings where the seller's role is largely passive.
Following a two-day trial on damages, the district court rejected Bessemer's lost profits theory of damages and accepted Branin's return of capital theory, concluding that Branin was liable to Bessemer on the breach of contract claim in the amount of $1,229,173: $826,335 damages and $402,838 prejudgment interest. Bessemer III, 544 F.Supp.2d at 393. Both parties challenge this finding. Branin argues that there should be no damage award because Bessemer did not prove a causal link between the breach and Bessemer's injury. Bessemer argues that the district court erred in accepting Branin's return of capital theory rather than its own lost profits theory. Since we are certifying the threshold question of whether Branin is liable to Bessemer for improper solicitation, we need not reach the question of how Bessemer's damages should be calculated, and thus reserve judgment on that issue. However, we do consider Branin's argument that, even if he breached the contract, the breach was harmless, because such a finding would obviate the need to determine liability. Branin bases this argument upon the district court's observation that it was really hav[ing] difficulty believing that [Palmer] was going to stay with [Bessemer] given what he thought of [its] people. . . . Even assuming that he was not going to go over to Branin, he was not going to stay with Bessemer. Trial Tr. at 1060, quoted in Appellant's Br. at 17 n. 5. We find this argument unpersuasive because it overlooks the fact that the district court made at least two explicit findings on the issue. See Bessemer III, 544 F.Supp.2d at 389 n. 8 (finding that defendant's conduct played a role, but not the sole role in Palmer leaving Bessemer); Bessemer I, 427 F.Supp.2d at 396 (finding that Bessemer has carried th[e] burden to prove that Branin's improper actions caused Palmer to move his account from Bessemer to Stein Roe). As Branin has demonstrated no clear error in these findings of fact, we reject his argument that Bessemer has failed to prove that, provided Branin is liable, damages would be greater than zero. We reserve decision on the correct method for the calculation of damages until we receive further guidance from the New York Court of Appeals on liability, and, if it wishes, on damages, should the court choose to accept the question that we certify.
Branin asserted four counterclaims in the district court: breach of contract with respect to his position at Bessemer, breach of contract as to his bonus, quantum meruit, and promissory estoppel based on the sale of the business and his offer of employment by Bessemer. On appeal, Branin alleges error only with respect to the district court's grant of summary judgment on his breach of contract claims. The quantum meruit and promissory estoppel arguments are therefore waived. See Norton v. Sam's Club, 145 F.3d 114, 117 (2d Cir.1998). And we find no error in the district court's rejection of Branin's remaining breach of contract claims.
Exhibit D to the Purchase Agreement sets out the criteria by which Branin's cash bonus was to be determined. Specifically, that exhibit provides that while Branin is eligible for participation in the Incentive Cash Bonus Plan[, t]he amount of the bonus is at the discretion of the Salary Committee, and at this time has a range of 0% to 250% of base pay. Purchase Agreement, Ex. D, at 1. Branin alleges that at the end of 2001, the other former Brundage principals received bonuses amounting to between ninety-two and more than one-hundred percent of the maximum bonuses provided for in Exhibit D to the Purchase Agreement. He asserts that he received instead only twenty percent of his potential bonus (slightly more than fifty percent of his base salary). He alleges that this constitutes a breach of Exhibit D. The district court rejected this claim on the ground that the same agreement expressly allows for a discretionary bonus range between 0% and 250% of his salary, Bessemer II, 498 F.Supp.2d at 638, and Branin's bonus, at more than fifty percent of his salary, was within this range, id. Branin concedes that under New York law the insertion of the word discretion into a bonus arrangement signals the end to any possible challenge to a bonus determination, Appellant's Br. at 60, but argues that the allowance for discretion does not settle the matter here. He asserts that the Purchase Agreement included a detailed written bonus plan incorporating explicit objective criteria and procedures. Id. Branin provides no persuasive authority to support his theory. In Valentine v. Carlisle Leasing Int'l Co., No. 97 Civ. 1406, 1998 WL 690877, 1998 U.S. Dist. LEXIS 15581 (N.D.N.Y. Sept. 30, 1998), on which Branin relies as support for his argument, the court reached precisely the opposite result from that which Branin seeks here. The court considered an offer letter that clearly stated that the employer would retain absolute discretion to determine both whether [the plaintiff] would receive a bonus and, if so, how much he would receive. Id., 1998 WL 690877, at , 1998 U.S. Dist. LEXIS 15581, at . In light of this explicitly conferred discretion, the court held that the plaintiff had no right to have the bonus terms enforced. Id. To be sure, in reaching this conclusion, the Valentine court noted in dicta that the employee's letter conferring employment indicated only generally that [the employee's] entitlement to a bonus would depend on his performance and that of the company but did not set forth objective criteria on which [the employer] would base its decision. Id. Branin attempts to seize on this language in Valentine to argue that where, as here, objective criteria are present, the failure to provide a bonus that meets those criteria is actionable despite the fact that discretion to provide a bonus was explicitly reserved by the employer. But, Valentine does not stand for the proposition offered. The dicta relied on by Branin did nothing more than explain the many ways in which the employer reserved discretion for itself. Exhibit D to the Purchase Agreement that Branin seeks to enforce here expressly states that its terms do not and are not intended to create either an expressed or implied employment contract. Purchase Agreement, Ex. D at 2. Exhibit D expressly states that any bonus to be awarded is at the discretion of the Salary Committee. Id. We find no error in the district court's reading of these clauses as dispositive of Branin's claim: They reserve to the Salary Committee the decision to award or not to award a bonus, and in what amount.
The Purchase Agreement required that Branin be given a position at Bessemer generally comparable to his former position at Brundage. Purchase Agreement, § 7.01(vii). The parties agreed upon what that position would be, the title of Managing Director, the base salary and bonus range, the terms of vacation time, and the form and scope of other benefits. Branin does not dispute that he received all that was agreed upon in this respect. Branin nonetheless continued to argue to the district court, and continues to argue here, that he suffered diminished responsibilities, exclusion from meetings, and effective demotion throughout his time at Bessemer. Bessemer II, 498 F.Supp.2d at 635. Because of these alleged diminished responsibilities, Branin maintains that questions of fact exist as to whether there was a material diminution in Mr. Branin's duties and responsibilities subsequent to the closing. Appellant's Br. at 63. The district court rejected this argument, concluding that even had Branin suffered the demotion and other grievances he alleges, Bessemer would not have breached any term of the Purchase Agreement or offer letter by doing so. Bessemer II, 498 F.Supp.2d at 635-36. We agree. Branin characterizes the Purchase Agreement's requirement that he be provided with a role that was generally comparable to the role he had at Brundage as a commitment that so long as Mr. Branin remained in Bessemer's employ, he would function in a comparable position with commensurate authority. Appellant's Br. at 64. But that is not what the contract says. Rather, the contract provides as a condition precedent to closing that the Brundage principals, Branin among them, accept in writing the terms of employment offered by Bessemer for a generally comparable position prior to the closing date. There is no allegation that this condition was not fulfilled. And Branin seems to concede as much in his admission that his employment at Bessemer was not subject to a definite duration. Id. Branin was thus essentially an at-will employee whose duties were subject to change or termination based on the needs and desires of his employer. Cf., e.g., Finley v. Giacobbe, 79 F.3d 1285, 1294-95 (2d Cir.1996) (noting that, with limited exceptions not relevant here, under New York law, an employee serving purely at will, by definition, has no contractual right to avoid dismissal). If he could be dismissed at will by Bessemer, it seems to us, the lesser action of changing his role at the firm, subject of course to his choosing to depart at his option instead, was permissible too.
Under the rules of this Circuit, [i]f state law permits, the court may certify a question of state law to that state's highest court. 2d Cir. R. 27.2(a); see also Prats v. Port Auth. of N.Y. & N.J., 315 F.3d 146, 150-51 (2d Cir.2002). Certification is within the discretion of this Court. See McCarthy v. Olin Corp., 119 F.3d 148, 153 (2d Cir.1997). In the past, we have recognized several factors that guide our decision of whether to certify a question to the New York Court of Appeals. First, and most important, we have recognized that certification may be appropriate if the New York Court of Appeals has not squarely addressed an issue and other decisions by New York courts are insufficient to predict how the Court of Appeals would resolve it. See Kuhne v. Cohen & Slamowitz, LLP, 579 F.3d 189, 198 (2d Cir.2009); O'Mara v. Town of Wappinger, 485 F.3d 693, 698 (2d Cir.2007). We find insufficient guidance in past New York cases regarding the application of the Mohawk doctrine to determine how it would be applied to the facts of this case. And, as we have noted, we think that because of the prominence of the financial services industry in the State of New York, clarification of New York law on the issues presented in this case would be of significant public interest. Second, certification may be appropriate where resolution of an issue involves value judgments and public policy choices that the New York Court of Appeals is best situated to make. See Colavito v. N.Y. Organ Donor Network, Inc., 438 F.3d 214, 229 (2d Cir.2006); Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA, Inc., 344 F.3d 211, 221 (2d Cir.2003). We think that the New York Court of Appeals is better positioned to determined the scope of permissible solicitation under New York law of former clients by voluntary sellers of those clients' good will. Finally, we have found certification appropriate where the question certified will determine the outcome of the case. See O'Mara, 485 F.3d at 698 (analyzing earlier version of the Second Circuit local rule governing certification). Here, resolution of the question of the scope of the Mohawk doctrine will determine our resolution of the question of liability and therefore control the outcome of this appeal of the district court's decision. Because each of these factors suggests that certification is appropriate, we hereby certify the question restated below.