Court Opinion

ID: 9469422
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:40:05.967614+00
Date Added: 2024-06-11T17:41:22.766755
License: Public Domain

*393MANSFIELD, Circuit Judge
(dissenting):
I respectfully dissent. The majority proceeds on the erroneous assumption that the restrictive covenant here must be treated the same as one of adhesion that might be extracted by a powerful employer from an employee, which will not be enforced by New York courts when it prevents the employee from earning his livelihood elsewhere. But no such circumstances are present here. The present covenant was agreed to after arm’s-length bargaining between a trade association (AIChE) and a well-established independent corporate management organization (Reber) that will continue, as it has in the past, to derive the great majority of its profits from wholly unrelated clients. Moreover, enforcement of the covenant would not reduce competition but increase it by giving AIChE, which has never engaged in the trade show business except through Reber as its agent, a reasonable “starting time” period needed to enter the business on its own and compete against others in the petrochemical trade show business.
Therefore the reasoning which underlies New York’s refusal to enforce such covenants in certain types of employer-employee cases has no application here. In any event Reber’s refusal for a long period to turn over records belonging to AIChE was a clear breach of fiduciary duty, whether or not Reber be treated as an employee or corporate business organization, and the district court erred in dismissing the action summarily without trial of the factual issue of whether the damage caused by that breach was substantial. To permit Reber in the meantime to capitalize on its violation of the covenant and its breach of fiduciary duty by putting on its own petrochemical trade shows would clearly deal AIChE a blow, described by the district court as “moderate to devastating,” which cannot adequately be compensated by money damages and threatens irreparable injury. For these reasons I would reverse the district court’s orders and grant relief enforcing the covenant.
New York courts are quite willing to enforce covenants not to compete when, as here, an employer-employee relationship is not involved. In Mohawk Maintenance Co., Inc. v. Kessler, 52 N.Y.2d 276, 437 N.Y.S.2d 646, 419 N.E.2d 324 (1981), the court noted that
“the inflexible approach of the judiciary to such agreements was relaxed to some extent as the courts came to realize that a blanket prohibition against agreements purporting to restrain trade was contrary to the equally strong public policy in favor of allowing individuals to dispose of their property freely and to enter into binding contracts.
“Indeed, the modern trend in the case law seems to be in favor of according such covenants full effect when they are not unduly burdensome, particularly in cases where the agreement in question is made in connection with the sale of a business and its accompanying ‘good will.’” Id. at 283-84, 437 N.Y.S.2d at 650, 419 N.E.2d at 328.
New York enforces covenants not to compete when entered into in conjunction with the sale of a business, Mohawk Maintenance Co., Inc., supra, or when they involve a professional such as a physician, Gelder Medical Group v. Webber, 41 N.Y.2d 680, 683, 394 N.Y.S.2d 867, 870, 363 N.E.2d 573, 576 (1977); Karpinski v. Ingrasci, 28 N.Y.2d 45, 49-50, 320 N.Y.S.2d 1, 4-5, 268 N.E.2d 751, 753-54 (1971).
Even when restrictive covenants are viewed in the employer-employee contexts New York holds that
“no hard-and-fast rules have yet been formulated and courts have been continuously engaged in the ongoing task of determining what restrictions are reasonable given the peculiar circumstances and context of each individual ease.” Sprin-zen v. Nomberg, 46 N.Y.2d 623, 628, 415 N.Y.S.2d 974, 976, 389 N.E.2d 456, 458 (1979).
Accord Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307, 386 N.Y.S.2d 677, 679, 353 N.E.2d 590, 592-93 (1976). *394Given the foregoing it is inappropriate for us to ignore the peculiar circumstances of this case and treat it as if it involved an employee’s loss of his livelihood.1 The reasons underlying New York’s disapproval of employer-employee restrictive covenants are not present here.
The primary reason relied upon by the New York courts for limiting restrictive covenants in the employer-employee context is that “there are ‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood.’ ” Columbia Ribbon & Carbon Manufacturing Co., Inc. v. A-1-A Corp., 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004, 1006, 369 N.E.2d 4, 6 (1977). Clearly this factor is not present here. Reber is a business organization, not a single individual. Moreover, Reber has not shown that its corporate livelihood is at stake. Without producing any records it claims that it has earned about 30% of its profits on AIChE shows. The temporary loss by a firm of 30% of its profits, which might well be recouped by aggressively seeking new business in areas outside the petrochemical market (70% of its business has apparently been non-petrochemical), is much less serious than a salesman’s loss of his livelihood when he is prevented from selling the one product with which he is familiar. Indeed, since two-thirds of the revenues which Reber derived from AIChE shows were from services sold directly to exhibitors, the 30% figure over-estimates the loss to Reber.
Even in the employer-employee context New York courts have enforced covenants not to compete when the covenants preclude the former employee from carrying on only a portion of his trade. In Re Riccardi, 45 A.D.2d 191, 197, 356 N.Y.S.2d 872, 879 (1st Dept. 1974) (employee prohibited from soliciting or servicing those who were customers of employer during period of agreement), aff’d, 36 N.Y.2d 945, 373 N.Y. S.2d 551, 335 N.E.2d 856 (1975); Bates Chevrolet Corp. v. Haven Chevrolet, Inc., 13 A.D.2d 27, 30, 213 N.Y.S.2d 577, 581 (1st Dept. 1961) (same), aff’d, 13 N.Y.2d 644, 240 N.Y.S.2d 759, 191 N.E.2d 290 (1963); Cole Steel Equipment Co., Inc. v. Art-Lloyd Metal Products Corp., 1 A.D.2d 148, 150, 148 N.Y.S.2d 440, 441-42 (1st Dept. 1956) (per curiam) (covenant limited to the sale of two items out of the many defendant sold was enforced), appeal dismissed, 2 N.Y.2d 836, 159 N.Y.S.2d 973, 140 N.E.2d 869 (1957). Thus this covenant would be enforced by New York even if Reber were an employee rather than a company, since it remains free to manage trade shows on subjects other than petrochemicals as it has in the past.
New York courts have also given as a reason for disfavoring restrictive covenants in employment contracts that “robust and uninhibited competition should not give way merely because a particular employer wishes to insulate himself from competition.” American Broadcasting Co., Inc. v. Wolf, 52 N.Y.2d 394, 404, 438 N.Y.S.2d 482, 487, 420 N.E.2d 363, 368 (1981). Here, however, robust competition is not threatened by enforcement of the covenant but, on the contrary, would probably be enhanced. AIChE, unlike the typical employer, was not itself in the market of putting on exhibitions except through Reber, upon which it relied totally. Thus this is not a case in which an aggressive employee is challenging his former established employer, with the latter attempting to avoid competition by hiding behind a restrictive covenant. This is a case in which a trade association has decided to enter the market for the first time in competition against others. Competition will be enhanced, not stifled, if parties like AIChE know that, should they decide to enter a market themselves, they can rely upon a covenant with their management company which will give them a reasonable period (3 years) to get established in the exhibition business by preventing that company (already established in the market) from using its past close relationship with them to undercut their entry. *395If such a covenant is not to be enforced a party like AIChE will be less likely to enter as a new competitor in the market-place.
Enforcement of the covenant not to compete here would have no anticompetitive effect in the exposition market, where there are many other participants. Failure to enforce it, however, could cripple AIChE’s attempt to enter that market because Re-ber, through operation of a business owned by AIChE, has over the last 20 years built up contacts, good will, and knowledge of customer needs and habits that give it a distinct competitive advantage over AIChE. This is evidenced by Reber’s footdragging in turning over essential customer data to AIChE until after AIChE had threatened to turn the matter over to legal counsel. (Even then Reber stalled, not turning over some documents until the day this action was filed.) If, as the majority argues, this information was all so public and available, why did Reber refuse for so long to turn it over and then initially turn over only exhibitors’ names and addresses but carefully delete each telephone number? The answer lies in common knowledge that particularized knowledge, just like legal research, often takes a long time and considerable effort to assemble, even when it is publicly available in a library. Indeed Reber has undoubtedly pointed to this work as part of its valuable services rendered to AIChE in the past, for which it was paid. By withholding this information Reber was able to delay AIChE’s competitive entry while Re-ber improperly used the same information for its own private purposes.
A final policy consideration that undoubtedly leads New York courts to disfavor restrictive covenants in the employer-employee context is that employees rarely have the same degree of bargaining power that their employers have. This factor is not present here; Reber and AIChE appear on this record to have equal bargaining power. The covenant was agreed to after arm’s-length bargaining; it is not the product of overreaching by a powerful employer.
In the face of these clear distinguishing factors the majority offers no sound reasons of New York law supporting its treatment of this action as an employer-employee case. Like the district court it relies upon Lynch v. Bailey, 275 A.D. 527, 530-32, 90 N.Y.S.2d 359, 362-63 (1st Dept.), aff’d, 300 N.Y. 615, 90 N.E.2d 484 (1949), and Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d 658, 666 (2d Cir. 1974). But neither case supports the majority’s holding. Lynch involved an attempt by an accounting firm to prevent a former partner from practicing that profession. Unlike Reber, the accountant in Lynch was completely prevented from practicing his profession. Furthermore, in Lynch the restrained party was a single individual, not a company. Thus Lynch can hardly support the majority’s conclusion that companies or business organizations should be treated as if they were employees. Nor is Capital Temporaries, Inc. of any help. That case merely noted that the enforceability of a restrictive covenant in a franchisor-franchisee case is a matter of state law, not federal antitrust law. 506 F.2d at 666. In light of the legally significant differences between this case and employer-employee cases relied on by the majority, I see no reason to treat this case as an employer-employee case.
The district court rested its decision heavily upon what it conceived to be the excessive “world-wide” scope of the restrictive covenant in the present case, which contains no geographic bounds. Not having the benefit of recent New York law on the subject, it mistakenly concluded that New York law precluded it from limiting the geographic scope of the covenant and permitted it only to strike “grammatically severable” portions of a contract, which is not possible in the present case. Apparently recognizing that New York law now permits a court to reform or restrict a covenant found to be unreasonable in geographic scope, the majority has wisely chosen not to espouse that ground. Recent decisions establish that enforcement of the covenant here would not be denied on the ground that its geographic scope might be unreasonable. In Deborah Hope Doelker, Inc. v. Kestly, 449 N.Y.S.2d *39652 (App.Div. 1st Dept.), the court held that when “an otherwise valid restrictive covenant does not contain a geographic limitation, the court may, if warranted by equity . .. interpret the clause in conformity with the intent of the parties.” Determining that the intent of the parties was that the geographic scope of the covenant be the area within a 50-mile radius of New York City, even though the contract, like the instant one, was silent on the subject, the court enforced the covenant as limited. In Borne Chemical Co., Inc. v. Dictrow, A.D., 445 N.Y.S.2d 406 (2d Dept. 1981), which involved a sale of a business and an employment relationship, the covenant barred the defendant from working anywhere in the United States where the employer-buyer was in business. The employer-buyer sought an injunction only for the area within a 150-mile radius of one of its offices, and the court, finding the narrowed scope reasonable, enforced the covenant. Under these decisions the district court would not be prevented from limiting the geographic scope of the present covenant to the United States where the exhibitions, which attract national exhibitors, are held.
The covenant before us is reasonable. Since it runs for a period of three years, at most only two of the shows proposed by Reber in violation of it will be precluded. The covenant is needed by AIChE to allow it a reasonable “start-up time” to enter the trade show business on its own without competition from Reber, its former alter ego. Under Kestly, supra, and Dictrow, supra, its geographic scope can be limited to the United States, a quite reasonable range in the trade show market. Judged under the standards appropriate in this context, the covenant should in my view be enforced.
Even assuming that this were an employer-employee case, summary judgment for Reber would in any event be inappropriate. The covenant here would be enforceable against an employee because it would not prevent him from engaging in his trade, but would only prevent him or her from dealing in one lesser segment of that trade. In Re Riccardi, supra; Bates Chevrolet Corp. v. Haven Chevrolet, Inc., supra; Cole Steel Equipment Co., Inc. v. Art-Lloyd Metal Products Corp., supra. Moreover, New York courts will enforce a covenant not to compete when necessary “to protect ... the goodwill of the employer’s business.” American Broadcasting Co., Inc. v. Wolf, supra, 52 N.Y.2d at 403, 438 N.Y.S.2d at 486, 420 N.E.2d at 367. Since the covenant’s effect on Reber’s ability to do business is limited, AIChE’s interest in protecting its good will is entitled to even greater weight as worthy of protection. The majority, relying on Lynch v. Bailey, supra, 275 A.D. 527, 90 N.Y.S.2d 359, rejects this reasoning on the theory that Reber “brought with it to the enterprise much of the good will for which the enterprise is seeking protection.” (At 389). Lynch, however, has no application here. There the former accounting partner against whom his firm sought to enforce a covenant not to compete had been one of the founding members of the firm and had brought many clients to the firm. When the accountant left the firm these clients attempted to follow him, desiring his, not the firm’s, services, but the covenant prevented him from taking this work. On leaving the firm the accountant was not compensated for the good will that he had contributed to it and was now losing. Thus the good will that the partnership was attempting to “protect” was not its own but that contributed by the former partner. Understandably, there, the court was unwilling to enforce the covenant.
By contrast, there is no evidence that Reber brought with it to AIChE any good will already established with petrochemical or refining engineers or concerns. It was hired and paid to develop the good will of AIChE as a sponsor of petrochemical trade shows, exploiting the good will which AIChE already had in the industry as a professional organization. While Reber had undoubtedly developed good will among non-petrochemical trade show sponsors as a trade show manager, there has been no showing that it brought any clients with it when it was hired by AIChE. The majori*397ty’s bland assertion that “much of AIChE’s good will is directly attributable to the good will contributed by Reber-Friel upon joining AIChE and not that developed on behalf of AIChE thereafter” (At 390), is not supported by any evidence and there was no such finding by the district court. It is improper for us to decide such an important contested factual issue which was never resolved below since the district court granted summary judgment without giving the plaintiff an opportunity to litigate it.
The majority’s claim that this covenant has no purpose other than to restrain competition is belied by the record. By now seeking to promote its own petrochemical trade show after having served as the managing agent of AIChE’s petrochemical show for over 20 years, and by doing so in violation of a covenant not to do so, Reber is attempting to borrow on the good will that AIChE developed through it over that period. Reber is particularly well situated to pirate away AIChE’s good will because during that 20-year period Reber was AIChE for purposes of trade shows. AIChE’s legitimate interest in protecting its own good will, an interest recognized by New York, and the reasonableness of the covenant, which eliminates only a small portion of the overall trade show market from Reber, mandate enforcement of the covenant, even assuming arguendo that Reber was an employee rather than a corporate business organization.
AIChE also claims breach of fiduciary duty, conversion, and unfair competition, none of which were discussed in the district court’s opinion granting summary judgment. In Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 328 N.Y.S.2d 423, 278 N.E.2d 636 (1972), the New York Court of Appeals noted that when
“there has been a physical taking or studied copying, the court may in a proper case enjoin solicitation, not necessarily as a violation of a trade secret, but as an egregious breach of trust and confidence while in plaintiffs’ service.” Id. at 391-92, 328 N.Y.S.2d at 427, 278 N.E.2d at 639.
Accord Tour and Study, Inc. v. Hepner, 77 A.D.2d 843, 432 N.Y.S.2d 148 (1st Dept. 1980); Continental Dynamics Corp. v. Ranter, 64 A.D.2d 975, 408 N.Y.S.2d 801 (2d Dept. 1978); Lincoln Steel Products, Inc. v. Schuster, 49 A.D.2d 618, 371 N.Y.S.2d 157 (2d Dept.), appeal dismissed, 38 N.Y.2d 738, 381 N.Y.S.2d 41, 343 N.E.2d 759 (1975); cf. Reidman Agency, Inc. v. Musnicki, 79 A.D.2d 1094, 435 N.Y.S.2d 837 (4th Dept. 1981) (when defendant “lawfully had possession” of documents and surrendered them, no injunction would issue).
Reber was in possession of AIChE customer lists and other information only because it had been chosen by AIChE to be its agent. Its refusal to turn over those records to AIChE amounted to a clear breach of fiduciary duty. If it used the records to further its own trade show, the breach was even more egregious. In either case an injunction is appropriate. I cannot agree with the majority’s implicit suggestion (At 391-392 & n.10) that because the relationship between AIChE and Reber was not that of employer-employee Reber had more of a right to withhold documents pertaining to the shows than would an employee. Aside from the inconsistency between that suggestion and the majority’s position elsewhere to the effect that Reber must be treated as an employee, surely neither a fiduciary nor an employee has any property interest in his employer’s records, even if the employee developed the business from “scratch.” I am at a loss to understand why the majority seems to assume that Reber had such an interest when even Re-ber, by finally turning over the records, seems to have recognized that it did not. The silence of the contract on this matter only confirms the point, for only a contractual provision could have given Reber the right to keep these records.2
*398The majority’s further attempt to narrow Silfen by suggesting that there is some significance to the fact that the defendant there had no contact with customers is unpersuasive. Taking or copying of a principal’s customer lists and other records by an agent would be a breach of fiduciary duty in either ease. Nor do I find persuasive the majority’s claim that the files in Silfen contained confidential information in addition to customer lists. The documents involved in Silfen appear to have contained nothing more secret than information about customers; similar information was contained in the files Reber withheld. Thus summary judgment for Reber was inappropriate on this ground as well.
The final issue is whether the district court properly denied preliminary injunctive relief. The record establishes that AIChE has shown probable success on the merits. The question is whether it showed “possible irreparable injury.” Vidal Sassoon, Inc. v. Bristol-Myers Co., 661 F.2d 272, 276 (2d Cir. 1981); Triebwasser & Katz v. American Telephone & Telegraph Co., 535 F.2d 1356, 1358 (2d Cir. 1976); Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973). See generally, Carey v. Klutznick, 637 F.2d 834, 837 (2d Cir. 1980); Jackson Dairy, Inc. v. H. P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979) (per curiam). On review we must determine whether the district judge abused his discretion or made a mistake of law. Vidal Sassoon, Inc., supra, 661 F.2d at 276; Union Carbide Agricultural Products Co., Inc. v. Costle, 632 F.2d 1014, 1017 (2d Cir. 1980); Jack Kahn Music Co., Inc. v. Baldwin Piano & Organ Co., 604 F.2d 755, 758 (2d Cir. 1979); Triebwasser & Katz, supra, 535 F.2d at 1358.
The district judge concluded that AIChE had not shown possible irreparable injury, stating that “the anticipated ‘moderate to devastating’ impact is too vague and speculative to constitute irreparable harm.” AIChE proved that it and Reber are competing in the same market, each attempting to convince the same exhibitors to spend part of their limited promotional budgets on a particular trade show. Reber has the advantage, derived solely from its contract with AIChE, of closer relationships to clients with whom AIChE should have the stronger connection, those who had exhibited at prior AIChE shows. Reber had subverted AIChE’s efforts to promote its shows by wrongfully withholding important business records. At the time of the hearing the sales of the CPE trade show were running 30% below normal. Given that AIChE is in effect a new entrant, the failure of CPE would have a negative effect on AIChE’s reputation and good will, a blow from which it might take a substantial period of time to recover. Such injury cannot be adequately compensated by the later award of money damages, for it will be extremely difficult to determine how successful AIChE’s shows would have been had Reber not breached the contract. There is nothing “vague” or “speculative” about this injury.
In my view the district court clearly erred in denying preliminary injunctive relief. I would reverse the order granting summary judgment to Reber and the order denying AIChE a preliminary injunction and direct the entry of preliminary relief.

. Because each case must be judged on its facts, New York courts are reluctant to grant summary judgment even when the covenant not to compete is in an employment contract. Wise v. Transco, Inc., 73 A.D.2d 1039, 425 N.Y.S.2d 434 (1980).

. The majority asserts that some of the records withheld may have been developed by Reber in the course of its independent service work for exhibitors. Reber has never claimed that AIChE sought such documents, and I am unable to find any evidence in the record supporting this assertion.