Court Opinion

ID: 4084759
Source: CourtListenerOpinion
Date Created: 2016-10-07 23:55:47.565026+00
Date Added: 2024-06-11T14:27:23.728617
License: Public Domain

SUPREME COURT OF THE STATE OF NEW YORK
           Appellate Division, Fourth Judicial Department

1113
CA 11-02485
PRESENT: FAHEY, J.P., PERADOTTO, CARNI, WHALEN, AND MARTOCHE, JJ.

LENEL SYSTEMS INTERNATIONAL, INC.,
PLAINTIFF-RESPONDENT,

                    V                             MEMORANDUM AND ORDER

RICHARD TODD SMITH, DEFENDANT-APPELLANT.

MCCONVILLE, CONSIDINE, COOMAN & MORIN, P.C., ROCHESTER (PETER J.
WEISHAAR OF COUNSEL), FOR DEFENDANT-APPELLANT.

WOODS OVIATT GILMAN LLP, ROCHESTER (WARREN B. ROSENBAUM OF COUNSEL),
FOR PLAINTIFF-RESPONDENT.

     Appeal from an order of the Supreme Court, Monroe County (Kenneth
R. Fisher, J.), entered September 22, 2011. The order, among other
things, denied defendant’s motion for summary judgment.

     It is hereby ORDERED that the order so appealed from is affirmed
without costs.

     Memorandum: Plaintiff commenced this action seeking rescission
of three incentive stock option agreements (Option Agreements) that
grant defendant options to purchase shares of plaintiff’s common
stock. The terms of the Option Agreements provide that, “[i]n
consideration of the grant of [the options],” defendant agrees that he
shall not “directly or indirectly, as an . . . employee . . . ,
conduct business in competition in any way” with plaintiff or its
products while employed by plaintiff and for a period of time after
his employment with plaintiff ends (noncompete provision). Plaintiff
alleges in its amended complaint that defendant became employed by a
competing corporation within three weeks of resigning from his
position with plaintiff.

     In a prior appeal, we concluded that Supreme Court properly
denied plaintiff’s prediscovery motion for summary judgment rescinding
the Option Agreements. We further concluded that the court properly
denied defendant’s cross motion for summary judgment dismissing the
complaint and for summary judgment on his counterclaim, which sought
dividends and an order directing plaintiff to issue “the outstanding
stock certificates to him.” We concluded that neither party was
entitled to summary judgment inasmuch as there were triable issues of
fact whether defendant breached the Option Agreements and, if he did,
whether the breach was so substantial that it defeated the object of
the parties in making the contracts (Lenel Sys. Intl., Inc. v Smith,
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                                                         CA 11-02485

34 AD3d 1284, 1285).

     The parties thereafter conducted discovery and, as relevant to
this appeal, defendant moved for summary judgment seeking, inter alia,
dismissal of the amended complaint, which seeks rescission of the
Option Agreements, and for judgment on several of his counterclaims,
i.e., for payment of money and liquidated damages. The court denied
the motion, and we now affirm.

     Rescission is an equitable remedy (see Singh v Carrington, 18
AD3d 855, 857), which “rests on the equitable principle that a person
shall not be allowed to enrich himself [or herself] unjustly at the
expense of another” (Miller v Schloss, 218 NY 400, 407). The effect
of rescission “is to declare [a] contract void from its inception and
to put or restore the parties to status quo” (Cusack v American
Defense Sys., Inc., 86 AD3d 586, 588). As a general rule, rescission
of a contract is permitted where there is a breach of contract that is
“ ‘material and willful, or, i[f] not willful, so substantial and
fundamental as to strongly tend to defeat the object of the parties in
making the contract’ ” (RR Chester, LLC v Arlington Bldg. Corp., 22
AD3d 652, 654, quoting Callanan v Keeseville, Ausable Chasm & Lake
Champlain R.R. Co., 199 NY 268, 284).

     Here, we conclude, as we did in the earlier appeal (Lenel Sys.
Intl., Inc., 34 AD3d at 1285), that there are triable issues of fact
whether defendant breached the Option Agreements by accepting
employment with an allegedly competing business and, if so, whether
such breach “substantially defeats” the purpose of those agreements
(Eldridge v Shaw, 99 AD3d 1224, 1225 [internal quotation marks
omitted]; see WILJEFF, LLC v United Realty Mgt. Corp., 82 AD3d 1616,
1617). The Option Agreements provide that “[plaintiff] considers it
desirable and in its best interest that [defendant] be given an
inducement to acquire a further proprietary interest in [plaintiff],
and an added incentive to advance the interests of [plaintiff]” by
providing defendant with certain stock options. Plaintiff’s general
counsel and director of business development testified at his
deposition that a key purpose of the noncompete provision is to
encourage employees to remain with the company for an extended period
of time and to ensure that the employees’ interests are “aligned with
that of the company . . . by them owning a piece of the company.”
Indeed, plaintiff’s stock option plan states that its purpose is to
“encourage stock ownership by directors and selected officers and
employees of [plaintiff] . . . to increase their proprietary interest
in the success of [plaintiff] and to encourage them to remain in the
service or employ of [plaintiff].” If an employee chooses to
terminate his or her employment with plaintiff in order to work for a
competing entity, that choice would no doubt frustrate, if not defeat,
the purpose of the Option Agreements.

     Defendant contends that rescission is unavailable to plaintiff
because the noncompete provision is unreasonable and thus
unenforceable as a matter of law. We reject that contention.
Although defendant correctly cites the well-settled proposition that
“noncompete clauses in employment contracts are not favored and will
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                                                         CA 11-02485

only be enforced to the extent reasonable and necessary to protect
valid business interests” (Morris v Schroder Capital Mgt. Intl., 7
NY3d 616, 620; see Post v Merrill Lynch, Pierce, Fenner & Smith, 48
NY2d 84, 86-87, rearg denied 48 NY2d 975), there is an equally well-
settled exception to that general principle “where an employer
conditions receipt of postemployment benefits upon compliance with a
restrictive covenant” (Morris, 7 NY3d at 620-621; see Lucente v
International Bus. Mach. Corp., 310 F3d 243, 254). Under the
“employee choice doctrine,” if an employee “is given the choice of
preserving his [or her] rights under his [or her] contract by
refraining from competition or risking forfeiture of such rights by
exercising his [or her] right to compete, there is no unreasonable
restraint upon an employee’s liberty to earn a living” (Morris, 7 NY3d
at 621; see Kristt v Whelan, 4 AD2d 195, 199, affd 5 NY2d 807). Where
the doctrine applies, “a restrictive covenant will be enforceable
without regard to reasonableness” so long as an employee voluntarily
left his or her employment (Morris, 7 NY3d at 621; see Post, 48 NY2d
at 89; see also Lucente, 310 F3d at 254; International Bus. Mach.
Corp. v Martson, 37 F Supp 2d 613, 619-620).

     Here, defendant agreed to the posttermination noncompete
provision in exchange for the receipt of additional incentive
compensation, i.e., stock options (see generally International Bus.
Mach. Corp., 37 F Supp 2d at 617). Upon entering into the Option
Agreements, defendant agreed to refrain from competing with plaintiff
while employed by plaintiff and for a period of two years after his
termination from employment. Defendant specifically acknowledged and
agreed that the noncompete provision was “reasonable and will not
operate to deprive [him] of his means of support or livelihood and
that [he] has received fair and adequate consideration therefor.” The
Option Agreements did not bar defendant from seeking or accepting
other employment (see Kristt, 4 AD2d at 199). Rather, upon
defendant’s decision to leave plaintiff’s employ, he had “the choice
of preserving his rights under the [Option Agreements] by refraining
from competition with [plaintiff] or risking forfeiture of such rights
by exercising his right to compete with [plaintiff]” (id.; see Morris,
7 NY3d at 622). Contrary to the contention of defendant, the absence
of an explicit forfeiture-for-competition clause in the Option
Agreements does not prevent plaintiff from seeking rescission of the
stock options under the circumstances of this case. Here, defendant’s
promise not to compete with plaintiff during his employment and for a
period of time thereafter was the sole consideration for the Option
Agreements. It therefore follows that, if defendant chose to compete
with plaintiff in violation of the only material condition of the
agreements, defendant would give up his right to the stock options
promised in exchange (see generally York v Actmedia, Inc., 1990 WL
41760, *1). Thus, defendant “ma[de] an informed choice between
forfeiting his [stock options] or retaining the benefit by avoiding
competitive employment” (Morris, 7 NY3d at 621).

     All concur except CARNI and WHALEN, JJ., who dissent and vote to
modify in accordance with the following Memorandum: We respectfully
dissent. Plaintiff contends that rescission of the three incentive
stock option agreements (Option Agreements) that grant defendant
                                 -4-                          1113
                                                         CA 11-02485

options to purchase shares of plaintiff’s common stock is justified
based on failure of consideration. The relevant consideration
language in the Option Agreements is as follows: “In consideration of
the grant of this option, [defendant] agrees that while employed by
[plaintiff], and for a period of two years after termination of
employment for any reason, . . . [defendant] shall not directly or
indirectly . . . conduct business in competition in any way” with
plaintiff (hereafter, restrictive covenant). That language appears to
set forth two separate forms of consideration for the stock options,
i.e., defendant’s agreement to abide by the restrictive covenant while
employed by plaintiff and for two years after termination of
employment. It is undisputed that, while employed, defendant adhered
to the restrictive covenant for approximately six years, thereby
providing plaintiff with part of the consideration. It is not unusual
for companies to ensure that their employees are devoting all of their
time and energy to them and not pursuing competing opportunities by
consulting or other means. Courts have held that where there is not a
total failure of payment, a breach is not so substantial to permit
rescission (see Septembertide Pub, B.V. v Stein and Day, Inc., 884 F2d
675, 678-679). Here, because defendant gave partial consideration by
complying with the restrictive covenant while employed by plaintiff,
rescission of the Option Agreements is not permitted. It should be
noted that plaintiff could have elected to pursue damages based upon
defendant’s competition post-employment but did not do so.

     We would therefore modify the order by granting that part of
defendant’s motion for summary judgment dismissing the amended
complaint and on his first, second, third and fourth counterclaims.
However, defendant is not entitled to summary judgment on his 10th
through 12th counterclaims.

Entered:   May 3, 2013                          Frances E. Cafarell
                                                Clerk of the Court