The opinion of the court was delivered by: CHARLES S. HAIGHT
In this diversity action, plaintiff DataType International, Inc. ("DataType") sues to enforce a restrictive covenant contained in an employment agreement with defendant Scott Puzia, a former employee. Plaintiff also seeks compensatory and punitive damages.
Plaintiff moved for preliminary injunctive relief by order to show cause. The Court advanced trial of the action on the merits with the hearing on the application for a preliminary injunction. See Rule 65(a)(2), Fed.R.Civ.P. Trial of the equitable issues has been completed. This opinion constitutes the Court's findings of fact and conclusions of law. Rule 52(a).
Plaintiff DataType is a New York corporation maintaining its offices at 145 E. 57th Street, New York City. Gail Propp is its president. Defendant Puzia is a New Jersey resident. DataType employed Puzia as a sales representative from 1982 until February 1992, when he resigned.
DataType is a direct mail company. Such companies offer expertise, guidance and program development to clients seeking to generate business by direct mailings to potential customers. The activities of direct mail companies give rise to that social and postal phenomenon popularly known as "junk mail" (although the industry prefers a different phrase).
DataType specializes in direct mailings for the pharmaceutical industry, comprised of pharmaceutical manufacturing companies and the advertising agencies that serve them. Pharmaceutical industry direct mailings are sent to physicians and nurses. They are intended to generate sales of pharmaceutical products, such as prescription drugs.
During the decade of his employment at DataType, Puzia was the company's principal salesman. He is effective at his job and over time built up useful relationships and contacts with product managers at pharmaceutical companies and account executives at advertising agencies.
Propp's expertise lies in computer programming, which plays a vital part in effective direct mail operations. Until the events about to be recounted, Propp owned all the shares of DataType. She relied on Puzia as the company's principal salesman, although she would attend presentations to potential customers on occasion.
On December 14, 1988 the parties executed two written agreements, each dated in its preamble as October 5, 1988. One was an "Agreement for Sale of Shares." It reflects a sale by Propp to Puzia of 60 shares of Class B non-voting common shares of DataType for $ 10,000, to be paid over twelve monthly installments.
The Corporation [DataType] hereby employs the Executive [Puzia] and the Executive hereby accepts employment upon the terms and conditions hereinafter set forth. This Agreement may be terminated at will by either party which termination shall be effective immediately upon notice being given. If terminated by the Corporation the Executive shall be entitled to his compensation for an additional Thirty (30) days following termination.
(a) While this Agreement is in effect, and for a period of Two (2) years after the termination of this Agreement, the Executive shall not, either directly or indirectly, compete with the Corporation or engage in any business similar to that conducted by the Corporation, within a radius of One Hundred Twenty Five (125) miles (the "restricted area") of the then principal office of the Corporation, whether as a shareholder, officer, director, sole proprietor, partner, employee, consultant, representative, lender, investor, independent contractor, agent or other capacity. Solicitation or acceptance of accounts outside the restricted area which entail services to be rendered to office or business locations within the restricted area shall constitute competition in violation of this Agreement.
(b) The Executive shall not, for a period of Two (2) years following termination of this Agreement, either directly or indirectly contact or solicit any "customers" of the Corporation, wherever located. As used herein the term "customers" shall be defined as any person or entity to whom or with which the Corporation (i) has provided services during the Eighteen (18) month period prior to termination, or (ii) is, at the time of termination, involved in negotiations for the providing of such services.
Propp signed the agreements for DataType. Puzia signed for himself.
Drafts of these agreements, prepared by DataType's attorney, had been shown to Puzia in July 1988 by Propp and Laurence Kramer, a consultant retained by Propp to advise on corporate matters. With respect to the restrictive covenant, Puzia asked and Propp agreed to reduce its duration from three years to two, and its geographical limit from 250 miles to 125 miles.
Prior to preparation of the draft agreements, Propp and Puzia had discussed the possibility of selling DataType. In a 10-page memorandum dated April 9, 1988 that Puzia sent to Propp, DX A, Puzia began by saying:
It's been six years since we started DataType, and I feel it's time for a look backward and forward. How are we progressing with our original plan to start this company, make it profitable and then sell it?
In that memorandum Puzia referred, among other things, to the many hours he devoted to the business each day, at night, and on weekends; asked that his compensation be increased; and referred to prior discussions about "my receiving partial ownership in the Company." In that regard, he expressed the view that "25% ownership would be a fair figure."
Propp responded by raising Puzia's base salary from $ 24,000 to $ 40,000 in May 1988. (Puzia was also at all times compensated by a 12% commission on net sales of business he had obtained for the company). Propp retained Kramer to assist her in the matter. Kramer suggested to Propp "that the sale of stock be contingent upon the preparation of an employment agreement that would include a covenant not to compete." Tr. 25. That gave rise to the July 1988 drafts, which Kramer discussed upon a number of occasions with Puzia, and to which Puzia eventually agreed, after requesting and obtaining the previously noted changes.
I need not pursue Puzia's fraud theory further because he has not proved its factual predicate. On this issue Puzia bears the burden of proof. Kramer and Propp denied having told Puzia that DataType would not enforce the restrictive covenant. On the contrary, Kramer testified that when Puzia asked why the employment agreement and covenant were necessary, Kramer explained to Puzia "that if there was going to be a sale of shares of the stock of the company, where he would become an investor, an owner of the company, one of the requirements would be that he would have to sign a covenant not to compete." Tr. 32. That is a general proposition, unrelated in any way to a prospective sale of the company. Kramer testified further that he made it clear to Puzia that Puzia "should take these documents rather seriously, because they were being drafted by an attorney, that he should take then seriously because Mrs. Propp was going to enforce them, and . . . I even strongly urged him to talk to an attorney about them because these were rather serious documents." Tr. 36. Kramer, who has done no business for Propp since 1988 and has no stake in the outcome of this litigation, was a credible witness and I accept this testimony. Furthermore, Puzia's contention that he was a victim of fraud surfaced for the first time at the trial. He did not make that claim in an action for determination of the legal rights and restrictions of the parties to the employment agreement which he commenced in the Superior Court of New Jersey, Bergen County, on May 28, 1992. Nor did he claim fraudulent inducement in any of the several discussions he had with Propp subsequent to his departure from DataType in February 1992.
In short, Puzia has not proved his claim of fraud. The rights and obligations of the parties therefore depend upon the provisions of the restrictive covenant, viewed in the light of governing law.
DataType paid Puzia the money Puzia used to pay Propp for the shares covered by the stock purchase agreement. The increase in Puzia's salary, coupled with commissions generated by his effective salesmanship, produced annual compensation in excess of $ 100,000. But Puzia remained dissatisfied with his job at DataType. He continued to work long hours. There was no discernible progress in arranging a profitable sale of DataType to a third party. Propp had spoken of a target sales price of $ 5 million, but DataType's profits never brought the company anywhere close to such a consummation, however devoutly wished. The determination grew in Puzia's mind to leave DataType. In 1986 Puzia had incorporated a company called Integrated Sales Systems. That company never did any business. On November 18, 1991 Puzia filed with the New Jersey authorities an amendment to that company's certificate of incorporation changing its name to Pharmaceutical Direct, Inc. At about the same time he also reserved a telephone line in the name of Pharmaceutical Direct, and arranged for office space if that company ever became active. Puzia did not tell Propp of these activities.
At a lunch meeting on November 13, 1991, Puzia told Propp that he would be leaving DataType. He submitted a letter of resignation dated February 11, 1992, PX 38, effective February 21, 1992, the date on which Puzia left DataType's employ.
Puzia accepted employment with a company pursuing a different, non-competitive business, but decided after only four days that he had made a mistake. Accordingly Puzia activated Pharmaceutical Direct, Inc., and began to compete with DataType, thereby generating this litigation.
Propp's affidavit in support of plaintiff's order to show cause accused Puzia of numerous bad acts. The Propp affidavit at P3 charged that Puzia "clandestinely" set up his own competing business while still in plaintiff's employ; "pillaged" plaintiff's "most critical asset, . . . its customer list"; is soliciting plaintiff's customers by using "trade secret information contained in plaintiff's files including the customers on plaintiff's customer list and plaintiff's pricing schedules"; and (upon information and belief) is "tortiously interfering with plaintiff's contracts with its customers" by predicting that plaintiff would be "going out of business soon" and implying that Puzia was DataType's "successor," which would have "a ruinous effect on plaintiff's present and future business." Propp added the allegation in P4 of her affidavit (underlining the assertion for emphasis) that: "To date, plaintiff has lost the business of several of these Customers who, upon information and belief, are ...