The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.
Michael Mathias ("Mathias"), formerly known as Nenad Matijasevic,
brought this diversity action against Bradley Jacobs ("Jacobs"), seeking
monetary damages and specific performance for breach of contract. Amended
Complaint ("Compl."). Mathias claims that Jacobs refused to honor a 1992
Stock Options Agreement (the "Options Agreement") Jacobs's answer raised
three affirmative defenses: (1) Mathias violated a non-competition
provision of the Options Agreement, thereby surrendering his right to
exercise the Options; (2) Mathias secured Jacobs's assent as a result of
duress; and (3) Mathias failed to tender payment in the manner prescribed
by the Options Agreement. Amended Answer ("Ans.") ¶¶ 21-28. Jacobs
also asserted a permissive counterclaim alleging that Mathias owed him
$50,000 on a personal loan. Id. at ¶¶ 29-35.
Discovery proceeded before Magistrate Judge James Francis. Jacobs moved
to dismiss the complaint or, in the alternative, for an adverse inference
against Mathias on the grounds that Mathias had destroyed evidence and
misled the court. By letter to Magistrate Judge Francis, Mathias moved
for sanctions against Jacobs in connection with the depositions of
Richard Weingarten ("Weingarten") and Alfred DelBello ("DelBello"), both
partners of the firm representing Mathias. The parties cross-moved under
Fed. R. Civ. p. 56(b) for summary judgment.
Magistrate Judge Francis found that Mathias had destroyed evidence but
declined to recommend dismissing the complaint or drawing an adverse
inference, instead ordering Mathias to pay Jacobs $28,271.75 for the
costs incurred as a result of the spoliation. Magistrate Judge Francis
also found that there was no reasonable basis for Jacobs to conduct the
Weingarten deposition or to pursue questions related to the duress
defense at the Delbello deposition. He therefore granted Mathias's motion
for discovery sanctions, ordering Jacobs's attorneys to pay opposing
counsel and the two deponents a total of $1,723.90. See Memorandum and
Order, Mathias v. Jacobs, No. 99 Civ. 2004, 2000 WL 1041668 (S.D.N.Y.
July 28, 2000) (Francis, M.J.)
Jacobs filed timely objections to Magistrate Judge Francis's Memorandum
and Order. Mathias filed his opposition to Jacobs's objections.
For the reasons discussed below, Mathias's motion for summary judgment
is granted, Jacobs's cross-motion for summary judgment is denied, and
Magistrate Judge Francis's order imposing sanctions against Jacobs's
attorneys is vacated.
In the 1980's, Mathias and Jacobs worked together in the oil brokerage
business in London. In 1989, Jacobs launched a waste management business
which eventually became United Waste Services, Inc. ("United Waste").
Mathias worked amicably for United Waste from 1989 until some time in
1992. Disagreement then arose about whether Jacobs had ever promised
Mathias an ownership stake in the company. On June 1, 1992, Mathias and
Jacobs seemingly resolved this dispute by entering into two
contemporaneous agreements, one terminating Mathias's employment with
United Waste (the "United Waste Agreement") and the other granting him
stock options in United Waste (the "Stock Options Agreement" or "Options
The United Waste Agreement provided Mathias with a lump sum of $31,200
in back pay, and, for a two-year period, monthly payments of $8,000 and
continuing health insurance coverage. In return, Mathias agreed to
several non-compete provisions, specifically promising, among
things, to not (1) disclose any of United Waste's confidential
information; (2) work for or own an interest in a company that competes
with United Waste; or (3) "speak to or correspond or have any contact
whatsoever with" three categories of persons and entities, including (i)
those who had, or were prospects for, a business relationship with United
Waste; (ii) any United Waste employees or officers, or their families;
and (iii) any company that was a possible acquisition by United Waste.
Id. at ¶¶ 4-5.
The Stock Options Agreement granted Mathias the right to purchase
400,000 shares of United Waste stock, exercisable at $3.00 per share
anytime between June 1, 1994 and May 31, 1999. See Stock Options
Agreement at ¶ 1. The Options Agreement incorporated by reference
the non-compete provisions of the United Waste Agreement. Id. at ¶
2. Further, the Options Agreement provided that the options would be
"automatically and unconditionally rescinded and terminated" if Mathias
breached the non-compete provisions. Id. at ¶ 2(b).
On March 8, 1999, Mathias attempted to exercise the option by tendering
a check for $1.2 million, the amount prescribed in the Options
Agreement, but Jacobs refused to accept it. Mathias consequently filed
this action to recover damages totaling the value of the stock shares on
the day Jacobs breached (minus the $1.2 million Mathias was required to
pay), plus interest, in addition to specific performance for delivery of
the stock shares.
In moving for summary judgment, Jacobs argues that Mathias repeatedly
breached Paragraph 5(b), or the "no-contact clause," of the non-compete
provisions and thereby relinquished the right to exercise the stock
options. Mathias counters that Paragraph 5(b) is unenforceable as
overbroad and against public policy.
A. LEGAL STANDARD FOR SUMMARY JUDGMENT
A motion for summary judgment may be granted only if there is no
genuine issue as to any material fact and the moving party therefore is
entitled to judgment as a matter of law. See Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986); Fed. R. Civ. P. 56. The role of the Court is
to determine whether there are any genuine issues of material fact to be
tried, not to decide them. See Gallo v. Prudential Residential Svcs.,
Ltd. Partnership, 22 F.3d 1219, 1224 (2d Cir. 1994). In considering the
motion, a court must resolve ambiguities and draw all reasonable
inferences in favor of the nonmoving party. See Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986)
B. THE NATURE OF THE STOCK OPTIONS AGREEMENT
Historically, New York courts refused to enforce restrictive covenants
on the ground that they constituted restraints on trade. DAR & Assocs.,
Inc. v. Uniforce Servs., Inc., 37 F. Supp.2d 192, 196 (E.D.N.Y. 1999).
"More recently, however, courts have held that in some situations it is
both desirable and essential to enforce restrictive covenants." Id.
Restrictive covenants in three types or contracts have been recognized as
enforceable: (1) contracts for the sale of businesses; (2) employment
contracts; and (3) ordinary commercial contracts. Id. at 196-97.
Courts analyze restrictive covenants in ordinary commercial contracts,
such as a licensing agreement, "under a simple rule of reason, balancing
the competing public policies in favor of robust competition and freedom
to contract." DAR & Assocs. Inc., 37 P. Supp.2d at 197. Courts typically
consider the legitimate business interests protected by the covenant, the
reasonableness of the covenant, and the degree of hardship imposed upon
the party against whom the covenant is enforced. Id. at 198-200.
Restrictive covenants in employment contracts, however, are subject to
more exacting scrutiny than are those in contracts for the sales of
business or ordinary commercial contracts. See DAR & Assocs., Inc., 37
F. Supp.2d at 196-97. Public policy favors economic competition and
individual liberty and seeks to shield employees from the superior
bargaining position of employers. See Ticor Title Ins. Co. v. Cohen,
173 F.3d 63, 70 (2d Cir. 1999); Reed, Roberts Assocs., Inc. v. Strauman,
40 N.Y.2d 303 (1976)
Mathias argues that the Stock Options Agreement coupled with the United
Waste Agreement constitute the contract which terminated his affiliation
with United Waste. Consequently, Mathias contends that the enforceability
of Paragraph 5(b) which is memorialized in the United Waste Agreement
and incorporated by reference into the Options Agreement, must be
analyzed according to the more demanding standards of restrictive
covenants in employment contracts.
Jacobs views the Options Agreement not as an employment contract, but
as an ordinary commercial contract — more specifically, a
settlement agreement. According to Jacobs, he Options Agreement is
autonomous of the United Waste Agreement, and was devised merely to
resolve the dispute regarding Mathias's claim to an ownership interest in
United Waste. Jacobs therefore advocates applying the simple rule of
reason test of ordinary commercial contracts.
This Court need not decide the nature of the contract at issue. It
concludes that under either construction, the challenged portions of the
non-compete provisions are overbroad and unrelated to any legitimate
United Waste business interest, and therefore unenforceable.
C. THE ENFORCEABILITY OF THE NO-CONTACT CLAUSE
1. Analysis of the Options Agreement as an Employment Contract
As described above, courts carefully review restrictive covenants in
employment contracts. Given the preference for competition and for a
person to apply in a new job the skills and capacities developed in prior
employment, restrictive covenants in employment contracts are enforced
only if they are reasonable and necessary to protect valid business
interests. See Reed, Roberts Assocs., Inc., 40 N.Y.2d at 307; Ticor Title
Ins. Co., 173 F.3d at 70. A restrictive covenant in an employment
contract is enforced "only if it (1) is no greater than is required for
the protection of the legitimate interest of the employer, (2) does not
impose undue hardship on the employee, and (3) is not injurious to the
public." BDO Seidman v. Hirshberg, 93 N.Y.2d 382,
388-89 (1999) (emphasis
Paragraphs 4 and 5 of the United Waste Agreement set forth the
non-compete provisions. Paragraph 5(a) prohibited Mathias from working
for or owning an interest in any competitor business of United Waste.
Paragraph 5(b) barred Mathias from having "any contact whatsoever" with
three expansive categories of persons and entities, including (1) persons
or entities who had, or were prospects for, a business relationship with
United Waste; (2) any United Waste employees or officers, or their
families; and (3) any company that was a possible acquisition by United
Waste. This no-contact clause was effective for two years subsequent to
the signing of the Agreements — June 1, 1992 through May 30, 1994.
Mathias and Jacobs agree that the no-contact language is sweeping in
design and effect. Mathias was unequivocally precluded from communicating
or interacting with the specified categories of persons and entities,
irrespective of whether the contact was in connection with United Waste
and its legitimate business interests. Jacobs asserts that any violation
of the no-contact clause, even an admittedly innocuous one, terminates
Mathias's right to exercise the stock options. Jacobs's Memorandum in
Support of Summary Judgment ("Jacobs Mem.") at 10-14. Mathias counters
that the far-reaching scope of the non-contact clause is invalid and
unenforceable. Mathias's Memorandum in Support of Summary Judgment
("Mathias Mem.") at 11-15. This Court agrees.
The first prong of the test to evaluate restrictive covenants in
employment contracts pertains to whether the restriction had the purpose
of safeguarding legitimate business interests. Legitimate business
interests include "protection against misappropriation of the employer's
trade secrets or of confidential customer lists, or protection from
competition by a former employee whose services are unique or
extraordinary." BDO Seidman, 93 N.Y.2d at 389; Ticor Title Ins. Co., 173
F.3d at 70. Here, there is no allegation that the no-contact clause was
necessary in order to prevent Mathias from disclosing confidential
information about United Waste or using his inside knowledge of United
Waste's operations to compete against it.
In addition, while the no-contact clause is circumscribed by a time
limitation, it is conspicuously devoid of a subject matter limitation
that describes the kinds of communication and interaction that would
injure United Waste. The plain language of Paragraph 5(b) proscribes
Mathias from having "any contact whatsoever" with the three particular
categories of persons and entitles. Thus, Paragraph 5(b) precluded
Mathias from contacts that were entirely inoffensive, such as social
contacts, and from contacts that could help him establish a new
professional career outside of the waste management industry, such as with
bankers, lenders, and venture capitalists.
2. Analysis of Options Agreement as an Ordinary Commercial Contract
D. JACOBS'S AFFIRMATIVE DEFENSES
Jacobs asserts the affirmative defense that he entered the agreements
under duress caused by Mathias's threats of economic interference and
physical violence. Jacobs described an "atmosphere of threats and
intimidation" during the period that he and Mathias negotiated the
agreements. Examination Before Trial of Jacobs ("Jacobs Dep.") at 198,
excerpt attached as exhibit 3 to Affirmation of Steven Feldman (counsel
for Jacobs) dated May 16, 2000. Jacobs depicts Mathias as a dangerous man
with ties to indicted Serbian war criminals. Jacobs's Memorandum in
Opposition to Summary Judgment ("Jacobs's Mem. in Opp'n to Summ. J.").
Jacobs's deposition testimony is replete with examples of Mathias's
allegedly threatening behavior during the period in which they were
discussing Mathias's termination. For instance, Jacobs claims that
Mathias brought a cast of unsavory characters to the United Waste
offices, including his cousin "Zoran," who is characterized as a
gun-toting mafia contract killer and "Little Mike", who "also was
described as basically a thug, and frankly made a convincing
performance." Jacobs Dep. at 198. Perhaps the most menacing Mathias
associate was a boxer allegedly employed by Mathias to extort money out
of Jacobs. Jacobs Dep. at 197-98. The boxer purportedly arrived
unannounced at the United Waste office and poised himself with an
intimidating glare before Jacobs. Id. The boxer left only after Jacobs
called Mathias and threatened to call the police. Id.
Jacobs portrays Mathias as possessing a generally violent temperament
not limited to their discussions of Mathias's termination from United
Waste. For example, Jacobs recounts an episode in which Mathias became
belligerent with a driver, who Mathias believed was taking too long
pumping gas at a gas station. The deposition testimony of John Milne, a
United Waste senior officer during Mathias's tenure there, corroborates
Jacobs's deposition testimony and adds to Mathias's character
composition. Milne stated that he considered Mathias to be a threatening
person "primarily due to the stories and information that Mike told us"
about his "violent lifestyle."*fn1 Milne Dep. at 80-81. Finally, Jacobs
buttresses his allegation of Mathias's violent personality by associating
Mathias with the tumult in the former Yugoslavia. Jacobs attaches as an
exhibit an excerpt from a book which identifies Nenad Matjasevic
(Mathias's former name) as an "operative in charge" of carrying out
apparent terrorist acts against Croatia.*fn2 Jacobs Mem. in Opp'n Summ.
J. Ex. 7. Jacobs also notes that contact information for Arkan and
Stojiljkovic, two Serbians purportedly indicted for war crimes in
connection with the war in the Balkans, was contained in Mathias's Palm
Pilot. Id. Ex. 11.