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September 27, 2001


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 Agreement")

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 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)


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.


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 in original).

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

Even if cons rued as an ordinary commercial contract, the non-compete provision is unenforceable. The "simple rule of reason" analysis differs from the employment contract test by according more deference to the parties' freedom to contract. This does not mean, as Jacobs suggests, that the Agreement memorialized by the parties must be enforced strictly according to its terms. On the contrary, the "simple rule of reason" still embraces consideration of the factors entailed in the employment contract test, including protection of legitimate business interests and the hardship imposed upon the former employee. As described above, the sweeping no-contact clause was not necessary to protect United Waste's business interests and it unduly burdened Mathias's ability to earn a living.


1. Duress

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.

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