Appeal by the defendant and cross-appeal by the plaintiff from a judgment of the United States District Court for the Southern District of New York. The district court (John E. Sprizzo, Judge) made three rulings relevant to this appeal. First, it found the defendant liable to the plaintiff for improper solicitation of a client's account where that account had earlier been transferred to the plaintiff by, inter alios, the defendant, in violation of the so-called "Mohawk doctrine." Second, the court granted summary judgment dismissing the defendant's counterclaims against the plaintiff for breach of contract, for promissory estoppel, and in quantum meruit. Third, it awarded damages to the plaintiff based on a "return of capital" rather than a "lost profits" theory. We certify to the New York Court of Appeals a question of New York law relevant to the determination of the defendant's liability under the Mohawk doctrine, affirm the dismissal of the counterclaims, and reserve decision on the question of damages pending a response from the Court of Appeals.
Affirmed in part, question certified in part, decision reserved in part.
The opinion of the court was delivered by: Sack, Circuit Judge.
Before: McLAUGHLIN, CALABRESI, and SACK, Circuit Judges.
The defendant Francis S. Branin, Jr., a former principal in an investment management firm, and his partners sold their firm and its good will to another investment management firm, the plaintiff Bessemer Trust Company, N.A. ("Bessemer"). Soon dissatisfied with his employment at Bessemer, Branin left and joined a competitor. He did not contact his former clients in search of their business directly, but he did respond to their inquiries as to his status. He also participated in at least two in-person meetings with respect to one client, and helped craft his new firm's strategy for soliciting that client's business.
When this client and several others stopped doing business with Bessemer to do business with Branin's new firm instead, Bessemer brought the instant lawsuit, alleging that Branin had solicited his former clients at Bessemer in violation of the doctrine established by Von Bremen v. MacMonnies, 200 N.Y. 41, 93 N.E. 186 (1910) and Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 419 N.E.2d 324, 437 N.Y.S.2d 646 (1981) (the "Mohawk doctrine"), which prohibits, in perpetuity, a voluntary seller of a client's good will from improperly soliciting business from that client after the client's business, including its good will, is transferred to the purchaser. Branin filed counterclaims against Bessemer for breach of contract, in quantum meruit, and for promissory estoppel.
After a bench trial in the United States District Court for the Southern District of New York, the court (John E. Sprizzo, Judge) concluded that Branin had improperly solicited one former client, but found insufficient evidence of improper solicitation with respect to the others. Instead of trying Branin's counterclaims, the court granted Bessemer summary judgment dismissing them. Finally, after a second trial on damages, the court adopted a "return of capital," rather than a "lost profits," theory upon which it awarded Bessemer $1,229,173.20 in damages and pre-judgment interest.
Branin appeals, contesting the finding of liability, the award of damages and the dismissal of his counterclaims.
Bessemer cross-appeals with respect to the calculation of damages.
The principal legal question before us depends not on interpretation of contract law, but on application of a branch of New York tort law, the Mohawk doctrine. We find insufficient guidance in New York case law to establish whether Branin's behavior constituted actionable improper solicitation under that law. We therefore certify to the New York Court of Appeals that question. Inasmuch as an answer to this question is dispositive of a finding of liability in this case, and is therefore also a threshold question that must be answered before any damages may be awarded, we need not, and choose not to, decide at this time whether the district court properly calculated damages. Branin's promissory estoppel and quantum meruit claims have been waived on appeal. We affirm the dismissal of his breach of contract counterclaims because, for reasons we will explain, as an at-will employee, he cannot prevail on them based on diminution of his responsibilities and because his claim for failure to provide an adequate bonus is without merit as his offer letter explicitly vested Bessemer with the sole discretion as to whether to pay him a bonus, and if so, in what amount.
Defendant Francis S. Branin, Jr., an investment portfolio manager, joined the investment management firm of Brundage, Story and Rose, LLC ("Brundage") in 1977, rose to the level of principal in the firm by 1982, served as Chief Executive Officer from 1996 until 2000, and at the time of the events in question, held the largest share of the firm.
In October 2000, pursuant to a purchase agreement dated August 18, 2000, (the "Purchase Agreement") Branin and the seven other principals in Brundage sold the assets of the firm, including its client accounts and related good will, to Bessemer for more than $75 million. Branin, in view of his substantial ownership of Brundage and as one of the lead negotiators for Brundage with respect to the sale, had substantial involvement in arranging the sale. All the principals were to be employed by Bessemer at will thereafter. They obtained no ownership stake in the new firm.
In an effort to ensure that the Brundage principals devoted their energies to transferring their client accounts to Bessemer and retaining those accounts, the Purchase Agreement provided that only a portion of the purchase price would be guaranteed -- an initial payment of $50 million, of which Branin received more than $9.1 million and that further payments could be earned upon the meeting of certain benchmarks for client retention, revenue enhancements, and reduction of expenses. The Brundage principals thereafter earned two such contingency payments, one for $10 million in September 2001 in return for their meeting client account transfer benchmarks from Brundage to Bessemer, and a payment of approximately $15 million in April 2002 because of a successful reduction of expenses. Branin received nearly one quarter of each of these two payments.
It soon became clear, however, that Branin and the other former Brundage principals would not be eligible for the remaining two contingency payments, in large measure because one of the former principals, Cheryl Grandfield, departed the firm in January 2001. She actively and successfully solicited many of her clients to follow her. That had a serious adverse effect on the ability of the remaining seven principals to meet the final two contingency-payment benchmarks.
Bessemer subsequently brought suit against Grandfield for improper solicitation of clients, alleging the same principal theory of liability that it asserts here. Grandfield settled that lawsuit, agreeing to repay her entire share of the payments she had received from the sale of Brundage.
Branin soon became unsatisfied with his role at Bessemer. Several factors in addition to the fact that he would not be eligible for any further contingency payments appear to have contributed to his dissatisfaction at Bessemer. In contrast to his role at Brundage, where he had actively managed the portfolios of his clients, for example, at Bessemer, Branin was a "client account manager" without the authority to make investment decisions himself. And less than two weeks after the closing of the Brundage transaction, Bessemer's CEO left the firm. His replacement reduced Branin's responsibilities, excluding him from management meetings. Branin understood this effectively to be a demotion.
Branin was also apparently upset by the fact that Bessemer had made minimal effort to introduce him to its new or existing client base and did not involve him in any of the firm's business development projects. Finally, and relevant to Branin's counterclaims in this case, when bonuses were distributed for year-end 2001, Branin received a far smaller bonus as a percentage of his potential target bonus than did the other former Brundage principals.*fn1
Branin's Move to Stein Roe
Branin then engaged a consulting firm to explore moving, with his business, from Bessemer to another firm. The consultants brought Branin to Stein Roe Investment Counsel LLC ("Stein Roe"), a competing investment management firm. For several months, Branin and Stein Roe negotiated toward a possible deal between them. Branin explicitly described for Stein Roe his client base at Bessemer and touted his ability to bring his Bessemer clients with him.
In or prior to June 2002, Branin agreed to move to Stein Roe. At that time, Branin indicated to Stein Roe his hope that within twelve months of joining the firm he would be able to transfer $1.5 to $1.8 million of the approximately $2.3 million in revenue that he was then generating for Bessemer to Stein Roe. He informed Stein Roe that it was possible, however, that few or none of his Bessemer clients would move their business. Prior to his resignation from Bessemer, Branin refrained from contacting any of his Bessemer clients to inform them of his impending move.
On July 12, 2002, Branin resigned from Bessemer. After his resignation, Branin took limited action to assist Bessemer in client retention, providing the firm with a memorandum profiling each of his accounts and the contact person for each account.
Attempts To Bring Clients to Stein Roe At the time Brundage was sold to Bessemer, Branin managed about $450 million in investments, more than ten percent of the approximately $4.1 billion managed by Brundage immediately prior to the sale. Once Branin joined Stein Roe, the company began crafting and implementing a strategy to entice Branin's former Bessemer clients -- most or all of whom had come to Bessemer with him from Brundage -- to move their business to Stein Roe. This strategy included a new schedule of fee rates to be charged to clients that followed Branin, under which clients' fees would not thereby be increased. He and Stein Roe had some initial success. By the following summer, around thirty of Branin's former clients, representing $205 million in assets, had transferred their accounts from Bessemer to Stein Roe, accounting for all but around $23 million of the assets Branin managed at Stein Roe.
Branin did not contact his clients directly to ask them to follow him to Stein Roe. He did, however, respond to their inquiries when they asked why he left and, if they requested information about the new firm, he sent them material about his new firm. According to the district court's memorandum opinion and order, Branin's "standard" answer to clients who asked why he left Bessemer was that "'a firm like Stein Roe was far more appropriate for me, . . . that the method of dealing with clients, that the approach whereby portfolio managers managed the client portfolios and interacted directly with the clients was more . . . appropriate for my training and experience of 30 years in the business.'" Bessemer Trust Co., N.A. v. Branin, 427 F. Supp. 2d 386, 391 (S.D.N.Y. 2006)("Bessemer I") (quoting Joint Statement of Undisputed Facts, Exh. A to Pre-Trial Order dated August 3, 2004) ("Joint Statement of Undisputed Facts") (ellipses in original). Branin did not say or suggest that Stein Roe's approach would be better or more appropriate for any particular client, nor is there evidence that Branin explicitly disparaged Bessemer.
The evidence introduced at trial established that Branin had individual meetings, either alone or with other Stein Roe employees participating, with representatives of two former clients with accounts at Bessemer: the Palmer family and Glen Raven, Inc. Their accounts were in the approximate amount of $117 million and $16 million, respectively.
The Palmer Family Account
The Palmer family had been a Brundage client since the 1930s. During the fifteen to twenty years Branin had managed the account there, he developed a close friendship with Carleton Palmer, III, who represented the family for these purposes. The two men, along with their wives and children, socialized and vacationed together, ...