McCarter & English, LLP, New York, NY (Craig M. Bonnist
of counsel), for appellant.
Keidel, Weldon & Cunningham, LLP, White Plains, NY (Jan
A. Marcus of counsel), for respondent.
C. BALKIN, J.P. JOHN M. LEVENTHAL SHERI S. ROMAN HECTOR D.
DECISION & ORDER
action, inter alia, to recover damages for breach of
contract, the defendant Daniel Southard appeals (1) from a
decision of the Supreme Court, Dutchess County (Forman, J.),
dated March 18, 2014, made after a nonjury trial, and (2), as
limited by his brief, from so much of an order of the same
court dated January 14, 2015, as denied that branch of his
motion which was pursuant to CPLR 4404(b) to set aside the
that the appeal from the decision is dismissed, as no appeal
lies from a decision (see Schicchi v J.A. Green Constr.
Corp., 100 A.D.2d 509); and it is further, ORDERED that
the order is modified, on the law, by deleting the provision
thereof denying that branch of the motion of the defendant
Daniel Southard which was pursuant to CPLR 4404(b) to set
aside so much of the decision as determined that the
plaintiff was entitled to an award of damages; as so
modified, the order is affirmed insofar as appealed from, and
the matter is remitted to the Supreme Court, Dutchess County,
for further proceedings consistent herewith; and it is
further, ORDERED that one bill of costs is awarded to the
defendant Daniel Southard.
2006, the defendant Daniel Southard left his job as an
insurance agent at the Fitzharris Insurance Agency and began
employment at the plaintiff, Marshall & Sterling, Inc.
(hereinafter M & S). At that time, Southard and M & S
entered into an employment agreement. Article V, Section 4,
of the employment agreement, entitled "Post-Termination
Commission Sharing by Employee, " provided that Southard
would pay M & S an amount "equal to 50% of
annualized gross commissions for the first 36 months"
for any client that followed him from M & S within 24
months of the termination of his employment.
January 2010, Southard left M & S to begin employment at
the defendant Ulster Insurance Services, Inc. (hereinafter
Ulster). A number of clients followed Southard to Ulster,
including clients that had followed him to M & S from
Fitzharris (hereinafter the Fitzharris clients) and clients
that Southard had originated at M & S (hereinafter the
non-Fitzharris clients). M & S demanded payment under the
employment agreement, which Southard refused. M & S
commenced this action against Southard, seeking damages for
breach of contract, and against Ulster, seeking damages for
tortious interference with contract. M & S settled with
Ulster prior to trial.
nonjury trial, the Supreme Court, in a decision, found that
Southard breached an enforceable employment agreement and
that M & S was entitled to $224, 470.35 in liquidated
damages for all of the clients that followed Southard from M
& S to Ulster. The Supreme Court also found that Article
V, Section 4, of the employment agreement was an enforceable
liquidated damages clause, not an unenforceable penalty,
because there was a "reasonable relationship"
between the amount of liquidated damages due under the clause
and "the damages suffered by M & S due to the
departure of its customer base to Ulster." Southard
moved, inter alia, to set aside the decision pursuant to CPLR
4404(b). In the order appealed from, the Supreme Court
denied, inter alia, that branch of the motion.
contracts that require compensation for clients that follow
employees to a new employer fall within the ambit of
noncompete clauses, and are carefully scrutinized by courts
(see BDO Seidman v Hirshberg, 93 N.Y.2d 382, 388).
Courts apply a three-prong test for balancing the competing
interests of the employer, the employee, and the public: the
"restraint is reasonable 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" (id. at 388-389).
"A violation of any prong renders the covenant
invalid" (id. at 389). "[T]he application
of the test of reasonableness of employee restrictive
covenants focuses on the particular facts and circumstances
giving context to the agreement" (id. at 390).
& S did not have a protectable interest in the Fitzharris
clients because those clients' goodwill was acquired
through their prior personal relationship with Southard and
not through the expenditure of M & S resources (see
id. at 393). Therefore, enforcement of the restrictive
covenant as to the Fitzharris clients would violate the first
prong of the BDO Seidman test and result in the
misappropriation by M & S of the goodwill created and
maintained through Southard's own efforts (see
id.). Contrary to M & S's assertions, the
insurance industry is not unique and its investment in
Southard did not create a protectable interest (cf.
Riedman Corp. v Gallager, 48 A.D.3d 1188). Accordingly,
the restrictive covenant is invalid as to the Fitzharris
to Southard's further arguments, the employment agreement
is otherwise enforceable. Courts have the power to sever
restrictive covenants, granting partial enforcement to the
extent that they do not violate the three-prong test (see
BDO Seidman v Hirschberg, 93 N.Y.2d at 391-392, 394).
Here, the restrictive covenant must be severed so as to
exclude the Fitzharris clients.
Supreme Court erred in awarding M & S damages without a
trial on that issue. At trial, M & S submitted a schedule
of values, which was alleged to show the identity and
commissions of the Fitzharris and non-Fitzharris clients.
Southard's counsel began to question the representative
of M & S regarding damages, but the Supreme Court stopped
this line of questioning. Southard should have been given the
opportunity to test the accuracy of the schedule of values,
upon which the court relied in determining the amount of the
award to which M & S was entitled (see Bitzios v
Michelakis, 89 A.D.3d 779). Further, the parties
disagree about the calculation of damages under Article V,
Section 4, of the employment agreement, which is ambiguous
and cannot be interpreted without additional evidence because
it permits different inferences, and fairminded and
reasonable persons may disagree as to its meaning and effect
(see Lamb v Norcross Bros. Co., 208 NY 427, 431).
Therefore, a trial on the issue of damages must be held as to
the non-Fitzharris clients.
[an] early termination fee represents an enforceable
liquidation of damages or an unenforceable penalty is a
question of law, giving due consideration to the nature of
the contract and the circumstances" (JMD Holding
Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 379-380).
"The party challenging a liquidated damages clause must
establish either that actual damages were readily
ascertainable at the time the contract was entered into or
that the liquidated damages were conspicuously
disproportionate to foreseeable or probable losses"
(United Title Agency, LLC v Surfside-3 Mar., Inc.,
65 A.D.3d 1134, 1135). Here, upon remittal, the Supreme Court
must determine anew whether the post-termination sharing
provision was an unenforceable penalty rather than an
enforceable liquidation of damages clause based ...