Bessemer Trust Co., N.A. v. Branin, 16 N.Y.3d 549 (2011)
When a business and its goodwill are sold, the seller has an implied duty to refrain from actively soliciting former customers, but may respond to inquiries initiated by those customers, within certain limitations.
Summary
Bessemer Trust purchased Brundage, Story & Rose, LLC, including its client accounts and goodwill. Francis Branin, a former principal at Brundage, became an employee of Bessemer but later joined Stein Roe, a competitor. When some of Branin’s former Bessemer clients followed him to Stein Roe, Bessemer sued, alleging improper solicitation. The Second Circuit certified the question of what constitutes improper solicitation under New York law when a seller of goodwill’s former clients initiate contact. The New York Court of Appeals held that a seller may respond to factual inquiries from former clients but cannot disparage the purchaser or actively solicit their business, even through a new employer.
Facts
Bessemer Trust acquired Brundage, Story & Rose, including its client accounts and goodwill, for over $75 million. As part of the deal, Francis Branin, a principal at Brundage, became an at-will employee of Bessemer. Branin later became dissatisfied with his role and joined Stein Roe. After Branin’s departure, Bessemer notified his clients. Some clients, including the Palmer family, contacted Branin about his move. The Palmers, after speaking with Branin and representatives from both Bessemer and Stein Roe, moved their accounts to Stein Roe.
Procedural History
Bessemer sued Branin in New York Supreme Court, alleging breach of duty of loyalty through improper solicitation. Branin removed the case to federal District Court. The District Court found Branin liable for improperly inducing the Palmer account to leave Bessemer. Following a trial on damages, the District Court awarded Bessemer over $1.2 million. Branin appealed to the Second Circuit, which certified the question of what constitutes improper solicitation to the New York Court of Appeals.
Issue(s)
Whether the active development and participation by the seller, in response to inquiries from a former client whose good will the seller has voluntarily sold to a third party, in a plan whereby others at the seller’s new company solicit a client, and participation by the seller in solicitation meetings where the seller’s role is largely passive constitutes “improper solicitation” under New York law.
Holding
No, because the implied covenant bars a seller of “good will” from improperly soliciting his former clients but does not prevent responding to factual questions from former clients who initiate contact; furthermore, a seller may assist his new employer in developing a plan to respond to a client’s inquiries, and a “largely passive” role at a resulting meeting does not constitute improper solicitation.
Court’s Reasoning
The Court of Appeals reaffirmed the principle from Mohawk Maintenance Co. v. Kessler, establishing an implied covenant that a seller of goodwill must refrain from soliciting former customers. However, the court clarified that this covenant does not prevent a seller from competing with the purchaser or accepting trade from former customers, provided there is no active solicitation. The court emphasized that customers have the right to make informed choices and seek information. Therefore, a seller may respond to factual inquiries from former clients without disparaging the purchaser. The court noted that a seller may convey information about a former client to a new employer and assist in preparing for a meeting requested by the client. A passive role in such a meeting, limited to answering factual questions, does not violate the implied covenant. The court distinguished between permissible responses to inquiries and impermissible active solicitation, finding that the former client initiated contact with Branin, who then answered questions and helped prepare a presentation but did not disparage Bessemer.