New York Law Review

Tag: Client Solicitation

  • Bessemer Trust Co., N.A. v. Branin, 16 N.Y.3d 549 (2011): Scope of “Improper Solicitation” After Sale of Goodwill

    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.

  • Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995): Fiduciary Duty and Solicitation of Clients by Departing Law Partners

    Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995)

    Departing law partners breach their fiduciary duty when they secretly solicit firm clients for their personal gain before resigning, as this undermines the duty of loyalty among partners and exceeds the scope of permissible client communication.

    Summary

    This case concerns a dispute between a law firm and its departing partners, focusing on whether the partners breached their fiduciary duty by soliciting firm clients before their resignation. The New York Court of Appeals held that such pre-resignation, surreptitious solicitation is actionable, as it undermines the duty of loyalty partners owe each other. The court clarified that while attorneys can inform clients of their departure and remind them of their right to choose counsel, they cannot secretly lure clients away or lie about their rights. The court also addressed claims of breach of contract and fraud, finding material issues of fact that precluded summary judgment.

    Facts

    Irving Moskovitz and Seymour Graubard founded the plaintiff law firm in 1949. Moskovitz brought in F. Hoffman LaRoche & Co., Ltd. (Roche) as a client in 1959, with billings exceeding $1 million per year by the late 1980s. In 1982, the firm adopted a retirement program that included clauses stating retirees would not impair the firm’s client relationships and would integrate clients with other partners. After the phase-down period, Moskovitz, unhappy with the firm, contacted a legal search consultant about moving to another firm with his tax partners, Schiller and Young, indicating Roche would follow. Moskovitz negotiated with LeBoeuf Lamb Leiby & MacCrae, ensuring Roche’s approval before finalizing any arrangement.

    Procedural History

    The law firm sued Moskovitz, Schiller, and Young for fraud, breach of fiduciary duty, breach of contract, and unjust enrichment after they resigned and joined LeBoeuf. The trial court denied the defendants’ motion for summary judgment, except for claims based on guarantees of client retention. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. Only Moskovitz appealed.

    Issue(s)

    1. Whether a withdrawing partner breaches fiduciary duty by soliciting firm clients before announcing their resignation.
    2. Whether a contractual requirement that an attorney try to “integrate” or “institutionalize” clients into the firm is legally enforceable.
    3. Whether a cause of action for fraud is stated by alleging that a promisor lacked the intention to perform representations when making them.

    Holding

    1. Yes, because pre-resignation surreptitious solicitation exceeds what is necessary to protect client freedom of choice and undermines the duty of loyalty among partners.
    2. Yes, because such provisions do not compromise client freedom of choice or an attorney’s freedom to practice law, but simply obligate partners to use their best efforts to expose clients to other attorneys in the firm.
    3. Yes, because a false statement of intention is sufficient to support an action for fraud, even if it relates to an agreement between the parties.

    Court’s Reasoning

    The Court of Appeals balanced the fiduciary duty partners owe each other with the attorney’s responsibility to clients and client’s freedom to choose counsel. While attorneys can inform clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and remind the client of its freedom to retain counsel of its choice, secretly attempting to lure firm clients to the new association is inconsistent with a partner’s fiduciary duties. The court emphasized that partners must maintain a “punctilio of an honor the most sensitive.” Regarding the breach of contract claim, the court found that the retirement agreement provision did not compromise client freedom. The court also held that a cause of action for fraud may arise when one misrepresents a material fact with no intention of complying with those representations. The court noted, “A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties.” Because there were material issues of fact the court determined that summary judgment was inappropriate.