New York Law Review

Tag: Non-solicitation agreement

  • MGM Court Reporting Service, Inc. v. Greenberg, 74 N.Y.2d 691 (1989): Express Contract Terms Override Implied Covenants

    MGM Court Reporting Service, Inc. v. Greenberg, 74 N.Y.2d 691 (1989)

    When parties expressly define the limits of a non-solicitation restriction in a contract, a court will not imply a broader restriction, even if one party sought a more general prohibition during negotiations.

    Summary

    This case addresses whether a non-solicitation covenant can be implied when the parties have already negotiated and expressly defined the limits of such a restriction in a contract. MGM Court Reporting Service sued Stanley Greenberg, a former shareholder, alleging he breached an implied restrictive covenant by soliciting MGM’s clients after selling his shares back to the company. The New York Court of Appeals held that because the parties had explicitly limited the non-solicitation restriction to three specific customers, a broader limitation could not be implied. The court affirmed the dismissal of MGM’s claims, emphasizing that express contractual terms take precedence over implied covenants.

    Facts

    Stanley Greenberg, a 40% shareholder in MGM Court Reporting Service, commenced dissolution proceedings against the corporation, alleging oppressive actions by the majority shareholder, Michael Yesner. Yesner and MGM then elected to purchase Greenberg’s shares. During settlement negotiations, Yesner attempted to secure a general prohibition against Greenberg soliciting MGM customers. The final settlement agreement, however, contained a specific non-solicitation clause that restricted Greenberg from performing services for only three named companies for a period of five years. Greenberg later started his own court reporting business and allegedly began soliciting MGM’s clients. MGM then sued Greenberg for breach of an implied covenant against impairment of goodwill.

    Procedural History

    MGM Court Reporting Service sued Stanley Greenberg in New York State court, alleging breach of an implied restrictive covenant and breach of fiduciary duty. The trial court’s decision is not specified in the provided text. The Appellate Division granted Greenberg’s motion for summary judgment, concluding that a non-solicitation covenant could not be implied because the sale of Greenberg’s shares was akin to a sale “under compulsion.” MGM appealed to the New York Court of Appeals.

    Issue(s)

    Whether a court can imply a broader non-solicitation restriction when the parties have expressly defined the limits of such a restriction in a written contract.

    Holding

    No, because the parties expressly limited the non-solicitation restriction to three specific customers, a more general limitation may not be implied.

    Court’s Reasoning

    The Court of Appeals reasoned that the parties’ explicit agreement regarding the non-solicitation restriction precluded implying a broader restriction. The court emphasized that the parties had negotiated and expressly defined the reach of the limitation on solicitation. The court stated, “The parties having thus negotiated and expressly defined the reach of the limitation on solicitation, a more general limitation may not be implied.” There was no claim that the agreed restriction was anything other than a specific non-solicitation covenant limited to three customers. The court distinguished the case from situations where the agreed restriction is not what it appears to be. Because the parties had the opportunity to include a broader restriction and did not, the court declined to imply one. The court did not reach the issue of whether the sale of shares was “under compulsion,” as the Appellate Division had.

  • Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981): The Indefinite Duty Not to Solicit Former Customers After Sale of Good Will

    Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981)

    When a business is sold, the seller has a permanent, implied duty to refrain from soliciting former customers to protect the transferred good will, regardless of any express covenants restricting competition.

    Summary

    Mohawk Maintenance Co. sued Kessler, the former owner, for soliciting its customers after selling the business. The court addressed whether the duty not to solicit former customers after the sale of a business’s good will is limited in duration. The court held that this duty is permanent and not subject to the “reasonableness” test applied to express covenants restricting competition. The court reasoned that the implied duty protects the transferred good will, a vested property right of indefinite duration, and prevents the seller from undermining the value of what was sold.

    Facts

    Kessler sold his controlling interest in Mohawk Maintenance Co., a building maintenance business, for $2,000,000. The sale agreement included an express covenant restricting Kessler from competing with Mohawk for five years. Kessler also entered an employment agreement with Mohawk, containing a separate anticompetition clause effective for 24 months after termination. Kessler voluntarily resigned from Mohawk in August 1978 and formed a competing business, Sure-Way Maintenance Services. Kessler allegedly solicited some of his former Mohawk customers.

    Procedural History

    Mohawk sued Kessler and Sure-Way, seeking damages and an injunction to prevent competition until August 1980 (based on the employment agreement’s anticompetition clause) and a permanent injunction against soliciting Kessler’s former Mohawk customers. Special Term granted partial summary judgment to Mohawk, enjoining Kessler from soliciting customers who were actively dealing with Mohawk in 1972 when the business was sold and finding the contractual limitations on his freedom to compete were intended to remain in effect for the 24-month period following the actual termination of his employment with Mohawk. The Appellate Division affirmed with a minor modification, clarifying that Kessler could accept unsolicited business from former customers. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the duty of a seller of a business to refrain from soliciting the patronage of customers who were actively being served by the business at the time of sale, arising from the transfer of good will, is indefinite in duration or subject to limitations of reasonableness applicable to express covenants not to compete.

    Holding

    Yes, because the duty to refrain from soliciting former customers is permanent and not subject to the durational limitations applied to express covenants restricting competition. The law imposes this duty to prevent the seller from impairing the good will they purported to sell.

    Court’s Reasoning

    The court distinguished between the duty to refrain from soliciting former customers (implied upon the sale of good will) and the duty to refrain from competing (arising only from express agreements). While express covenants restricting competition must be reasonable in scope and duration, the implied duty not to solicit is permanent. The court reasoned that the purchaser of good will acquires the right to expect continued patronage from the business’s established customers. The seller is not allowed to derogate from their own grant, and “ ‘[a] man may not derogate from his own grant; the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant, on the sale of good will, that the vendor does not solicit the custom which he has parted with; it would be a fraud on the contract to do so’ ”. The court found that the sale of Mohawk included a transfer of good will, evidenced by the purchase price and the express covenants against competition. The court emphasized that “the defendants remain under a positive and permanent duty to refrain from interfering with the rights acquired by plaintiff as a result of its acquisition of Mohawk’s ‘good will’”.