TOTARO, DUFFY, CANNOVA & COMPANY, LLC, v. LANE, MIDDLETON & COMPANY, LLC, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2649-03T12649-03T1

TOTARO, DUFFY, CANNOVA &

COMPANY, LLC, a limited

liability company of the

State of New Jersey,

Plaintiff-Respondent,

v.

LANE, MIDDLETON & COMPANY, LLC,

a limited liability company of

the State of New Jersey,

Defendant,

and

MERRITT LANE III,

Defendant-Appellant,

and

DAVID P. MIDDLETON,

Defendant.

___________________________________

 

Argued October 12, 2005 - Decided February 27, 2006

Before Judges Wefing, Fuentes and Graves.

On appeal from Superior Court of New Jersey,

Law Division, Ocean County, Docket No.

OCN-C-225-01.

Arnold Lakind argued the cause for appellant

Merritt Lane III (Szaferman, Lakind,

Blumstein, Blader & Lehmann, attorneys;

Mr. Lakind, of counsel and on the brief).

John F. Gelson argued the cause for

respondent Totaro, Duffy, Cannova

& Company (McLaughlin Gelson, attorneys;

Mr. Gelson, of counsel and on the brief;

Shannon Fury Curtis, on the brief).

PER CURIAM

Defendant, Merritt Lane, III, (Lane) appeals from the judgment of the Law Division finding him liable for violating an agreement he entered into with plaintiff, Totaro, Duffy, Cannova & Company, (TDC), not to solicit clients to perform "compliance work," a specific type of accounting service. The court awarded plaintiff $67,612.35 in damages, and entered an order restraining defendant from soliciting any former clients of plaintiff and defendant Lane Middleton Company, for a period of three years.

Lane now argues on appeal that the award of damages should be reversed, because there is no evidence that any act of alleged solicitation caused any damage to TDC, and the trial court "grossly overstated" Lane's true profits. Lane does not challenge on appeal that portion of the judgment restraining him from soliciting former clients of TDC and Lane, Middleton & Co., LLC through July 17, 2006. After reviewing the record, and in light of prevailing legal standards, we affirm substantially based on Judge Oles's well-reasoned memorandum of decision dated July 17, 2003.

We add only the following brief comments. Lane's principal objection to the decision of the trial court is centered on proximate cause. He attacks the court's finding that he violated the non-solicitation agreement, because it "was based on a single mailing of an announcement letter to a limited number of individuals who had been [his] long-term clients." Lane mischaracterizes Judge Oles's factual findings, and proximate cause analysis flowing therefrom.

The facts and interactions of the parties that led to this litigation are thoroughly set out in Judge Oles's memorandum of opinion. In the interest of clarity, we will summarize them here. By so doing, we also incorporate by reference Judge Oles's full recitation of the factual record.

TDC is in the business of providing accounting services to the general public. Lane is a certified public accountant engaged in similar work. Lane opened his independent accounting practice in 1980. He developed a significant client base over a twenty-year period, in part comprised of friends and family. In 1996, Lane decided to discontinue compliance accounting and focus on developing his business in the areas of financial and estate planning. Compliance accounting consists of preparing income tax returns, financial statements and general accounting for payrolls.

On January 4, 1997, Lane entered into a merger agreement, entitled, "Agreement to Merge Accounting Practices," with David Middleton for the creation of a new accounting firm. Under the terms of the agreement, Middleton agreed to pay Land over a five year period for the sale of Lane's compliance accounting business. The agreement provided that Middleton pay to Lane the sum of $50,000 immediately, plus annual payments for the next five years of 30% of the gross collections from the existing clients. This agreement also included a provision that Lane would work on a per diem basis, for a specified number of hours, that declined as the years proceeded. Lane received approximately $558,000 under this agreement. This agreement provided that Middleton pay to Lane the sum of $50,000 immediately, plus annual payments for the next five years of 30% of the gross collections from the existing clients. This agreement also included a provision that Lane would work on a per diem basis, for a specified number of hours that declined as the years proceeded.

On or about December 14, 2000, Middleton commenced negotiations with Daniel Duffy, a representative of TDC, for the sale of Lane Middleton Company. An agreement on the sale was signed on February 2, 2001. As an expressed condition of the sale, Duffy requested that Middleton obtain a signed non-compete clause from Lane for the benefit of TDC. Although Lane refused to sign a restrictive covenant, he acceded to signing a non-solicitation statement, specifically agreeing not to solicit clients of the Middleton business, or perform compliance accounting work for any former clients. The agreement was memorialized in a statement signed by Lane dated February 2, 2001. The "Non-Compete Clause" provided:

You agree that for a period of four (4) years after the date hereof you will not, individually or as an owner or employee of any business entity, solicit opportunities to provide compliance accounting services for any of the clients of LMC or any parties that were your clients at the time of the Original Purchase Transaction. You agree that [TDC] will be a third party beneficiary of this covenant and entitled to enforce the provisions of this Section 4.

In consideration for agreeing to the restrictions of the non-solicitation agreement, Lane received free office space from TD in the existing office of LMC for a period of one year and an immediate payment from LMC of $112,500 as the final payment under the 1997 agreement between Lane and Middleton. On February 2, 2001, Middleton and TDC signed a separate agreement under which TCD paid $345,000 for the accounting practice of LMC, including client lists, goodwill, all the equipment, furnishings and the right to use the business name. The purchase price was allocated between goodwill, a covenant not to compete, furniture, fixtures and equipment.

TDC's working relationship with Lane was fraught with problems almost from the start. As a result, in May 2001, Lane opened his own competing accounting practice within the same office building. Between February 2, 2001 and June 28, 2001, Lane accessed TDC's software program and obtained copies of their client list. Lane did this without TDC's knowledge and approval. Ironically, Lane had most of the client names available to him in his Quick Books program created prior to the merger with Middleton.

Lane used TDC's client list to mail between 125 and 150 letters to TDC clients. These letters contained: (1) an announcement for the opening of Lane's office; (2) an enclosed fee schedule for accounting services performed, including compliance work; (3) a disengagement letter from TDC; (4) and a letter to engage Lane as their accountant. Within approximately two weeks of Lane's mailing, TDC received 159 "Lane-prepared" disengagement letters. Lane testified that he does work for 140 of the 159 clients.

In total, TDC and Lane called approximately twenty-five of these clients to testify at the trial. All of the clients testified similarly. They all generally stated that they had long-standing relationships with Lane as clients, family or friends, and considered Lane to be their accountant exclusively. The reasons given for choosing to retain Lane as their accountant ranged from a desire to preserve continuity; their personal relationship with Lane; and dissatisfaction with TDC's services. Several individuals also testified that they did not remember receiving a notice of solicitation from Lane prior to switching from TDC to Lane. Both parties stipulated that:

Approximately 25 clients have testified in these proceedings. If we required additional clients to appear and testify, their testimony on direct and cross-examination would be substantially the same as those clients who have appeared and testified to date.

From this record, the trial court found that Lane had violated his agreement not to solicit TDC's clients, specifically in the area of performing compliance accounting services. The trial court's conclusion in this respect is amply supported by competent credible evidence. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-484 (1974).

The more difficult question concerns the calculation of damages. After all, both by stipulation and by submission of live testimony, all of the evidence before the court indicates that the clients who retained Lane after his professional separation from TDC, were not induced by the solicitation packet sent to them. Thus, there appears at least at first blush, to be no rational basis from which to link Lane's breach of contract to quantifiable damages sustained by TDC.

As noted by Judge Oles, however, "the rule of law relating to the uncertainty of the damages applies to the uncertainty as to the fact of damages and not as to its amount." We agree with Judge Oles that TDC was unquestionably economically injured by Lane's actions. The close temporal proximity between the mailing of the solicitation letters and TDC's receipt of 159 Lane-crafted disengagement letters, is sufficient evidence to infer that, had there been no interference, plaintiff would have received the economic benefit of servicing these clients. Lamorte Burns & Co. v. Walters, 167 N.J. 285, 296-297 (2001).

In Lamorte, our Supreme Court upheld the trial court's finding that the defendant's action of taking the clients' names, addresses, phone numbers, accident dates and billing rates constituted a breach of the duty of loyalty, tortious interference with an economic advantage, and misappropriation of plaintiff's confidential and proprietary information. Lamorte Burns & Co., supra, 167 N.J. at 309; see AYR Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 504-505 (App. Div. 1993) (finding that names and addresses of clients are private information and property of the company). Client information need not rise to the level of a trade secret or be not otherwise publicly available to be afforded protection. Lamorte Burns & Co., supra, 167 N.J. at 299. This is because, while the names and addresses may be public, the fact that these individuals were customers is not public information. Id. at 300-301.

The test to determine if there has been misuse of confidential customer lists is based on "the relationship of the parties at the time of disclosure and the intended use of the information." Id. at 299. In the employer-employee relationship, the employee as an agent of the employer is bound by a duty not to use confidential information of the employer in competition with or to the injury of the employer. Id. at 300-301. In determining whether information is confidential and proprietary, attempts by the employer to have the employee sign a non-compete or non-solicitation agreement constitutes substantial evidence. Id. at 301-302.

The methodology employed by Judge Oles to determine the amount of actual damage sustained by TDC here is sound. We see no cause to substitute our judgment for his on this issue. We thus adopt, by reference, the calculations and conclusions he reached, as reflected in his memorandum of opinion.

Finally, we note our dissenting colleague's conclusion that, in her opinion, the record does not establish a casual nexus between the breach of the non-solicitation agreement and the loss of compliance business experienced by plaintiff. In our view, this conclusion glosses over the key evidence relied upon by the trial court in support of its proximate cause analysis, to wit, the close temporal proximity between Lane's mailing of the solicitation letters, and TDC's receipt of 159 Lane-crafted disengagement letters. This body of evidence satisfies the "reasonably certain" standard establishing a causal link between TDC's loss of compliance work and defendant's breach.

 
Affirmed.

___________________________________

WEFING, P.J.A.D, dissenting.

I write separately because I am unable to agree with my colleagues that the record before the trial court warrants affirming the judgment awarding plaintiff damages in the sum of $67,612.35. I agree with appellant Lane that the trial court failed to find that his mailing was a proximate cause of damage to plaintiff. In my view, the absence of such a finding is fatal to the award of damages.

My colleagues acknowledge, moreover, that the record before the trial court would hardly support such a finding; as they state, "both by stipulation and by submission of live testimony, all of the evidence before the court indicates that the clients who retained Lane after his professional separation from TDC, were not induced by the solicitation packet sent to them." Faced with that record, my colleagues rely upon the principle that uncertainty as to the amount of damages will not preclude recovery of damages and conclude that the judgment below should be affirmed.

The trial court relied upon that principle as well and cited Tessmar v. Grosner, 23 N.J. 193 (1957), and American Sanitary Sales Co. v. State, Dep't of Treasury, 178 N.J. Super. 429, 435 (App. Div. 1981), in support. That principle is applicable, however, when the uncertainty relates to the amount of damages and not to the present situation, in which the uncertainty relates to whether the defendant was a cause of the damage. Tessmar, supra, 23 N.J. at 203. "[A]lthough the exact amount of the loss need not be certain," Donovan v. Bachstadt, 91 N.J. 434, 445 (1982), "the loss must be a reasonably certain consequence of the breach." Ibid.

Because plaintiff did not establish that any loss it may have experienced was "a reasonably certain consequence" of Lane's actions, I would reverse the award of damages and leave in place the restraints upon Lane's solicitation of former clients of TDS and Lane & Middleton, LLC.

 

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February 27, 2006