Valenti v Drory
Annotate this CaseDecided on May 11, 2005
Supreme Court, New York County
Anthony Valenti and AMERICAN INDUSTRIES, LLC, Plaintiffs,
against
Sarid Drory, ALIAN PORTAL, PERRY HIIMAN NEW YORK KITCHEN & HOME BATHROOM CORP. and METROPOLITAN WOOD FLOOR INC., Defendant.
101977/05
Louis B. York, J.
Plaintiffs Anthony Valenti and American Industries, LLC, (American) move for a preliminary injunction barring defendants Sarid Drory, Alian Portal, Perry Hiiman, New York Kitchen & Bathroom Corp. (New York Kitchen)(together, the New York Kitchen defendants), and Metropolitan Wood Floor Company Inc. (Metropolitan), from violating a non-compete clause contained in an asset purchase agreement. The action has been discontinued as to defendant Sarid Drory.
In an Asset Purchase Agreement (the Agreement)(Summons and Complaint, Ex. A), an entity known as NYCF Acquisition Company, LLC (NYCF) purchased the businesses of five corporations (the corporations), for the sums of $2,223,000. The Agreement was also signed by individual defendants Sarid Drory (Drory), Perry Hiiman (Hiiman) and Alian Portal (Portal), all allegedly owners, directors and/or officers in the corporations. Plaintiff claims to be NYCF's successor in interest by assignment. Plaintiff Anthony Valenti is the owner of American.
According to the complaint, American is in the business of "installing, repairing, finishing and servicing floors, floor coverings, rugs and carpeting and interior painting, construction and contracting." Complaint, ¶ 8. According to the recitations in the Agreement, the corporations were in the same business.
The Agreement contains a non-compete clause, barring the sellers from engaging in any business "competing directly" with American for five years after the date of the sale, within 100 miles of American's principal place of business, which is located at 110 West 26th Street, New York, New York. The non-compete clause also bars the sellers from calling on any of American's customers to solicit business, or from soliciting any of American's employees to leave American for a competing business created by the sellers. [*2]
Plaintiffs maintain that Hiiman, in violation of the Agreement, created New York Kitchens, a business in direct competition with American, located within blocks of American. Plaintiffs also allege that several of its newly-appointed employees left American to work for Metropolitan.
Although this court denied plaintiffs' application for a temporary restraining order (TRO), the parties have entered into two so-ordered stipulations, agreeing to TROs as follows. In the TRO dated February 17, 2005, defendants agreed not to compete with American by engaging "in the business of installing, repairing, finishing and servicing floors, floor coverings, rugs and carpeting, interior renovations (other than kitchen or bathroom remodeling) and interior painting, in competition with the Plaintiffs, or any subsidiaries, within 100 miles of 110 West 26th Street, New York, New York." Plaintiffs' Reply Aff., Ex. A, ¶ 1. These parties also agreed, among other things, not to solicit American's employees, or communicate with American's current or former customers. Defendants also agreed that, pending hearing and determination of this motion, "defendants will remove from any and all advertisements or informational materials, including their internet web page and coupon book advertisements, all reference to "floor installation," "carpet installation," and "interior painting." Id., § 3.
In the second TRO, which is between plaintiffs and Metropolitan, and dated March 4, 2005, Metropolitan represented that there was no connection between it and the other defendants, but that it would not participate or facilitate any violation of the first stipulation with the New York Kitchen defendants, or, essentially, do business in any manner with New York Kitchen in the area of selling, installing, repairing, finishing or servicing floors, floor coverings, rugs or carpets.
"The party seeking a preliminary injunction must demonstrate a probability of success on the merits, danger of irreparable injury in the absence of an injunction and a balance of equities in its favor." Nobu Next Door, LLC v Fine Arts Housing, ___ NY2d ___, 2005 WL 756651 (2005); see also Manhattan Real Estate Equities Group LLC v Pine Equity, NY, Inc., ___ AD2d ___, 791 NYS2d 418 (1st Dept 2005). However, as the present action involves a non-competition agreement in relation to the sale of a business, "irreparable injury is presumed ... to protect [the] buyer's purchase of [the] business and accompanying good will." Manhattan Real Estate Equities Group LLC v Pine Equity, NY, Inc., at 419; see also Hay Group, Inc. v Nadel, 170 AD2d 398 (1st Dept 1991). Therefore, the present inquiry is limited to the question of whether plaintiffs have established a likelihood of success on the merits, and whether the equities balance in their favor.
Plaintiffs have failed to establish a right to a preliminary injunction against Metropolitan. According to the affidavit of Eric Klein (Klein), Metropolitan is owned by himself and Adam Desiderio, both of whom are non-signatories to the Agreement, and non-parties in this action. Klein attests that his business is in no way connected with New York Kitchen or any of the individual defendants. Klein notes that plaintiffs' allegations concerning an actual relationship between New York Kitchen and Metropolitan are limited merely to claims that plaintiffs have an "understanding" that New York Kitchen "works closely with Metropolitan" (Aff. of Valenti, at 3), and that Klein has been seen by someone driving a car belonging to Portal.
Plaintiffs have failed to show a likelihood of success on their claim that Metropolitan is bound by the Agreement, or that it has any relevant connection with defendants. All of their [*3]allegations regarding Metropolitan's alleged connection with New York Kitchen are extremely conclusory. There is no agreement between Metropolitan and plaintiffs which would bar Metropolitan from dealing with New York Kitchen, and plaintiffs' contention that Klein's use of Portal's car somehow connects Metropolitan with New York Kitchen, so as to bind Metropolitan to the covenant not to compete, is specious. Therefore, no preliminary injunction will be granted enjoining Metropolitan from pursuing its business, or doing business with New York Kitchen.
Covenants not to compete contained in employment agreements are governed by a standard of reasonableness. BDO Seidman v Hirshberg, 93 NY2d 382 (1999). "'In this context a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.'" Id. at 389, quoting Reed Roberts Associates v Strauman, 40 NY2d 303, 307 (1976); see also Battenkill Veterinary Equine P.C. v Cangelosi, 1 AD3d 856 (3d Dept 2003). "Covenants not to compete pursuant to sale of a business are not treated as strictly as those whose sole purpose is to limit employment." Town Line Repairs, Inc. v Anderson, 90 AD2d 517, 517-518 (2d Dept 1982), citing Mohawk Maintenance Co., Inc. v Kessler, 52 NY2d 276 (1981). However, before the issue of reasonableness can be reached, it must be ascertained whether or not New York Kitchen is actually in competition with American in a manner which violates the non-compete clause.
The New York Kitchen defendants contend that they do not directly compete with American, because the only businesses which they sold to American by way of the Agreement was the business of "wood flooring and floor cleaning." Aff. of Hiiman, ¶ 6 (or that of "wood flooring, carpeting and painting" Aff. of Marc Z. Newman [Newman], ¶ 3). Both Hiiman and Newman also insist that the businesses which were sold to plaintiffs never involved general contracting or construction. In fact, Hiiman claims that the words "construction and contracting" were obviously "tacked on" in the Agreement, because the businesses being sold did not involve general contracting. Aff. of Hiiman, ¶ 11. Therefore, according to these defendants, New York is not in "direct competition" with American, as stipulated in the non-compete clause, and is free to engage in any business other than that of the installation of wood flooring and carpet cleaning (and, presumably, painting).
The New York Kitchen defendants further argue that reading the term "direct competition" to be broader than direct competition in the areas of wood flooring and carpeting would bar New York Kitchen from competing with American in any other business in which American might choose to engage in the future, even if American "went into the toy business ... ." Aff. of Berger , March 11, 2005, ¶ 5.
The interpretation of unambiguous writings is a matter of law reserved for the court. Taussig v Clipper Group, L.P., 13 AD3d 166 (1st Dept 2004). The question is whether the term "direct competition" in the Agreement refers to the nature of the business which was sold to American, and which it presumably intended to engage in after the purchase, or to any kind of business which American is presently engaged in, or which it may choose to engage in, in the future.
A preliminary injunction should not impose restrictions "broader than those contained in the ... Agreement." Healthworld Corporation v Gottlieb, 12 AD3d 278, 279 (1st Dept 2004). The idea that "direct competition" with American might encompass any business in which [*4]American might choose to become involved since the execution of the Agreement is illogical, and contrary to the unambiguous language of the Agreement. There is nothing in the Agreement which might indicate that the New York defendants were to be barred from competing with American in any business other than that in which American was engaged as a result of the sale of the corporations' business.
On the other hand, according to the express language of the Agreement, the sellers were engaged in the business of "installing, repairing, finishing and servicing floors, floor coverings, rugs and carpeting and interior painting, construction and contracting." Agreement at 1. The New York Kitchen defendants' present efforts to distance themselves from this clear statement, by now claiming that, in fact, they only sold American the business of installing wood flooring and carpet cleaning, does not create an ambiguity in the Agreement. Consequently, American has established a likelihood of success on the merits of its claim that the New York Kitchen defendants agreed not to compete with American in the areas of business which the New York Kitchen defendants, by their execution of the Agreement, admitted were being sold to American, i.e., the business of installing, repairing, finishing and servicing floors, floor coverings, rugs and carpeting and interior painting.
However, this court also concludes, from inspection of the Agreement, that an ambiguity exists as to whether the New York Kitchen defendants agreed to refrain from engaging in the field of construction and contracting in areas other than those outlined in the Agreement, such as kitchen and bathroom remodeling, areas recognized in the TRO. The Agreement does not address from what kind of construction and contracting the sellers were to be barred. As a result, the New York Kitchen defendants cannot, at this time, be found to be in competition with American in the area of construction and contracting work outside of those areas set forth in the Agreement, such as construction and contracting in the context of kitchen and bathroom remodeling, as presently set forth in the TRO. Therefore, American has failed to show a likelihood of success on the merits on the question of whether the Agreement bars defendants from these activities.
The reasonableness of the time and area of the restrictive covenant must next be considered. The TRO presently in effect against the New York Kitchen defendants covers, with sufficient precision, the areas of business in which these defendants agreed not to compete. This leaves only the question of whether the restrictions placed upon these defendants, barring their competition with American for five years within a radius of 100 miles, are reasonable as to time and scope. See BDO Seidman v Hirshberg, 93 NY2d 382, supra . The restriction herein as to area essentially encompasses the entire metropolitan area and beyond.
Courts have recognized that there are different considerations when a restrictive covenant is contained in an employment agreement, as opposed to such a restrictive covenant made part of the sale of a business. "Where, for instance, there is a sale of a business, involving as it does the transfer of its good will as a going concern, the courts will enforce an incidental covenant by the seller not to compete with the buyer after the sale. Purchasing Associates, Inc. v Weitz, 13 NY2d 267, 271 (1963).
This rule is grounded, most reasonably, on the premise that a buyer of a business should be permitted to restrict his seller's freedom of trade so as to prevent the latter from recapturing and utilizing, by his competition, the good will of the very [*5]business which he transferred for value.
Id. However, the test is still one of reasonableness, "that is, "not more extensive, in terms of time and space, than is reasonablely necessary to the buyer for the protection of his legitimate interest in the enjoyment of the asset bought." Id., 271-272.
American, as a buyer of both the corporations' assets and their good will, has a legitimate interest in protecting its acquisition from competition which might compromise the value of its purchase. This means that it may rightfully seek to limit the New York Kitchen defendants' incursion into the arena of competition in the area in which American does business.
As indicated above, it is the reasonableness of the restrictive covenant vis-a vis the sale of a business which concerns the court, not the reasonableness of an employee's covenant not to compete. The reasonableness of such a restrictive covenant is dependant upon, among other things, the type of business in which the parties are engaged. See Town Line Repairs, Inc. v Anderson, 90 AD2d 517, supra . A restrictive covenant barring competition by the seller of a consulting business for two years has been found to be reasonable. See Hay Group, Inc. v Nadel, 170 AD2d 398, supra . Such a covenant limiting competition in the selling of "Business Recovery Services" in the United States for a three year period has also been found to be reasonable. See FTI Consulting, Inc. v PricewaterhouseCoopers LLP, 8 AD3d 145 (1st Dept 2004). However, a covenant restricting competition in the retail sale of heating oil for the counties of Nassau, Suffolk, Queens, Kings, and New York "in perpetuity" has been held to be unreasonable, "[c]onsidering the character and size of the counties involved and the duration of the covenant." Slomin's Inc. v Gray, 176 AD2d 934 (2d Dept 1991).
A hearing has occasionally been held to determine the reasonableness of a covenant not to compete (see Town Line Repairs, Inc. v Anderson, 90 AD2d 517, [supra ]), the covenant in question here is quite wide-ranging over the area of restricted competition. There is a difference between the sale of a business which can be carried out over a wide area, such as a consulting business, or the sale of "Business Recovery Services," as in FTI Consulting, Inc. v PricewaterhouseCoopers LLP, 8 AD3d 145, supra , and one which can only be carried out from a showroom or store front, i.e., in a limited locale, as in the present case. See e.g. Slomin's Inc. v Gray, 176 AD2d 934, supra . Although a five-year abstinence from competition might arguably be found reasonable, the provision contained in the Agreement barring defendants from competing in an area of 100 miles is excessive, since it encompasses an area even larger that the confines of New York City. Such an area may be greater than that "reasonably necessary ... for the protection of [American's] legitimate interest in the enjoyment of the asset bought" (Purchasing Associates, Inc. v Weitz [13 NY2d at 271]), in light of the type of business which American conducts. Consequently, a hearing shall be held to determine the geographical area over which the restriction on competition should exist. The court is concerned with the location of plaintiff's customers for transactions occurring over the last twelve months. See, Karpinski v Ingrassi, 28 NY2d 45 (1971) [Duration of restriction not to compete to be decided after a hearing]; See, also Town Line Repairs v Anderson, 90 AD2d 517 [2d Dept 1982] The parties' dispute concerning a promissory note need not be addressed, as it is not part of the present action.
Accordingly, it is
ORDERED that a hearing shall be held to determine the area over which a reasonable restriction on competition should exist, and it is further [*6]
ORDERED that the TROs presently in effect shall continue until further order of the court; and it is further
ORDERED that both parties shall contact the Clerk of the Part at (646) 386-3852 in a conference call to schedule the date of the hearing.
Dated: May 11, 2005
ENTER:
___________________________
J.S.C.
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