Piaker & Lyons, P.C. v Johnson

[*1] Piaker & Lyons, P.C. v Johnson 2005 NY Slip Op 50822(U) Decided on May 4, 2005 Supreme Court, Broome County Rumsey, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 4, 2005
Supreme Court, Broome County

Piaker & Lyons, P.C., Plaintiff,

against

Daniel P. Johnson, Defendant.



2002-1451



Levene, Gouldin & Thompson, LLP

By:Philip C. Johnson, Esq.

Attorneys for Plaintiff

P.O. Box F-1706

Binghamton, New York 13902-0106

Aswad & Ingraham

By: Richard N. Aswad, Esq.

Attorneys for Defendant

46 Front Street

Binghamton, New York 13905

Phillip R. Rumsey, J.

In this action to recover damages for the alleged breach of a non-competition covenant, plaintiff, an accounting firm, contends that defendant, its former employee, violated the terms of his employment agreement by performing accounting services for plaintiff's former clients after he ceased working for plaintiff in May 2001. Defendant moves for summary judgment dismissing the complaint on several grounds. First, defendant contends that the employment agreement, which he signed in 1984, is unenforceable, due to its failure to specify the compensation he was to receive or the services he was to provide for plaintiff at that time. Second, defendant argues that even if the agreement was enforceable when it was signed, his subsequent licensure as a Certified Public Accountant, and later promotion to different positions within the company, requiring that he perform different services, terminated the contract. And lastly, if the court rejects those arguments and finds that the agreement continued to bind defendant throughout his employment, he maintains that the "liquidated damages" set forth therein, to be paid as compensation for a breach of the non-competition covenant, are so excessive and disproportionate to the damage actually suffered by plaintiff as to constitute an unenforceable penalty.

In the court's view, none of these arguments provides a basis for granting the drastic remedy of summary judgment. The facts and circumstances set forth in plaintiff's opposing affidavits - including the firm's general practice of obtaining a prospective employee's agreement to a proposed salary prior to presenting the written agreement for signature, and the fact that defendant had already been working for plaintiff for several years, at an agreed-upon salary - at least raise a factual question as to whether the parties had actually agreed upon the amount of compensation to be paid defendant, pursuant to the employment agreement, prior to entering into the written contract. The agreement's reference to payment of "an annual salary as mutually agreed upon" (Affidavit of John R. May, dated March 10, 2005, Exhibit A [Agreement], ¶ 3), leaves open the question of whether the amount to be paid was to be agreed upon (in the future), or had been agreed upon, before the agreement was made.[FN1] If it had already been agreed upon, and the amount was left out of the agreement for other reasons, the agreement would not be properly characterized as an unenforceable "agreement to agree" (compare, Martin Delicatessen, Inc. v Schumacher, 52 NY2d 105, 109-111 [1981]; Parkway Group, Ltd. v Modell's Sporting Goods, 254 AD2d 338, 339 [1998]; Matter of Seiden v Francis, 184 AD2d 904, 905 [1992]). Thus, the averments of plaintiff's vice president, to the effect that defendant's salary had already been established when he signed the agreement, preclude summary judgment in defendant's favor on this issue.

Nor is the agreement unacceptably vague with respect to the services that were to be [*2]rendered by defendant. By specifying that defendant would "perform such duties as are assigned to him from time to time by the officers of the corporation" (Agreement, ¶4), the employment contract provides sufficient guidance in this respect (see, Cudney v R.R. Phillips Mfg. Co., 181 App Div 257, 260-261 [1917]).

Defendant's second argument is premised on his interpretation of the agreement's reference to his employment "as a public accountant" as encompassing only those duties he was qualified to perform, and did perform, at the time it was signed, as distinct from those he later

assumed after being licensed as a Certified Public Accountant, and promoted to different positions within the firm. When his duties changed from those he was originally hired to perform, defendant contends, the agreement ceased to govern his employment, and was effectively terminated and replaced by "a new at-will contract" (Defendant's Memorandum of Law, pp. 12-13). The term "public accounting" is, however, equally susceptible to the alternate interpretation urged by plaintiff, that is, as encompassing all of the services and duties performed by employees of plaintiff, with different individuals assuming different duties, as assigned by their supervisors in accordance with their abilities, training, and experience. Viewed in this way, the Employment Agreement - which specifically contemplates, and permits, increases in salary and the payment of bonuses - would continue to govern the employment relationship despite changes in the particular duties defendant was assigned to perform. Additional support for this construction may be found in the fact that another individual, commencing employment with plaintiff as a "principal," signed a contract that identified the work he was to perform in the same terms ("as a public accountant") used in defendant's contract (Affidavit of John R. May, dated March 10, 2005, ¶ 16, Exhibit B). This is at least sufficient to raise a factual question as to whether the contract was intended to encompass all of the different types of work performed by plaintiff's accounting staff during their progression through the "ranks" from entry-level positions to those with more supervisory responsibilities, rather than, as defendant suggests, to govern his employment only so long as he continued to perform the precise duties he was assigned at the time of its execution. If the broader interpretation was intended, a shift in the focus of defendant's accounting work, toward more independence and supervision of other employees, would not necessarily have constituted a "material change" in his duties, from those he had agreed to perform, such as might be deemed to terminate a more narrowly drafted contract.

As for the liquidated damages clause, the court is not persuaded, at this juncture, that the method of calculating those damages is per se unreasonable, or would necessarily result in a recovery that is so excessive and disproportionate to the actual damages that might be sustained by plaintiff as to constitute an unenforceable penalty. When it is established that a former client of plaintiff's has been served by defendant, in violation of the non-competition covenant, the employment agreement provides for payment by defendant, as liquidated damages, of 25% of the gross fees earned by defendant, over the first five years after the violation (hereinafter the "Maximum"), with a minimum payment of 75% of the gross fees received by plaintiff from the client, in the last year prior to the violation (hereinafter the "Minimum"). Thus, for any client that moves its business to defendant, if 25% of defendant's billings, for the five year period, do not exceed 75% of the fees received by plaintiff in the last year before the breach, defendant must pay the latter amount as damages.

In similar cases, courts have refused to reject, as a matter of law, provisions requiring the [*3]payment of 150% of the gross fees received by a defecting employee's former firm during the prior year (see, BDO Seidman v Hirshberg, 93 NY2d 382, 396-397 [1999]; Arthur Young & Co. v Galasso, 142 Misc 2d 738, 744 [1989]). In light of those holdings, it cannot be said that the Minimum damage amount established by defendant's contract (75% of the fees earned by plaintiff during the prior year), is clearly so excessive or unrelated to actual damages as to be unconscionable on its face, particularly given the difficulty in ascertaining how long a client would have continued to obtain services from plaintiff, had defendant not provided a competitive alternative (BDO Seidman, at 396).

And, defendant's protestations notwithstanding, there is no basis for concluding that the potentially higher Maximum damage amount is, on its face, unconscionably excessive, or unrelated to the damages actually sustained by plaintiff. If, as defendant suggests, a particular client's needs were to increase after it transferred its business to defendant (thus resulting in a high Maximum, based on the fees earned by defendant thereafter), it could reasonably be assumed that a similar increase in work would have benefitted plaintiff, had there been no prohibited competition by defendant. Because of the very factors cited by defendant - namely, the possibility that a particular client's needs might increase or decrease over time - the fees earned by defendant from a client, in the years after the violation, probably provide the best measure of what would have been earned by plaintiff, had there been no violation; thus, it cannot be said to be unreasonable to use those fees as a measure of the damage sustained by plaintiff.

Nor is it necessarily improper to calculate liquidated damages as a percentage of gross earnings, as opposed to net earnings or profit. While it would clearly be improper to award, as damages, the full value of gross earnings from a client (as that figure would certainly exceed actual profit by a substantial amount), the use of a percentage of gross billings - particularly a relatively small percentage, such as 25% - could be intended to incorporate some allowance for overhead, expenses, and other factors that reduce actual earnings. Having failed to introduce any evidence as to typical overhead in the accounting field, the parties' actual expenses or profit margins, or client retention rates, defendant has simply not established, through competent proof, that 25% of gross billings for a five-year period does not reasonably approximate the damages sustained by plaintiff as the result of a breach (compare, Curtis v Amela-Bouyea, 137 AD2d 944, 944-945 [1988] [liquidated damages, calculated on a daily basis without regard to past profits of plaintiff or post-breach profits of defendant, found to bear "no reasonable relationship to the probable loss"]). Accordingly, summary judgment cannot be granted on these issues at this juncture.

Defendant's motion is therefore denied. This decision shall constitute the order of the court. Trial shall commence on Monday, May 16, 2005, at 9:00 a.m., at the Broome County Courthouse in Binghamton, New York.

Dated: May 4, 2005

Cortland, New York

____________________________

HON. PHILLIP R. RUMSEY

Supreme Court Justice Footnotes

Footnote 1:Defendant's focus on the word "shall" is misplaced, as that term modifies the verb "pay" ("[plaintiff] shall pay [defendant] an annual salary * * * "), and has no bearing on the meaning of the subsequent phrase "as mutually agreed upon".