Mohawk Maintenance Co., Inc. v. Kessler

• Decision Date: 19 February 1981
• Citation: 419 N.E.2d 324,437 N.Y.S.2d 646,52 N.Y.2d 276
• Parties: , 419 N.E.2d 324 MOHAWK MAINTENANCE CO., INC., Respondent, v. Irving G. KESSLER et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 646

437 N.Y.S.2d 646

52 N.Y.2d 276, 419 N.E.2d 324

MOHAWK MAINTENANCE CO., INC., Respondent, v. Irving G. KESSLER et al., Appellants.

Court of Appeals of New York.

Feb. 19, 1981.

Amos Alter and Mark Abramowitz, New York City, for appellants

Stephen A. Marshall and Martin J. Schwartz, New York City, for respondent.

OPINION OF THE COURT

GABRIELLI, Judge.

Defendants appeal by permission of the Appellate Division, First Department, 74 A.D.2d 511, 424 N.Y.S.2d 907, from an order of that court which affirmed, with slight modification, an order of the Supreme Court, New York County, granting partial summary judgment to plaintiff and enjoining defendants indefinitely from soliciting the patronage of defendant Kessler's former customers. The order appealed from rests upon the premise that defendants have a legal duty to refrain from acting to impair the "good will" which defendant Kessler had transferred to plaintiff in connection with the sale of his business and that this duty exists independent of any additional obligations undertaken by Kessler pursuant to certain express restrictive covenants contained in the contract of sale. We find this premise to be legally sound and, accordingly, hold that the order of the court below should be affirmed. In so holding, we necessarily conclude that the duration of defendants' duty to refrain from soliciting certain of plaintiff's customers is not in any way limited by the durational provisions contained in the express restrictive covenants or by the legal principle derived from our cases that express covenants restricting competition must be reasonable in scope.

The instant litigation arises out of the October 10, 1972 sale of defendant Kessler's controlling shareholder's interest in Mohawk Maintenance Co. to plaintiff's predecessor for the sum of $2,000,000. Since its incorporation in 1952, Mohawk had been engaged in the business of providing building maintenance services in the tri-State area encompassing New York, New Jersey and Connecticut and had developed an impressive list of customers largely through the efforts of defendant Kessler, the firm's president and principal shareholder. In connection with the sale of the business, Kessler agreed that he would not "either as owner, partner, officer, employee, agent, consultant manager, lessee or lessor or in any other capacity, directly or indirectly * * * carry on or engage * * * in any business competitive with any business carried on by (Mohawk)" for a period of five years after the closing date of the sale. The geographical scope of the restriction on Kessler's business activities was confined to New York, Connecticut and any other State where Mohawk was actively doing business on the date of contract closing. Additionally, it was agreed between the parties that Kessler would continue to work for Mohawk as an employee for a period of three years and that the provisions of his employment contract would continue in force if he elected to remain with the company after his initial term of employment ended. The employment agreement also contained an anticompetition clause which precluded Kessler from engaging in any rival business "(f)or a period of 24 months after the termination of this agreement".

Kessler remained in Mohawk's employ until August of 1978, when he voluntarily resigned his position. Shortly thereafter, he formed a new corporation, Sure-Way Maintenance Services, and began once again to engage in the business of providing building maintenance services. It is not seriously disputed that Kessler's new business was competitive in certain respects with the business carried on by Mohawk. Indeed, the affidavits submitted to Special Term indicate that Kessler may have approached at least one of his former customers in an effort to lure its patronage away from Mohawk.

On January 23, 1979, Mohawk commenced the instant action seeking damages and a permanent injunction to prevent Kessler and Sure-Way from competing with it until August of 1980, the date that Mohawk claimed would mark the expiration of the anticompetition clause in defendant Kessler's employment agreement. ¹ Additionally, Mohawk sought an order permanently restraining defendants from soliciting the patronage of Kessler's former Mohawk customers. ²

Upon Mohawk's motion for partial summary judgment, defendant Kessler took the position that any obligations he may have had to refrain from competing with Mohawk were terminated, at the latest, on October 9, 1977, 24 months after the original employment agreement expired. Thus, Kessler argued, the decision by him in 1978 to enter into a competing enterprise could not have constituted a breach of the terms of the agreement. Special Term, however, rejected Kessler's contentions, finding that 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 and not, as he contended, for the 24-month period following the expiration of his original three-year term. Since defendant Kessler had not actually left Mohawk's employ until August of 1978, Special Term reasoned, he should be prevented from competing with that firm until August of 1980. The lower court also issued an injunction permanently restraining defendants from soliciting the patronage of those customers who had been actively dealing with Mohawk in 1972, when the business was transferred to plaintiff's predecessor. Noting that the 1972 sale of the business included an implicit transfer of the firm's existing "good will", Special Term held that "it would be clearly inequitable" to permit defendants to impair that asset by luring such customers away from Mohawk's present owners. Finally, after concluding that plaintiff was entitled to partial summary judgment, the court directed that a trial be held in order to assess plaintiff's interim damages.

On defendants' appeal to the Appellate Division, the determination of Special Term was affirmed with one minor modification. While the Appellate Division basically indorsed the reasoning of the lower court, it found it necessary to amend the court's order to make clear that the direction forbidding solicitation of the customers being serviced by Mohawk at the time the business was sold did not prevent defendants from accepting the patronage of those customers who voluntarily leave Mohawk and, without urging by defendants, request the services of Kessler's new firm. The Appellate Division subsequently granted defendants leave to appeal to this court and certified the following decisive question of law: "Was the order of this Court, which modified the order of the Supreme Court, properly made?"

Preliminarily, we note that, for purposes of the present appeal, defendants have abandoned their contention that the anticompetition clause in Kessler's employment agreement was effective only until October 9, 1977. Anticipating that their appeal would not be considered or decided by the Court of Appeals until after August of 1980, defendants elected not to press their challenge to that part of the Appellate Division order which enjoins them from competing with Mohawk until that date has passed, since, in their view, the matter is now academic. ³ Defendants have thus limited the issue in the present appeal to the narrow question of the propriety of the lower court's direction that they refrain indefinitely from soliciting the patronage of those Mohawk customers who were being serviced by the firm at the time it was sold to plaintiff. While defendants do not seriously dispute that they had a legal duty to refrain from soliciting such customers for a reasonable period of time after the transfer of the business to plaintiff, they do argue vigorously that the enforcement of this duty for an indefinite period is contrary to law. This contention is based, in turn, upon what defendants perceive to be the "modern view" that express covenants restricting competition may be enforced only to the extent that they are reasonable in geographic scope and duration. Since the law looks with disfavor upon agreements which purport to impose permanent limitations upon a party's freedom to compete, according to defendants, it should similarly reject the notion that the legal duty to refrain from soliciting former customers is of indefinite duration.

We cannot embrace the proposition advanced by defendants, however, because, in our view, it fails to take into account the important distinction between the duty to refrain from soliciting former customers, which arises upon the sale of the "good will" of an established business, and separate duty to refrain from competing with the purchaser, which may only arise out of an express agreement such as that contained in defendant Kessler's employment contract. When a business is sold, the purchaser acquires no legal right to expect that the seller will refrain from engaging in a competing enterprise. Indeed, the seller remains free to pursue his own economic interests without restraint unless the purchaser has managed to extract from him an express promise to refrain from competing (Von Bremen v. MacMonnies, 200 N.Y. 41, 47-48, 93 N.E. 186).

At one time in the early history of the common law, such promises were routinely held to be unenforceable, since they were deemed to be violative of the strong public policy in favor of encouraging free trade and discouraging monopolies (see Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136; 14 Williston, Contracts (3d ed.), §§ 1635-1636). Later, however, the inflexible approach of the judiciary to such agreements was relaxed to some extent as the courts came to realize that a blanket prohibition against agreements purporting to restrain trade was contrary to the equally strong public policy in favor of allowing individuals to dispose of their property freely and to enter into binding contracts (see ...