Arthur Young & Co. v. Galasso
| Decision Date | 23 February 1989 |
| Citation | 142 Misc.2d 738,538 N.Y.S.2d 424 |
| Court | New York Supreme Court |
| Parties | ARTHUR YOUNG & COMPANY, Plaintiff, v. Joseph P. GALASSO, Jr., Defendant. |
Carl D. Liggio, Gen. Counsel, Scott M. Univer, Asst. Gen. Counsel, Lois A. Chamberlain, Sr. Counsel, New York City, for plaintiff.
Cahill Gordon & Reindel, New York City (Thomas J. Kavaler, Thomas M. Campbell, of counsel), for defendant.
In Reed Roberts Assoc. v. Strauman, 40 N.Y.2d 303, 308, 386 N.Y.S.2d 677, 353 N.E.2d 590, the Court held that "restrictive covenants will be enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential information." The issue raised by the defendant's motion to dismiss the complaint (CPLR 3211[a][7] ), is whether this holding mandates that a restrictive covenant contained in an agreement between a national accounting firm and one of its former partners be enforced only if enforcement will prevent the disclosure of trade secrets or confidential information.
The defendant was a partner in the large national accounting firm of Arthur Young & Company from 1980 to 1987. The four-page letter agreement signed by the defendant and relied upon by the plaintiff is dated as of January 1, 1987, and recites that its terms are consented to "In consideration of the benefits which will inure to me as a partner in, or a withdrawn partner of, the partnership existing under and evidenced by the Articles of Partnership of Arthur Young United States dated as of October 1, 1986". Among its terms is the provision that for a period of two years after the partner withdraws from the firm, he will not provide professional accounting services to any client of the firm, and will not solicit any client of the firm which was a client of the firm at any time during the twelve months prior to his withdrawal and for whom he provided accounting services during the five year period prior to his withdrawal from the firm. Also among the terms of the letter is a liquidated damages clause providing that if the ex-partner serves any client of the firm as prohibited, he shall pay the firm 150% of either the last year's fees billed to that client or the average of the last three years' bills to that client.
The defendant contends that the letter agreement is void for lack of consideration and mutuality, and is unenforceable in that the restrictive covenant is not reasonably necessary to protect the firm's legitimate business interests. He also challenges the legality of the liquidated damages provision.
Initially, I reject the plaintiff's suggestion that the doctrine of estoppel against inconsistent positions precludes the defendant from challenging the legality of the restrictive covenant. The doctrine against inconsistent positions also known as judicial estoppel, (Environmental Concern, Inc. v. Larchwood Constr. Corp., 101 A.D.2d 591, 593, 476 N.Y.S.2d 175 [2d Dept.1984] ).
Environmental Concern, supra, illustrates the classic situation to which judicial estoppel applies: there, Larchwood Corp. had contracted to supply certain plants to be used in the construction of a sewer district project; Larchwood then subcontracted with Environmental Concern, Inc. for Environmental to supply the plants. When a delay in construction resulted in the destruction of the plants, Larchwood sued the sewer district, taking the position that the plants had been ready for delivery on the date specified in the contract and met the contract's specifications. Larchwood prevailed in that action. However, when the subcontractor sued Larchwood for breach of the subcontract, Larchwood asserted as a defense that the plants did not meet contractual specifications and were not tendered in accordance with the terms of the subcontract. The court judicially estopped Larchwood from asserting that defense, since it had already succeeded in asserting an exactly opposite position.
The case of Houghton v. Thomas, 220 App.Div. 415, 221 N.Y.S. 630, aff'd 248 N.Y. 523, 162 N.E. 509 further illustrates the principle. It explains that in one action, brought by a law firm to recover a fee from a client, an ex-partner who was named as a party defendant testified for the client that the firm had not done the work required under its agreement with the client; despite his testimony, the firm obtained a judgment for its fee. Subsequently, the ex-partner interposed a claim against the law firm in another action, seeking a portion of the fee previously recovered from the client. The ex-partner was judicially estopped from asserting the claim, with the explanation that he had "endeavored to defeat the claim, and he should not ... be permitted to assert a part of its existence in his favor" (Houghton v. Thomas, 220 App.Div. 415, 423, 221 N.Y.S. 630, supra ).
In both of the above cases, the party being judicially estopped was an actual party to the prior action. The plaintiff has not cited, nor has the court found, any cases in which an individual is judicially estopped from taking a legal position previously taken by an organization to which that individual belonged. Yet the plaintiff now contends that the doctrine of estoppel against inconsistent positions should be applied to the defendant because of a legal position previously adopted by the plaintiff firm when the defendant was a member of it.
The prior litigation upon which the plaintiff relies here were other, similar actions brought by the accounting firm, as an entity, against ex-partners. The defendant in the present action was certainly not a named party to the prior actions, although he was a member of the firm during those prior lawsuits.
The interests of a firm as a whole are not necessarily always identical to the interests of the individual partners. Consequently, the legal positions taken by the firm--particularly vis-a-vis the actions of ex-partners--cannot properly be attributed to or imposed upon its individual partners, who may themselves seek to dissociate themselves from the firm in the future. I therefore conclude that the firm's legal arguments in the prior litigation do not preclude the individual ex-partner from subsequently offering contrary arguments simply because he was a member of the firm during the earlier litigation.
Turning to the legality of the restrictive covenant, the defendant fails to demonstrate that as a matter of law the agreement lacks consideration. The continuing benefits inuring to the defendant under the October 1986 partnership agreement, as recited in the agreement, includes financial benefits and such intangibles as increased knowledge, skill, or status in his profession, and constitutes consideration.
The issue of mutuality is also raised by the defendant as a defense to the letter agreement. He relies on the case of Lynch v. Bailey, 275 App.Div. 527, 90 N.Y.S.2d 359 [1st Dept.1949] affd. 300 N.Y. 615, 90 N.E.2d 484, which considered a restrictive covenant contained in the partnership agreement of a national accounting firm. After analysis of the covenant's extent, scope, and purpose, ...
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