Dar & Associates, Inc. v. Uniforce Services, Inc.
| Decision Date | 13 January 1999 |
| Docket Number | No. 98-CV-409(JG).,98-CV-409(JG). |
| Parties | DAR & ASSOCIATES, INC., et al., Plaintiffs, v. UNIFORCE SERVICES, INC., Defendant. |
| Court | U.S. District Court — Eastern District of New York |
Jeffrey L. Forman, Kauffman and Forman, P.A., Towson, MD, for plaintiffs.
Joel A. Klarrreich, Newman Tannenbaum Helpern, Syracuse & Hirschtritt, LLP, New York City, for defendant.
Plaintiffs DAR & Associates, Inc. ("DAR"), its two principals, Wilson S. Davis and Sheryl Davis-Kohl, and D.A.R. Temps, Inc., initiated this action against Uniforce Services, Inc. ("Uniforce"), for breach of contract and for a declaratory judgment that the restrictive covenants and a liquidated damages provision in certain contracts between these parties are unenforceable under New York law. Before me now are cross-motions for partial summary judgment with respect to the declaratory judgment issues. In addition, DAR seeks a return of the amounts paid to Uniforce under their agreement since the date the complaint was filed.
Uniforce, a New York corporation, owns and licenses supplemental staffing service offices, which provide temporary employees to businesses and government agencies. As of September 1, 1998, Uniforce owned ten and licensed twenty-six of these offices in nineteen states, furnishing services in twenty-four states and the District of Columbia. In February 1988, Uniforce purchased the assets of Employers Overload, a Minnesota corporation that operated and franchised supplemental staffing service offices. Among the purchased assets was an existing franchise agreement between Employers Overload and DAR, a Maryland corporation, for the operation of a temporary employment agency in certain areas of Maryland.
On November 14, 1988, Uniforce and DAR entered into a licensing agreement (the "License Agreement"). Under this contract, Uniforce permitted DAR to operate a supplemental staffing service office in Maryland under the trade name "Uniforce" and provided DAR with a comprehensive operations plan called the "Uniforce System." This plan included information about management, training, marketing, and the general operations of a temporary services office. Uniforce also agreed in the contract to perform all payroll functions, including withholding and processing of taxes and acquiring workers' compensation and employer's liability insurance. Under the agreement, DAR and Uniforce divide the "gross profit," which is the balance remaining after these expenditures. Since January 1, 1991, the profit split has been 55% to DAR and 45% to Uniforce.
Uniforce contends that, through its operating manual, training tapes, training sessions, and consultations, it imparted to DAR confidential information pertaining to developing and selling Uniforce product lines; training managers; techniques on how to recruit, retain, reactivate, and acquire referrals; sales presentations to prospective clients; billing rates; advertising; and cross-selling techniques. Uniforce also provided DAR with accounts receivable processing, credit and collection advice, and a liaison between the two companies. Uniforce has loaned DAR over $285,000 during the term of the companies' affiliation, and has advanced DAR $100,000 on collected receivables.
Article XV of The License Agreement, entitled "Covenants Not To Compete," includes a covenant not to compete, a nonsolicitation provision, and a liquidated damages clause. Article XV(C) sets forth the noncompetition clause:
Upon termination of this Agreement, [DAR and its principals] agree that for a period of one (1) year commencing on the effective date of termination or the date on which [DAR] ceases to operate a Uniforce temporary personnel service within the Territory, whichever is later, neither [DAR nor its principals] will have any direct or indirect interest ... in: (1) any business offering temporary personnel services operating within a radius of fifty (50) miles of DAR's former place of business or (2) any entity which is granting franchises or licenses for businesses offering temporary personnel services.
Article XV(D) is the nonsolicitation clause:
Upon termination of this Agreement, [DAR and its principals] agree that for a period of two (2) years, commencing on the effective date of termination, or the date upon which [DAR] ceases to operate a Uniforce temporary personnel service within the Territory, whichever is later, neither [DAR nor its principals] directly or indirectly ... will (1) solicit or accept any temporary personnel service business from any client of the Uniforce business formerly operated by [DAR] or (2) solicit for employment or employ any person employed by Uniforce and placed by [DAR] within (a) a period of one year prior to the effective date of termination or (b) the date upon which [DAR] ceases to operate a Uniforce temporary personnel service business, whichever is later.
In the event DAR or its principals breach either of these restrictive covenants, Article XV(F) provides for liquidated damages:
[DAR] acknowledges that in the event [DAR] does not comply with the restrictions of either Article XV(C) or Article XV(D), the damages sustained by [Uniforce] due to [DAR's] or its owner's business activity in violation of these restrictions, and the reasonable value of the knowledge, confidential information, methods and trade secrets comprising the UNIFORCE SYSTEM shall be difficult to ascertain; and, therefore, [DAR] or its owners who engage in business activity violating these covenants shall pay [Uniforce] as liquidated damages, and not as a penalty, a sum equal to twelve (12) times the highest monthly service charge earned by [Uniforce] hereunder as described in Article X(C)(2) of this Agreement during the twelve (12) months preceding the earlier of: (1) the date of notice of termination of this Agreement; or (2) the date on which [DAR] ceases to operate a UNIFORCE temporary personnel service business.
In 1994, the parties agreed to transfer to DAR the role of employer-of-record of the temporary employees placed by DAR, and DAR created D.A.R. Temps, Inc. ("D.A.R.Temps"), a Maryland corporation, for that purpose. On May 31, 1994, Uniforce, DAR, and D.A.R. Temps entered into an agreement (the "1994 Agreement") that assigned to D.A.R. Temps that responsibility and the additional responsibility of obtaining workers' compensation insurance. Uniforce, however, remained obligated to fund the payroll and take care of tax withholding and reporting for those employees.
Paragraph seven of the 1994 Agreement is a covenant not to compete. Pursuant to that provision, D.A.R. Temps, which was not a party to the License Agreement, acknowledged the proprietary nature of, inter alia, Uniforce's client and temporary employee lists, and agreed neither to engage in the temporary personnel service business (other than with Uniforce) nor to disclose such proprietary information for a one-year period after the termination of the agreement. This covenant relates only to D.A.R. Temps; DAR continued to be bound by the covenants in the 1988 License Agreement.
On August 8, 1997, plaintiffs filed a complaint in the District of Maryland, asserting a breach of contract claim against Uniforce and seeking a declaration that the covenant not to compete, the non-solicitation provision, and the liquidated damages provisions in the License Agreement are unenforceable, as is the covenant not to compete in the 1994 Agreement. The Honorable Benson Everett Legg, by order dated December 22, 1997, transferred the case to this district.
Courts must grant summary judgment where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In determining whether material facts are in dispute, courts must resolve all ambiguities and draw all inferences in favor of the non-moving party. See Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir.1998).
The moving party bears the initial burden of demonstrating the absence of any genuine issues of material fact. Gallo v. Prudential Residential Servs., Ltd. Partnership, 22 F.3d 1219, 1223 (2d Cir.1994). Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citations omitted). The nonmoving party cannot survive a properly supported motion for summary judgment by resting on its pleadings "without offering `any significant probative evidence tending to support the complaint.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (quoting First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 290, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968)).
Here, as reflected by both sides having moved for summary judgment, the parties agree that there are no disputed issues of fact. Specifically, plaintiffs do not dispute the assertions set forth in the affidavit of John Fanning dated September 8, 1998 ("Fanning Aff."). Rather, they assert that the restrictive covenants are unenforceable under New York law and that, if they are enforceable, the liquidated damages clause is void as a penalty under New York law.
Under New York law,1 the enforceability of a restrictive covenant depends in part upon the nature of the underlying contract. In Purchasing Assocs. v. Weitz, 13 N.Y.2d 267, 246 N.Y.S.2d 600, 196 N.E.2d 245 (1963), the New York Court of...
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