Holloway v. Faw, Casson & Co.

• Decision Date: 18 April 1990
• Docket Number: No. 44,44
• Citation: 319 Md. 324,572 A.2d 510
• Parties: Robert E. HOLLOWAY v. FAW, CASSON & CO. Sept. Term 1989.
• Court: Maryland Court of Appeals

Page 324

319 Md. 324

572 A.2d 510

Robert E. HOLLOWAY v. FAW, CASSON & CO.

No. 44 Sept. Term 1989.

Court of Appeals of Maryland.

April 18, 1990.

John B. Robins, IV and Leonard Bruce Wade (Robins & Johnson, on brief), Salisbury, for petitioner and cross-respondent.

Sally D. Adkins (Fletcher P. Thompson, A. Gillis Allen, II, Adkins, Potts & Smethurst, on brief), Salisbury, for respondent and cross-petitioner.

Argued before MURPHY, C.J., ELDRIDGE, COLE, RODOWSKY, McAULIFFE and ADKINS, JJ., and MARVIN H. SMITH, Associate Judge of the Court of Appeals of Maryland (retired), Specially Assigned.

RODOWSKY, Judge.

This is an action for money damages brought by a firm of accountants against a former partner based on breaches of provisions in the written partnership agreement governing voluntary withdrawal. The controversy focuses on the withdrawing partner's promise to pay to the firm, in the event a client of the firm engages the services of the former partner in that person's new practice of public accountancy, an amount equal to the firm's billings to that client for the twelve months preceding that engagement. The former partner principally contends that the provision is an illegal restraint of trade which is totally void. The trial court and the Court of Special Appeals held, inter alia, that the five year restriction is void, but that it could be judicially modified to three years and, as modified, enforced. Holloway v. Faw, Casson & Co., 78 Md.App. 205, 552 A.2d 1311 (1989). We shall hold, as hereinafter explained, that the provision is severable on a client by client basis. Hence we do not reach whether the rule applied by the lower courts is part of Maryland law.

The accounting firm is Faw, Casson & Co. (FC). The withdrawing partner is Robert E. Holloway, C.P.A. (Holloway). The relevant partnership agreement is that effective as of June 1, 1980 (the Agreement). Holloway had been initially employed by FC as a staff accountant upon his graduation from college in 1968. He progressed from junior accountant, to senior accountant, to supervisor, to manager and, in 1979, to partner. Holloway voluntarily withdrew from FC on December 3, 1984. At that time FC maintained offices in Salisbury, Ocean City, Easton and Annapolis, Maryland and in Dover, Wilmington, Georgetown, Milford and Rehobeth, Delaware. Holloway had worked for a number of years out of FC's Ocean City office and was one of the partners in the Salisbury office when he withdrew. Holloway left FC to practice with another public accounting firm, Twilley & Rommel, which was also located in Salisbury within five miles of the FC office there. At the time Holloway mailed his resignation to his FC partners, he also mailed an announcement of his new professional affiliation to FC's clients. At least 171 of them followed him to his new firm. In 1987 Holloway left Twilley & Rommel and formed a new firm, also in Salisbury.

Paragraph XXI of the Agreement, dealing with voluntary withdrawal from the firm, includes provision for a five year payout by FC to a former partner of the latter's capital account. The paragraph also addresses competition between a withdrawing partner and FC:

"Any partner withdrawing from the partnership voluntarily or involuntarily hereby covenants and agrees that he or she will not engage in the general practice of public accountancy or any of its allied branches, either individually or with any other person, firm or corporation, either directly or indirectly, at any place within a forty mile radius of any of our offices for a period of five years from the date of such withdrawal. If within these limits the partner engages in the general practice of public accountancy or any of its allied branches, either individually or with any other person, firm or corporation, he or she agrees to pay Faw, Casson & Co. or its successor, 100% of the prior year's fee for any clients that were Faw, Casson & Co.'s who engage the services of the withdrawing partner during the five year period. Any amounts due such partner under item XVII shall be forfeited by such partner. However, such forfeited vested amounts will be used to offset payments above. If there is a balance due Faw, Casson & Co. after offsetting of vested amounts, the partner's individual capital account will be used to offset the balance. Any remaining balance will be secured by a note to Faw, Casson & Co. from the partner payable over a three year period."

Paragraph XVII deals with continued income participation (CIP). CIP payments are equal, monthly payments made by FC, without interest, to a terminated partner for a period of ten years following termination. In broad outline computation of one's CIP payment involves several steps. Annually FC determined as to each partner the product of the firm's gross professional fees for the year multiplied by that partner's distribution percentage. FC partners earned a "vested" interest in the respective amounts so determined at rates set forth in schedules in the Agreement. Holloway, who had six years service as a partner, had thirty percent of his current CIP vested. For the fiscal year ending May 31, 1984, Holloway's 100% CIP figure was $118,416 and his vested portion was $35,525.

FC filed a complaint in the Circuit Court for Wicomico County against Holloway in February 1986 seeking damages pursuant to Paragraph XXI. No injunctive relief has ever been claimed by FC. Indeed, FC disclaims that it is available under Paragraph XXI. Holloway filed a counterclaim seeking damages for breach of express contract, for breach of quasi-contractual obligations, and for conversion, and seeking a declaratory judgment that Paragraph XXI of the Agreement was invalid.

The circuit court decided the validity of Paragraph XXI on cross motions for partial summary judgment. Before addressing the validity of the paragraph, that court interpreted the Agreement in three aspects. The trial judge read "100% of the prior year's fee for any clients" to refer to the twelve months prior to a client's going with the partner who withdrew. The language "any place within a forty mile radius of any of our offices" was interpreted to apply only to offices in existence at the time a partner withdrew. Further, the court concluded that, although Paragraph XXI contained a covenant against competition, the Agreement limited the remedy to damages calculated as set forth in the Agreement, so that injunctive relief would not be available even if it had been sought by FC.

The court then undertook an analysis of Paragraph XXI under the law applicable to covenants not to compete with an employer, made by an employee, ancillary to an existing employment relationship, and relating to post employment activity by the employee. The trial judge concluded that the covenant was unreasonable in that its terms could include clients who might first become FC clients after Holloway left but who then might decide to engage Holloway. Further, the court thought that three years would be a reasonable duration of the covenant. The court reasoned that

"once the partner ... has been completely away from Faw, Casson for that three year period of time ... any client-accountant relationship I think would clearly have been severed ... and if there were any future contacts between the accountant and client, it would not have been something that was generated by virtue of their employment with Faw, Casson. I believe that it is unreasonable for five years but not as to three."

The circuit court then applied a rule which has been blessed by the legal commentators and applied by some courts. It is described by its proponents as partial enforcement of a restrictive covenant and by its detractors as judicial rewriting of a contract. The circuit court adjudicated that

"the provisions of Paragraph XXI of [FC's] partnership agreement relating to payments to be made by withdrawing partners who provide services to clients of Faw, Casson & Co. after their withdrawal are declared to be reasonable and valid as a matter of law with respect to the clients of Faw, Casson & Co. who engage their services within three years from the dates of their withdrawals from Faw, Casson & Co."

Trial was had before a jury on December 7 and 8, 1987. FC presented proof in support of damages in the amount of $95,976, including prejudgment interest. FC listed in an exhibit the names and former account numbers of some 171 clients whom FC contended had followed Holloway in his new practice. Next to each name FC set forth the professional fee earned by it for work done for that client in the twelve months preceding December 3, 1984. There was no objection to the period selected for the damage computation which in effect treated each former FC client as having changed accountants on the date Holloway withdrew. These fees totaled $160,194. FC credited Holloway with $37,417, representing Holloway's capital account, and with $35,525, representing Holloway's vested CIP, leaving a balance due of $87,252. Under the Agreement, this balance was payable over three years, in equal annual payments of $29,084, beginning December 3, 1985. FC also claimed $8,724 in interest at the rate of ten percent per year on the deferred installments, for a total claim of $95,976.

In his direct testimony in the defendant's case, Holloway identified the names on FC's damage computation exhibit as "a list of my clients that I was servicing at Faw, Casson." He stated that he did not contest that he has "serviced them at some point in time since [his] departure from Faw, Casson."

Neither party sought, through the proffer of factual evidence, to reopen the interlocutory declaratory judgment on the issue of contract validity. The case was submitted to the jury on questions of damages and prejudgment interest only. The jury returned a verdict of $75,655.90 in damages and $6,367.59 in prejudgment interest in favor of FC. ¹

Holloway appealed and FC cross appealed to the Court...