Mailman, Ross, Toyes & Shapiro v. Edelson

• Citation: 183 N.J.Super. 434,444 A.2d 75
• Parties: MAILMAN, ROSS, TOYES & SHAPIRO, Plaintiff, v. Edward EDELSON, Defendant.
• Decision Date: 29 March 1982
• Court: Superior Court of New Jersey

Page 434

183 N.J.Super. 434

444 A.2d 75

MAILMAN, ROSS, TOYES & SHAPIRO, Plaintiff, v. Edward EDELSON, Defendant.

Superior Court of New Jersey, Chancery Division Somerset County.

Decided March 29, 1982.

Richard Wilde, Union, for plaintiff (Romano, Hehl, Romankow & Wilde, Union, attorneys).

John H. Schmidt, Westfield, for defendant (Lindabury, McCormick & Estabrook, Westfield, attorneys).

DREIER, J. S. C.

This action was brought by an accounting firm seeking injunctive enforcement of a restrictive employment covenant against its former employee, and damages for the employee's alleged breach of that covenant. Thus, on this return date of the order to show cause, the issue of the validity of restrictive covenants between accountants, as yet unresolved in New Jersey, is placed squarely before this court.

In January 1978 defendant Edward M. Edelson, a certified public accountant of the State of New Jersey, entered the employ of plaintiff Mailman, Ross, Toyes & Shapiro, an established accounting firm in North Plainfield. Defendant alleges that at no time prior to his hiring did he have any discussions with plaintiff concerning a restrictive employment covenant; however, three days after commencing employment he was presented with a restrictive covenant agreement and directed to execute it as a condition of his continued employment. He did so.

The agreement provides:

During employment and for a period of two (2) years after termination, however that comes about, the undersigned employee shall not accept, solicit or offer accounting services from or to, or employment with any client of MAILMAN, ROSS, TOYES & SHAPIRO, unless MAILMAN, ROSS, TOYES & SHAPIRO consents in writing to permit such services.

The agreement further provides for compensatory and exemplary damages, and injunctive relief in the event of a breach.

Defendant resigned from his position with plaintiff in November 1981 and subsequently opened his own office, also in North Plainfield. Just prior to his departure from the firm defendant alleges that one of the partners made an unsolicited statement to him that he, the partner, would have no problem with defendant's providing accounting services for plaintiff's clients.

Defendant asserts that he did not, after leaving plaintiff's employ, solicit plaintiff's clients and, in fact, responded to unsolicited telephone inquiries from several of plaintiff's clients that he was bound by a restrictive covenant and therefore could not provide accounting services to the caller. Defendant did, however, accept employment from one of plaintiff's clients who had recently terminated his relationship with plaintiff, but only after learning of an alleged oral representation by another of plaintiff's partners to the former client, that plaintiff had consented to the new arrangement. Plaintiff now claims that Edelson violated the terms of the restrictive covenant by accepting this employment without plaintiff's written consent.

New Jersey case law is barren of any consideration of the enforceability of such restrictive employment covenants in the accounting profession. Decisions from other jurisdictions offer no clear direction. ¹ However, the principles articulated in three seminal New Jersey cases dealing with restrictive covenants in other fields provide the framework within which this covenant must be analyzed.

Under Solari Industries, Inc. v. Malady, 55 N.J. 571, 576, 264 A.2d 53 (1970), a covenant not to compete will be given effect "if it is reasonable in view of all the circumstances of the particular case." Solari further provides a three-prong test to determine reasonableness: (1) the covenant must be no more restrictive than is necessary to protect the legitimate business interests of the employer; (2) it must impose no undue hardship on the employee and (3) it must not be injurious to the public interest. In light of these criteria the court may reduce or impose temporal or territorial restrictions should the covenant on its face fail to limit its effect to a definite and not excessive time and area, or may otherwise reform the covenant to render it reasonable and therefore enforceable.

In Dwyer v. Jung, 133 N.J.Super. 343, 336 A.2d 498 (Ch.Div.1975), aff'd 137 N.J.Super. 135, 348 A.2d 208 (App.Div.1975), the court considered the validity of a restrictive covenant in a partnership agreement among attorneys. That covenant contained no territorial limitation but rather prohibited each partner from maintaining any professional relationship whatsoever with a client of another partner for a period of five years following the termination of the partnership. The covenant was declared void as against public policy, with the court focusing on the special relationship between lawyer and client:

Commercial standards may not be used to evaluate the reasonableness of lawyer restrictive covenants. Strong public policy considerations preclude their applicability. In that sense lawyer restrictions are injurious to the public interest. A client is always entitled to be represented by counsel of his own choosing. The attorney-client relationship is consensual, highly fiduciary on the part of counsel, and he may do nothing which restricts the right of the client to repose confidence in any counsel of his choice. (133 N.J.Super. at 346-347, 336 A.2d 498; footnote and citations omitted).

The court's holding, however, was based on DR 2-108(A), which expressly forbids restrictive employment covenants between lawyers.

In Karlin v. Weinberg, 77 N.J. 408, 390 A.2d 1161 (1978), our Supreme Court refused to adopt a per se rule declaring restrictive covenants unenforceable between physicians. There the covenant prohibited the employee from engaging in the practice of dermatology within a ten-mile radius of his former employer's office for a period of five years. Analyzing the effect of such a covenant according to Solari's criteria, the court found the covenant to be valid and enforceable.

Although the court "endorse(d) the sound holding of Dwyer," (77 N.J. at 419, 390 A.2d 1161), it distinguished that case on two grounds. First, the Dwyer covenant contained a blanket proscription which in effect restricted the rights of the public to chose an attorney, whereas under the Karlin covenant, although

... some patients may have to travel a greater distance to Dr. Weinberg's new office (and conceivably some a shorter distance) than they travelled to his former office, no patient will, by force of law, automatically be deprived of continuing his ongoing relationship with his physician. (at 419, 390 A.2d 1161)

Second, "Dwyer represents an exercise by the judicial branch of its unique constitutional responsibility for regulating the conduct of attorneys." (At 419, 390 A.2d 1161). Karlin emphasized that the regulations governing physicians do not include a parallel prohibition to DR 2-108(A) on which the Dwyer decision was grounded.

The covenant in the case now before the court is similar to that in Dwyer-it does not restrict the location of a professional practice but rather limits the clientele which may be served. On the other hand, accountants, unlike lawyers but like physicians, are not bound by any regulation barring noncompetition agreements. ² The problem presented here, however, will not be resolved by attempting to determine if accountants are more similar to doctors than to lawyers, or vice versa. Rather, it is necessary to examine the effects of this particular type of covenant on the accounting profession and its clientele, applying the Solari criteria.

An employer's ongoing professional relationship with its clients is generally recognized as a legitimate business interest which may be protected through a restrictive covenant. Karlin v. Weinberg, supra, 77 N.J. at 417, 390 A.2d 1161; Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 33, 274 A.2d 577 (1971). See, also, Ebbeskotte v. Tyler, 127 Ind.App. 433, 142 N.E.2d 905 (Ind.App.1957); Scott v. Gillis, 197 N.C. 223, 148 S.E. 315 (1929). Here, Mailman, Ross, Toyes & Shapiro is an accounting firm with an established practice. During his three-year association with the firm defendant became acquainted with its clientele and familiar with its business practices. No allegations are made, however, that defendant used any confidential information, such as plaintiff's client lists or fee schedules, which may have come to him as a result of his employment with plaintiff, to injure plaintiff's relationship with its clients. Nor is there any indication that defendant induced clients to leave plaintiff and engage his services. The basis of plaintiff's complaint is that defendant accepted employment from a client which had already terminated its relationship with plaintiff before seeking out defendant's services.

The second prong of the Solari test of reasonableness calls for a weighing of the burden placed on the employee by the restrictive covenant. Here the duration of the covenant is but two years, a term generally held to be reasonable. See, for example, Rhoads v. Clifton, Gunderson & Co., 89 Ill.App.3d 751, 44 Ill.Dec. 914, 411 N.E.2d 1380 (App.Ct.1980). The covenant, however, contains no territorial limitation, an omission which many courts in other jurisdictions have found fatal. See, for example, Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 406 A.2d 1310 (Sup.1979). Magic Fingers, Inc. v. Robins, 86 N.J.Super. 236, 206 A.2d 601 (Ch.Div.1965). Other courts have implied a reasonable territorial limitation in an effort to uphold the covenant. Ebbeskotte v. Tyler, 127 Ind.App. 433, 142 N.E.2d 905, supra. This latter course became open to New Jersey courts with the Solari decision in 1970.

The emphasis placed on the inclusion of a reasonable territorial limitation in determining the enforceability of a restrictive covenant, however, seems in some instance to misapprehend the type of interest which is sought to be protected. When a covenant prohibits the employee...