Mathias v. Jacobs, 99 Civ.2004 VM JCF.
| Decision Date | 27 September 2001 |
| Docket Number | No. 99 Civ.2004 VM JCF.,99 Civ.2004 VM JCF. |
| Citation | 167 F.Supp.2d 606 |
| Court | U.S. District Court — Southern District of New York |
| Parties | Michael Ned MATHIAS, f/k/a Nenad Matijasevic, Plaintiff, v. Bradley S. JACOBS, Defendant. |
Patrick M. Reilly, Delbello Donnellan Weingarten & Tartaglia, LLP, White Plains, NY, for plaintiff.
Leslie A. Lupert, Orans, Elsen & Lupert, New York, NY, for defendant.
DECISION AND ORDER
Michael Mathias ("Mathias"), formerly known as Nenad Matijasevic, brought this diversity action against Bradley Jacobs ("Jacobs"), seeking monetary damages and specific performance for breach of contract. Amended Complaint ("Compl."). Mathias claims that Jacobs refused to honor a 1992 Stock Options Agreement (the "Options Agreement"). Jacobs's answer raised three affirmative defenses: (1) Mathias violated a non-competition provision of the Options Agreement, thereby surrendering his right to exercise the options; (2) Mathias secured Jacobs's assent as a result of duress; and (3) Mathias failed to tender payment in the manner prescribed by the Options Agreement. Amended Answer ("Ans.") ¶¶ 21-28. Jacobs also asserted a permissive counterclaim alleging that Mathias owed him $50,000 on a personal loan. Id. at ¶¶ 29-35.
Discovery proceeded before Magistrate Judge James Francis. Jacobs moved to dismiss the complaint or, in the alternative, for an adverse inference against Mathias on the grounds that Mathias had destroyed evidence and misled the court. By letter to Magistrate Judge Francis, Mathias moved for sanctions against Jacobs in connection with the depositions of Richard Weingarten ("Weingarten") and Alfred DelBello ("DelBello"), both partners of the firm representing Mathias. The parties cross-moved under Fed.R.Civ.P. 56(b) for summary judgment.
Magistrate Judge Francis found that Mathias had destroyed evidence but declined to recommend dismissing the complaint or drawing an adverse inference, instead ordering Mathias to pay Jacobs $28,271.75 for the costs incurred as a result of the spoliation. Magistrate Judge Francis also found that there was no reasonable basis for Jacobs to conduct the Weingarten deposition or to pursue questions related to the duress defense at the Delbello deposition. He therefore granted Mathias's motion for discovery sanctions, ordering Jacobs's attorneys to pay opposing counsel and the two deponents a total of $1,723.90. See Memorandum and Order, Mathias v. Jacobs, 197 F.R.D. 29 (S.D.N.Y. 2000) (Francis, M.J.).
Jacobs filed timely objections to Magistrate Judge Francis's Memorandum and Order. Mathias filed his opposition to Jacobs's objections.
For the reasons discussed below, Mathias's motion for summary judgment is granted, Jacobs's cross-motion for summary judgment is denied, and Magistrate Judge Francis's order imposing sanctions against Jacobs's attorneys is vacated.
In the 1980's, Mathias and Jacobs worked together in the oil brokerage business in London. In 1989, Jacobs launched a waste management business which eventually became United Waste Services, Inc. ("United Waste"). Mathias worked amicably for United Waste from 1989 until some time in 1992. Disagreement then arose about whether Jacobs had ever promised Mathias an ownership stake in the company. On June 1, 1992, Mathias and Jacobs seemingly resolved this dispute by entering into two contemporaneous agreements, one terminating Mathias's employment with United Waste (the "United Waste Agreement") and other granting him stock options in United Waste (the "Stock Options Agreement" or "Options Agreement").
The United Waste Agreement provided Mathias with a lump sum of $31,200 in back pay, and, for a two-year period, monthly payments of $8,000 and continuing health insurance coverage. In return, Mathias agreed to several non-compete provisions, specifically promising, among other things, to not (1) disclose any of United Waste's confidential information; (2) work for or own an interest in a company that competes with United Waste; or (3) "speak to or correspond or have any contact whatsoever with" three categories of persons and entities, including (i) those who had, or were prospects for, a business relationship with United Waste; (ii) any United Waste employees or officers, or their families; and (iii) any company that was a possible acquisition by United Waste. Id. at ¶¶ 4-5.
The Stock Options Agreement granted Mathias the right to purchase 400,000 shares of United Waste stock, exercisable at $3.00 per share anytime between June 1, 1994 and May 31, 1999. See Stock Options Agreement at ¶ 1. The Options Agreement incorporated by reference the non-compete provisions of the United Waste Agreement. Id. at ¶ 2. Further, the Options Agreement provided that the options would be "automatically and unconditionally rescinded and terminated" if Mathias breached the non-compete provisions. Id. at ¶ 2(b).
On March 8, 1999, Mathias attempted to exercise the option by tendering a check for $1.2 million, the amount prescribed in the Options Agreement, but Jacobs refused to accept it. Mathias consequently filed this action to recover damages totaling the value of the stock shares on the day Jacobs breached (minus the $1.2 million Mathias was required to pay), plus interest, in addition to specific performance for delivery of the stock shares.
In moving for summary judgment, Jacobs argues that Mathias repeatedly breached Paragraph 5(b), or the "no-contact clause," of the non-compete provisions and thereby relinquished the right to exercise the stock options. Mathias counters that Paragraph 5(b) is unenforceable as overbroad and against public policy.
A motion for summary judgment may be granted only if there is no genuine issue as to any material fact and the moving party therefore is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Fed.R.Civ.P. 56. The role of the Court is to determine whether there are any genuine issues of material fact to be tried, not to decide them. See Gallo v. Prudential Residential Svcs., Ltd. Partnership, 22 F.3d 1219, 1224 (2d Cir. 1994). In considering the motion, a court must resolve ambiguities and draw all reasonable inferences in favor of the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Historically, New York courts refused to enforce restrictive covenants on the ground that they constituted restraints on trade. DAR & Assocs., Inc. v. Uniforce Servs., Inc., 37 F.Supp.2d 192, 196 (E.D.N.Y.1999). "More recently, however, courts have held that in some situations it is both desirable and essential to enforce restrictive covenants." Id. Restrictive covenants in three types of contracts have been recognized as enforceable: (1) contracts for the sale of businesses; (2) employment contracts; and (3) ordinary commercial contracts. Id. at 196-97.
A restrictive covenant in a contract for the sale of a business limits the seller's right to launch a new enterprise which competes with the business sold. See Chevron U.S.A., Inc. v. Roxen Serv., Inc., 813 F.2d 26, 28-29 (2d Cir.1987). Restrictive covenants in this context are routinely enforced because the buyer has in part bargained for the good will of the seller's customers. Id. at 29; Purchasing Assocs. v. Weitz, 13 N.Y.2d 267, 246 N.Y.S.2d 600, 196 N.E.2d 245 (1963). If the seller is permitted to initiate a competing enterprise, which presumably would attract the patronage of the seller's former customers, the buyer would not receive the full benefit of her bargain.
Courts analyze restrictive covenants in ordinary commercial contracts, such as a licensing agreement, "under a simple rule of reason, balancing the competing public policies in favor of robust competition and freedom to contract." DAR & Assocs., Inc., 37 F.Supp.2d at 197. Courts typically consider the legitimate business interests protected by the covenant, the reasonableness of the covenant, and the degree of hardship imposed upon the party against whom the covenant is enforced. Id. at 198-200.
Restrictive covenants in employment contracts, however, are subject to more exacting scrutiny than are those in contracts for the sales of business or ordinary commercial contracts. See DAR & Assocs., Inc., 37 F.Supp.2d at 196-97. Public policy favors economic competition and individual liberty and seeks to shield employees from the superior bargaining position of employers. See Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir.1999); Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 386 N.Y.S.2d 677, 353 N.E.2d 590 (1976).
Mathias argues that the Stock Options Agreement coupled with the United Waste Agreement constitute the contract which terminated his affiliation with United Waste. Consequently, Mathias contends that the enforceability of Paragraph 5(b), which is memorialized in the United Waste Agreement and incorporated by reference into the Options Agreement, must be analyzed according to the more demanding standards of restrictive covenants in employment contracts.
Jacobs views the Options Agreement not as an employment contract, but as an ordinary commercial contract — more specifically, a settlement agreement. According to Jacobs, the Options Agreement is autonomous of the United Waste Agreement, and was devised merely to resolve the dispute regarding Mathias's claim to an ownership interest in United Waste. Jacobs therefore advocates applying the simple rule of reason test of ordinary commercial contracts.
This Court need not decide the nature of the contract at issue. It concludes that under either construction, the challenged portions of the non-compete provisions are overbroad and unrelated to any legitimate United Waste business interest, and therefore...
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