Sarnoff v. American Home Products Corp.

• Decision Date: 20 February 1985
• Docket Number: No. 83 C 0647.,83 C 0647.
• Citation: 607 F. Supp. 77
• Parties: Norton SARNOFF and Carl Fletcher, Plaintiffs, v. AMERICAN HOME PRODUCTS CORP., a Delaware corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

607 F. Supp. 77

Norton SARNOFF and Carl Fletcher, Plaintiffs, v. AMERICAN HOME PRODUCTS CORP., a Delaware corporation, Defendants.

No. 83 C 0647.

United States District Court, N.D. Illinois, E.D.

February 20, 1985.

Lionel G. Gross, Robert K. Blain, Altheimer & Gray, Chicago, Ill., for plaintiffs.

Lewis Perkiss, Kenneth J. Petrine, New York City, for defendants.

MEMORANDUM OPINION AND ORDER

WILLIAM T. HART, District Judge.

Plaintiffs Norton Sarnoff and Carl Fletcher brought this action against their former employer, American Home Products Corporation ("AHP"), in an effort to recover profit-sharing benefits awarded to them under AHP's Management Incentive Plan (the "Plan") during their employment. AHP, through its Incentive Compensation Committee (the "Committee"), declared a forfeiture of these benefits when it determined that Sarnoff and Fletcher were employed by a competitor, in violation of the Plan's noncompetition provision. The parties do not dispute the facts surrounding these events and have filed cross-motions for summary judgment on the issues of whether the Plan's noncompetition provision is valid under applicable law and whether Sarnoff and Fletcher were in violation of the Plan's noncompetition provision. These are the matters currently before the Court.

FACTS

AHP is a Delaware corporation headquartered in New York and selling AHP sells products in a variety of industries (e.g., drugs, foods, paints, household products, housewares) on a worldwide basis. AHP adopted its Management Incentive Plan in 1967 and since then has administered the Plan from its New York headquarters. The Plan covers present and former AHP employees worldwide.

Plaintiffs Sarnoff and Fletcher became AHP employees during 1979, when AHP acquired their former employer, EZ-Por Corporation ("EZ-Por"). Prior to its acquisition by AHP, EZ-Por produced and sold aluminum cookware items. EZ-Por maintained its sole place of business in Illinois, where it was incorporated. Sarnoff served as Vice-President of EZ-Por and owned shares in the company while Fletcher worked as EZ-Por's plant manager and salesman. After the acquisition both Sarnoff and Fletcher continued to work in Illinois in their former positions for AHP's EZ-Por subsidiary ("AHP-EZ-Por").

On January 29, 1981, AHP sent letters to Sarnoff and Fletcher informing them that AHP's Incentive Compensation Committee had granted them "contingent" stock awards of 600 and 150 shares, respectively, of AHP stock. These letters state that the awards would be paid out at a future date under certain conditions. The letter also requested award recipients to sign and return to AHP a copy of the letter "as acknowledgement of receipt of both this notification and a copy of the Plan, and your acceptance of New York Law as governing Plan interpretations." Both Sarnoff and Fletcher signed and returned copies of the letter as requested.

After resigning from AHP-EZ-Por in January of 1981, Sarnoff formed Ensar Corporation ("Ensar") as an Illinois corporation. Fletcher joined Sarnoff at Ensar after leaving AHP-EZ-Por during February, 1981.

In December of 1981, Sarnoff and Fletcher received questionnaires from AHP, which they completed and returned as requested, attaching Ensar's product list. At its January 27, 1982 meeting, AHP's Committee determined that several of Ensar's products were in competition with products sold by AHP's Ekco Housewares Division. Consequently, the Committee determined that Sarnoff and Fletcher had forfeited their awards.¹ By letter dated February 3, 1982, AHP's Treasurer notified Sarnoff and Fletcher of the Committee's decision. This action ensued.

DISCUSSION

AHP argues that New York law governs this action, that New York law recognizes the validity of the Plan's noncompetition clause and that since the plaintiffs breached the noncompetition clause, the Committee properly declared the forfeiture. Sarnoff and Fletcher contend that Illinois substantive law governs this action, and that under Illinois law the AHP's noncompetition clause is void as overbroad. Alternatively, Sarnoff and Fletcher assert that AHP's noncompetition clause is similarly void under New York law. They also maintain that they have not breached the noncompetition clause and that, in any event, AHP should be estopped from asserting a breach.

Because there is no real conflict between the substantive law of New York and that of Illinois as to the validity of AHP's noncompetition clause, the choice of law issue is not controlling. Even assuming that New York and Illinois differ on this issue, however, Illinois' conflict of law principles indicate that Illinois' substantive law governs this controversy. Thus Illinois law must be applied in any event and its application precludes enforcement of the Plan's noncompetition clause.²

The courts of Illinois disfavor noncompetition clauses, enforcing only such provisions as are "reasonably necessary to protect a legitimate business interest or to prevent improper and unfair competition." Rao v. Rao, 718 F.2d 219, 223 (7th Cir. 1983). See also American Hardware Mutual Insurance Co. v. Moran, 705 F.2d 219, 221 (7th Cir.1983); Akhter v. Shah, 119 Ill.App.3d 131, 74 Ill.Dec. 730, 733, 456 N.E.2d 232, 235 (1st Dist.1983); MBL (USA) Corp. v. Diekman, 112 Ill.App.3d 229, 67 Ill.Dec. 938, 944-45, 445 N.E.2d 418, 424-25 (1st Dist.1983) ("restrictive covenants are closely scrutinized"). These principles have been applied by Illinois courts to a forfeiture of deferred compensation based on breach of a noncompetition clause. Johnson v. Country Life Insurance Co., 12 Ill.App.3d 158, 300 N.E.2d 11 (4th Dist.1973) (forfeiture of renewal premiums resulting from former insurance agent's breach of noncompetition clause).

AHP does not contest the adherence of the New York courts to this same restrictive view of noncompetition clauses; when found in employment contracts. See American Institute of Chemical Engineers v. Reber-Friel Co., 682 F.2d 382, 386-87 (2nd Cir.1982). Rather, AHP maintains that New York courts do not evaluate the reasonableness of noncompetition provisions where such clauses operate only to forfeit deferred compensation and such clauses do not actually prohibit competition by a former employee.

In support of its argument AHP cites Kristt v. Whelan, 4 A.D.2d 195, 164 N.Y.S.2d 239 (1st Dept.1957), aff'd w/o opinion 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116 (1958). In Kristt, the New York Supreme Court, Appellate Division articulated the so-called "employee choice" rule: that a noncompetition clause is enforceable where the former employee has "the choice of preserving his rights to deferred compensation by refraining from competition with his former employer or risking forfeiture of such rights by exercising his right to compete." 164 N.Y.S.2d at 243. However, in Bradford v. New York Times Co., 501 F.2d 51 (2nd Cir.1974), the Second Circuit stated that in light of subsequent decisions by the Court of Appeals of New York:

We do not agree that Kristt represents the law of the state if it be construed to eliminate any inquiry into reasonableness because of some purported doctrine of `employee choice.' The inquiry remains whether or not the restraint was reasonable and the contract was breached.

501 F.2d at 57.

Although the Second Circuit in Bradford had apparently interred the much criticized "employee choice" rule, at least three district court decisions within the Second Circuit have since concluded that Kristt remains alive and well. Murphy v. Gutfreund, 583 F.Supp. 957, 962-65 (S.D.N.Y. 1984) (recognizing the "employee choice" rule but refusing to apply the rule to noncompetition clause imposed after former employee agreed to work for a competitor); Diakoff v. American Re-Insurance Co., 492 F.Supp. 1115, 1121-23 (S.D.N.Y.1980); Kelsey v. American Home Products Corp., CV 82-0448, Slip Op. at 7-8 (E.D.N. Y.1983). Each decision declined to follow Bradford as a result of the intervening decision by the Court of Appeals of New York in Post v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 421 N.Y.S.2d 847, 397 N.E.2d 358 (1979).

In Post, the New York court refused to apply the "employee choice" rule whenever the employer had discharged its former employee, then went on to find that forfeiture of pension benefits based on a noncompetition clause was "unreasonable as a matter of law ... where an employee is involuntarily discharged by his employer without cause." 421 N.Y.S.2d at 849, 397 N.E.2d at 361 (emphasis added). In the course of its opinion, the New York court, citing Kristt, noted that where the employee had voluntarily terminated the employment relation, "effect has been given to the forfeiture-for-competition provision." Id. Each of the subsequent district court opinions cited above read this approving language, admittedly dicta, as breathing new life into Kristt.

This court must respectfully disagree. A rule which is honored only through its breach is not much of a rule, and this seems to be the state of the Kristt rule in the courts of New York. Post itself enunciated a major limitation of the rule stated in Kristt. Such limitations often presage the reversal of a rule rather than its reaffirmation. That Post did not disavow Kristt in cases of voluntary termination is not decisive, since the issue of voluntary termination was not before the Post court. Further, the parties have not cited to this court and research has failed to disclose a single reported decision by the Court of Appeals of New York or the Appellate Division interpreting Post as reaffirming the "employee choice" rule.³ Therefore, the Second Circuit's assessment in Bradford must be adopted as an accurate reading of New York law. Since the Second Circuit's view of New York law accords with Illinois law, no conflict exists.

Moreover, Illinois conflict of law rules⁴ would preclude application of the "employee choice" rule in this case were that rule...