Schuhalter v. Salerno

• Decision Date: 21 February 1995
• Citation: 279 N.J.Super. 504,653 A.2d 596
• Parties: Murray SCHUHALTER and M. Schuhalter & Co., P.C. (formerly Schuhalter, Salerno & Co., P.C.), a New Jersey professional corporation, Plaintiffs-Appellants and Cross-Respondents, v. Anthony V. SALERNO, Anthony V. Salerno & Co., P.A., A.V. Salerno, a professional association, Howard R. Berlly, Dennis A. Cannon and Herbert Weber, Defendants-Respondents and Cross-Appellants.
• Court: New Jersey Superior Court — Appellate Division

Page 504

279 N.J.Super. 504

653 A.2d 596

Murray SCHUHALTER and M. Schuhalter & Co., P.C. (formerly Schuhalter, Salerno & Co., P.C.), a New Jersey professional corporation Plaintiffs-Appellants and Cross-Respondents, v. Anthony V. SALERNO, Anthony V. Salerno & Co., P.A., A.V Salerno, a professional association, Howard R Berlly, Dennis A. Cannon and Herbert Weber, Defendants-Respondents and Cross-Appellants.

Superior Court of New Jersey Appellate Division.

Argued Sept. 21, 1994.

Decided Feb. 21, 1995.

Steven C. Herzog, for appellants/cross-respondents (Sydney Hyman and Associates, attorneys; Brad S. Karp and Mr. Herzog, of the New York Bar, admitted pro hac vice, on the brief).

Patricia Breuninger, for respondents/cross-appellants (Breuninger & Hansen, attorneys; Ms. Breuninger and Laura LeWinn, on the brief).

Before Judges GAULKIN, KESTIN and A.A. RODRIGUEZ

The opinion of the court was delivered by

GAULKIN, P.J.A.D.

In 1987, Murray Schuhalter and Anthony V. Salerno, principals in an accounting firm known as Schuhalter, Salerno & Co., P.C., (S & S) entered into an agreement for dissolution of the firm and apportionment of its assets and business. The agreement designated certain firm clients as Salerno's and the remainder as Schuhalter's, and restricted each of the principals from soliciting or serving the other's clients. Schuhalter brought this action in 1989, alleging, among other matters, that Salerno had breached the agreement by soliciting and serving Schuhalter's clients. Schuhalter also joined as defendants Howard R. Berlly, Dennis A. Cannon and Herbert Weber, former S & S employees who joined Salerno following the dissolution. The defendants asserted a number of counterclaims, including a claim that Schuhalter had wrongfully withheld monies due under the agreement. All the claims and counterclaims were dismissed before or at trial, except for two: the jury awarded Schuhalter $3000 in fees due under the agreement and found no cause for action on Salerno's claim for wrongful withholding of fees by Schuhalter. Schuhalter appeals, and Salerno cross-appeals, both asserting errors in the dismissal of the claims not submitted to the jury.

I

Schuhalter's central contention is that the Law Division wrongly held "that the parties' arms-length agreement was void as against public policy to the extent it conditioned, in any respect, the ability of a former accounting partner to work for former clients of the partnership."

The dissolution agreement named particular S & S clients as Salerno's; the remaining clients were regarded as Schuhalter's. The parties agreed to "cooperate with the other to avoid placing a client of the other in a position of embarrassment or discomfort in continuing to engage [Schuhalter] or Salerno as that client's accountant." If a client of one "express[es] discomfort and/or dissatisfaction to the other," ... the recipient "shall promptly notify the other of the tenor and substance of the conversation(s)."

Section 4.7a of the agreement then provided that if the client

nevertheless expresses a desire to engage the other as that client's accountant, the other may, at ... his option, accept such engagement from the client after giving notice to the other party, and in the event of acceptance of such engagement, ... he shall pay to the other party (the former accountant) a sum equal to the billings of fees to such client by the other party (the former accountant) for the last full year, consisting of the 12 months immediately preceding, in sixty (60) consecutive equal monthly installments, without interest, the first installment being due and payable on the first day of the month following the date on which the party (the new accountant) accepting such client renders services to that client.

Finally, in Sections 12.1 and 12.2, Salerno and Schuhalter mutually covenanted that for two years after the dissolution neither would solicit or serve the other's clients except as allowed by Section 4.7a.

The First Count of Schuhalter's complaint alleged that Salerno violated the agreement by soliciting and serving Schuhalter's clients. Salerno denied those allegations and asserted that the restrictive provisions of the agreement were "unenforceable as violative of the public policy of the State of New Jersey." After some discovery, Salerno moved for partial summary judgment dismissing the First Count. A Law Division judge denied that application with the following explanation:

With respect to the question of the validity of the so-called restrictive covenant, however, it does not appear that summary judgment can be granted at this posture of the case. There is no question but that the clients of the accountants have the absolute right to choose the firm which shall be responsible for their accounting needs. The question, however, appears to be as to whether or not there was any active solicitation as to some of them or one of them as the case may be. Consequently, partial summary judgment with respect to that aspect of the case shall be denied.

Some months later, Salerno again moved to dismiss the First Count. That motion was heard by a second judge, who interpreted the prior denial as a holding that "the restrictive covenants [are] unenforceable except as to solicitation." The second judge found that to be the law of the case, although he frankly acknowledged that "I'm not so sure that if the issue were before me afresh, without a prior ruling by [the first judge], that I would come to the same result." Based on that ruling ¹, and on a finding that there was no proof of Salerno's actual solicitation of Schuhalter's clients, the judge dismissed the First Count.

The record supports the finding of no actual solicitation. But we conclude that the restrictive covenants are enforceable even in the absence of actual solicitation.

II

The modern New Jersey view of noncompetitive agreements was stated in Solari Industries, Inc. v. Malady, 55 N.J. 571, 576, 264 A.2d 53 (1970):

Though noncompetitive agreements were at one time flatly outlawed, it is now well recognized that they do have a proper place and are enforceable under appropriate circumstances. Thus a seller's incidental noncompetitive covenant, which is designed to protect the good will of the business for the buyer, is freely enforceable in the courts. And while a covenant by an employee not to compete after the termination of his employment is not, because of the countervailing policy considerations, as freely enforceable, it will nonetheless be given effect if it is reasonable in view of all the circumstances of the particular case. It will generally be found to be reasonable where it simply protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public.

Here Salerno and Schuhalter can be regarded as both sellers and buyers of portions of the partnership business. Salerno does not contend otherwise, nor does he suggest that enforcement of the covenants should be restricted because of any unequal bargaining power or other "countervailing policy considerations" associated with employer--employee covenants. See, e.g., Foti v. Cook, 220 Va. 800, 263 S.E.2d 430, 433 (1980) (restrictive covenant of partners of accounting firm are unlike employees' covenants). Salerno argues, rather, and the Law Division appears to have agreed, that he "fall[s] within that class of professionals whose services, like those of lawyers and doctors, are so personal and confidential in nature as to prohibit restrictive covenants which impinge on the public's right to free access to the professional of its choice."

Salerno relies on a series of New Jersey cases assertedly holding that "agreements between professionals whose services entail personal, confidential, and fiduciary relationships with their clients must not serve to restrict the public's rights of free choice of such professionals." We find no such principle in our case law.

The earliest of the modern New Jersey cases is Dwyer v. Jung, 133 N.J.Super. 343, 336 A.2d 498 (Ch.Div.), aff'd 137 N.J.Super. 135, 348 A.2d 208 (App.Div.1975). There a law partnership was dissolved pursuant to an agreement parcelling out named clients to specific partners and providing that "all partners shall be restricted from doing business with a client designated as that of another partner for a period of 5 (five) years." Id. 133 N.J.Super. at 345, 336 A.2d 498. The court refused to enforce those restrictions, finding "[s]trong public policy considerations" against anything "which restricts the right of the client to repose confidence in any counsel of his choice." Id. at 346-47, 336 A.2d 498. Importantly, the court relied on the disciplinary rules promulgated by the American Bar Association and adopted in New Jersey declaring unethical any contractual restriction on the right of a lawyer to practice law. Id. at 347-49, 336 A.2d 498.

The narrow scope of the Dwyer holding is made clear in the subsequent cases. In Karlin v. Weinberg, 77 N.J. 408, 390 A.2d 1161 (1978), the Supreme Court refused to invalidate a post-employment restrictive covenant ancillary to an employment contract between physicians. The Court held that, like post-employment covenants in commercial settings, a restraint on a physician is enforceable "to the extent that it protects a legitimate interest of the employer, imposes no undue hardship on the employee, and is not injurious to the public." Id. at 412, 390 A.2d 1161. The Court specifically rejected the argument that Dwyer rendered restrictive covenants among professionals unreasonable per se. Id. at 418, 390 A.2d 1161. Rather, Dwyer "represents an exercise by the judicial branch of its unique constitutional responsibility for regulating the conduct of attorneys." Id. at 419, 390 A.2d 1161.

Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 607 A.2d 142 (1992), again confirmed that "any [contractual] provision, whether...