Opinion
C.A. No. 2223-VCL.
Submitted: September 10, 2007.
Decided: December 7, 2007.
Patricia R. Uhlenbrock, Esquire, MORRIS JAMES LLP, Wilmington, Delaware; Carmen J. DiMaria, Esquire, OGLETREE, DEAKINS, NASH SMOAK STEWART, P.C., Morristown, New Jersey, Attorneys for the Plaintiff.
Jim Young, Pro Se Defendant.
MEMORANDUM OPINION AND ORDER
This action concerns the interpretation of restrictive covenants found in two separate employment contracts. The covenants state that, for two years and within a 25-mile radius of the defendant's former place of business, the defendant could not solicit, hire, or retain any of the company's employees or independent contractors. The court finds that the covenants are enforceable because they serve to protect the legitimate business interests of the employer without placing unreasonable restrictions on the defendant.
I. Facts And Procedural History
On June 14, 2006, the plaintiff, Weichert Co., a Pennsylvania corporation engaged in the real estate sales business, filed a verified complaint against James F. Young, Jr., Colonial Real Estate Services, LLC, and Colonial Real Estate Group, LLC. The complaint alleges that Young was Weichert's at-will employee, acting as a manager of Weichert's office in Bear, Delaware, from March 2003 until April 7, 2006. According to the complaint, Young entered into an employment contract dated August 27, 2004 (the "Manager's Employment Agreement") that contained restrictive covenants. Specifically, Young agreed that for a period of two years from the termination of his employment for any reason, he would not, within a 25-mile radius of the Bear office, solicit, hire, accept for employment, contract with or retain the services of any of Weichert's employees, independent contractors of Weichert, or Weichert affiliates, including sales associates.
Mgr.'s Empl. Agmt ¶ 17(a)(ii).
Young's employment with Weichert terminated on April 7, 2006. In connection with his termination, Young entered into a contract with Weichert called the Special Severance Agreement and General Release (the "Severance Agreement"). In paragraph 7 of the Severance Agreement, Young agreed to abide by the restrictive covenants contained in the Manager's Employment Agreement. In return, Young received a total of $29,533.69, which was itemized in the following amounts: $10,000 for Young's 2005 bonus, $7,341.39 in severance pay, $4,500 for a recruiting bonus, and $7,692.32 for three weeks' salary and two weeks' vacation.
See Def.'s Ex. L.
Shortly after leaving Weichert, Young opened his own real estate office in Middletown, Delaware, under the corporate names Colonial Real Estate Services, LLC, and Colonial Real Estate Group, LLC. Middletown, Delaware is approximately 15 miles from Bear, Delaware. According to the complaint, Weichert learned in mid-May 2006 that Young, along with his newly-formed business entities, had "hired, accepted for employment, contracted with, retained the services of and/or solicited" several of Weichert's employees or independent contractors. Weichert argues that Young's actions blatantly violate the restrictive covenants in the Manager's Employment Agreement and the Severance Agreement. The complaint alleges claims for breach of contract, tortious interference, unjust enrichment, and unfair competition, and seeks injunctive relief and monetary damages.
Compl. ¶ 17.
Before a hearing scheduled for June 20, 2006, the parties agreed to the terms of a Stipulation and Consent Order, which the court entered on June 21, 2006. The Order provides that, pending further order of the court, Young and the other defendants would not solicit or hire any Weichert employees or contractors within a 25-mile radius of the Bear office other than the six he had already hired, and Young would return all of Weichert's confidential information.
It appears from Young's Opposition Brief that Young may have hired two more former Weichert employees since entry of the Order (Terri Abegglen and Bev Stewart). See Def.'s Ex. G (listing present location of former Weichert employees from Bear). Weichert, however, has not had an opportunity to seek relief for these hirings, and the court's decision does not address them.
The defendants' counsel withdrew from the case on August 25, 2006. Young has proceeded as a pro se litigant since that time, while Colonial Services and Colonial Group have remained unrepresented. On October 30, 2006, Young served Weichert with a motion to dismiss, which this court denied on December 13, 2006.
The case was dormant until May 25, 2007, when Weichert filed a motion for summary judgment. With this motion for summary judgment, Weichert seeks to make the Order's injunction permanent until April 7, 2008 (two years from the date Young ended employment with Weichert), and seeks an order awarding monetary damages-specifically disgorgement of the monies paid to Young pursuant to the Severance Agreement. Weichert also seeks reimbursement of attorneys' fees pursuant to paragraph 17(f) of the Manager's Employment Agreement. Young argues that the restrictive covenants are not valid because they lack consideration, that the covenants are unenforceable because Weichert materially breached both the Manager's Employment Agreement and the Severance Agreement, and that the restrictions in the covenants are overly broad.
Weichert has abandoned its claims against the limited liability companies, and instead proceeds solely against Young. Weichert has also abandoned its claims for tortious interference, unjust enrichment, and unfair competition, instead focusing on the breach of contract claims. See Emerald Partners v. Berlin, No. 9700, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (stating "[i]t is settled Delaware law that a party waives an argument by not including it in its brief').
Although the contracts at issue specifically state that New Jersey law governs, the parties' briefs rely primarily on Delaware law. The court similarly relies primarily on Delaware law because the laws of New Jersey and Delaware are substantially similar, and this court would reach the same result under either state's law.
II. Injunctive Relief
To merit a permanent injunction, a plaintiff must show: (a) actual success on the merits, (b) irreparable harm, and (c) that, on balance, the equities weigh in favor of issuing the injunction. Further, to prevail on summary judgment, the moving party must "demonstrate that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law." In addition, "[t]he court must view the evidence presented in the light most favorable to the non-moving party." Once the moving party has demonstrated such facts, and those facts entitle it to summary judgment, the burden shifts to the non-moving party to present "specific facts showing that there is a genuine issue of fact for trial." The non-moving party "may not rest upon the mere allegations or denials [contained in the pleadings]."A. Actual Success On The Merits
Weichert premises its right to injunctive relief on Young's alleged breaches of restrictive covenants found in the Manager's Employment Agreement and the Severance Agreement. In order to show actual success on the merits of its breach of contract claims, Wiechert must establish that the covenants impose valid, enforceable contract obligations, that Young breached those obligations, and that damages resulted.1. The Covenants Are Valid And Enforceable Contract Obligations
To be enforceable, a restrictive covenant must (a) meet general contract law requirements, (b) be reasonable in scope and duration, (c) advance a legitimate economic interest of the party enforcing the covenant, and (d) survive a balance of the equities. The court finds that the covenants at issue are valid and enforceable, and therefore Weichert has satisfied the first element of its breach of contract claims.
See All Pro Maids, Inc. v. Layton, No. 058-N, 2004 WL 1878784, at *3 (Del.Ch. Aug. 10, 2004) (citing Del. Express Shuttle, Inc. v. Older, No. 19596, 2002 WL 31458243, at *11 (Del. Ch. Oct. 23, 2002)); Knowles-Zeswitz Music, Inc. v. Cara, 260 A.2d 171, 174-75 (Del.Ch. 1969); see also Comty. Hosp. Group, Inc. v. More, M.D., 838 A.2d 472, 479 (N.J.Super. App. Div. 2003) (stating that, under New Jersey law, restrictive covenants are enforced if the covenant "protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public"), aff'd in part, rev `d in part, 869 A.2d 884 (N.J. 2005); A.T. Hudson Co., Inc. v. Donovan, 524 A.2d 412 (N.J.Super. App. Div. 1987) (same); Am. Cellular Network Corp. v. Car-Talk, Inc., No. 11352, 1990 WL 71342, at *5 (Del.Ch. May 24, 1990) (applying New Jersey law).
a. The Covenants Meet General Contract Requirements
Young argues that the covenant in the Manager's Employment Agreement is invalid for lack of consideration because he was already employed when he signed it, and Weichert did not offer him additional compensation upon its execution. However, Young does not dispute that he was an at-will employee of Weichert. As a matter of law, "employment or continued employment may serve as consideration for an at-will employee's agreement to a restrictive covenant."
All Pro Maids, 2004 WL 1878784 at *3 (citing Research Trading Corp. v. Powell, 468 A.2d 1301, 1305 (Del.Ch. 1983)); see also Am. Homepatient, Inc. v. Collier, No. 274-N, 2006 WL 1134170, at *2 (Del. Ch. Apr. 19, 2006).
Young also argues that Weichert breached the Manager's Employment Agreement by not paying wages he earned while working from January 1, 2006 to March 15, 2006. Citing Dickinson Medical Group v. Foote and the doctrine of unclean hands, Young concludes that Weichert cannot enforce the restrictive covenant contained in the Manager's Employment Agreement. Yet Young ignores the implications of his admission that Weichert eventually paid those wages as part of his severance package in April 2006. Assuming that Weichert actually breached the Manager's Employment Agreement, Weichert had cured its breach by the time Young hired his first ex-Weichert employee in May 2006. Further, even if Weichert had breached the Manager's Employment Agreement, Young would still be bound by the Severance Agreement, which contains the very same restrictive covenant found in the Manager's Employment Agreement, and is independently binding upon Young. Thus, the covenant in the Severance Agreement has continued in full force and is a sufficiently independent basis upon which to predicate the relief Weichert seeks in this action.
No. 84C-JL-22, 1989 WL 40965, at *7 (Del.Super. Mar. 23, 1989) (stating that a plaintiff may not complain of a defendant's failure to perform a restrictive covenant "if plaintiff is first guilty of a material breach").
Def'.s Opp. 5.
Young notes that the Severance Agreement guaranteed him 21 days to review the Agreement. However, according to Young, he needed the money promised in the Severance Agreement because Weichert had not paid him "adequate compensation" in 30 days, and Weichert informed him that the longer he waited to sign the Agreement, the longer he would have to wait for the promised compensation. These allegations do not establish that Weichert breached the Severance Agreement or that Young signed it under duress. Rather, they simply suggest that Young, for reasons within his own control, chose to sign and return the Agreement to Weichert before the expiration of the 21-day period.
b. Reasonable Duration And Scope
The restrictive covenants at issue are of two-years' duration, and encompass a 25-mile radius around Weichert's Bear office. Young contends that both the duration and scope of these covenants are unreasonable.
Covenants of two-years' duration are consistently held to be reasonable. Those few cases holding that two years is an unreasonable duration involve unskilled workers who received no specialized training-clearly not the type of employee in this case. Nor is this a case in which the goodwill at issue is valuable for less than two years. In fact, Young concedes that the average turnover rate for properties is five to seven years. In this circumstance, it is eminently reasonable that Weichert would want to maintain a relationship with a particular client for two years.
See All Pro Maids, 2004 WL 1878784 at *3 (citations omitted); see also Comty. Hosp. Group, Inc., 838 A.2d at 898 (enforcing two-year restrictions); A.T. Hudson Co., 524 A.2d at 428, 434 (same); Mailman, Ross, Toyes Shapiro v. Edelson, 444 A.2d 75, 78 (N.J. Ch. 1982) (stating that a covenant duration of two years is "generally held to be reasonable").
See Elite Cleaning Co., Inc. v. Capel, No. 690-N, 2006 WL 1565161, at *8 (Del.Ch. June 2, 2006); see also Bernard Pers. Consultants, Inc. v. Mazarella, No. 11660, 1990 WL 124969, at *3 n. 2 (Del.Ch. Aug. 28, 1990) (assuming the 12 month restriction in the covenant at issue was reasonable, but noting that such an assumption was "controversial" "given the particularities of the business, in which there . . . appears to be no highly valuable trade secrets").
Def.'s Opp. 11.
Further, the facts in this case, viewed in a light most favorable to Young, establish that the scope of the covenants is reasonable as well. The geographic scope of a restrictive covenant is acceptable to the extent it is necessary to protect a party's legitimate interests. Thus, the reasonableness of a covenant's scope is not determined by reference to physical distances, but by reference to the area in which a covenantee has an interest the covenants are designed to protect.
See Research Trading Corp., 1992 WL 345465 at *12; see also Comty. Hosp. Group, Inc., 838 A.2d at 480.
In this case, Weichert, a real estate business, operates in the service industry. In such industries, clients often develop a loyalty to the particular employee who provides the services, rather than to the employer. Therefore, Weichert "has an interest in the goodwill created by its sales representatives and other employees, which is vulnerable to misappropriation if the employer's former employees are allowed to solicit its customers shortly after changing jobs." Further, Weichert expends considerable resources training its employees and helping them obtain the appropriate licenses. In fact, the record shows that Weichert established a pre-licensing school where it teaches potential agents before they take their licensing exams. Thus, Weichert also has an interest in protecting its relationship with its employees.
See Singh v. Batta Envtl. Assoc, Inc., No. 19627, 2003 WL 21309115, at *8 (Del.Ch. May 21, 2003).
All Pro Maids, 2004 WL 1878784 at *5 (citing Rhis, Inc. v. Boyce, No. 18924,2001 WL 1192203, at *6 (Del.Ch. Sept. 26, 2001)); Research Trading Corp., 1992 WL 345465 at *12; see also Meadox Medicals, Inc. v. Life Sys. Inc., 3 F. Supp. 2d 549, 552 (D.N.J. 1998); Whitmyer Bros., Inc. v. Doyle, 274 A.2d 577, 581 (N.J. 1971) (stating that "the employer has a patently legitimate interest in protecting his trade secrets as well as his confidential business information and he has an equally legitimate interest in protecting his customer relationships"); Schuhalter v. Salerno, 653 A.2d 596, 599-600 (N.J.Super. App. Div. 1995); Mailman, Ross, Toyes Shapiro, 444 A.2d at 78 ("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").
See Fizzano Aff. ¶ 5-6.
See Fizzano Aff. ¶ 6.
There are several ways Weichert can protect these interests. The most conventional method would be to require each employee and independent contractor to sign agreements in which the individual promises not to compete against Weichert. Another method Weichert could utilize, and the one it chose to use here, is to require individuals put in charge of Weichert employees and contractors, such as managers of branch offices, to sign agreements in which they promise that upon termination they will not hire Weichert employees or contractors.
Young does not dispute that the individuals he hired developed significant contacts with Weichert's clients. Rather, Young argues that his office is "below the canal" in Middletown, Delaware, while Bear, Delaware is "above the canal." He then alleges that the real estate industry treats the two areas as distinct and separate markets. Because they are two distinct and separate markets, Young argues, he is not misappropriating the contacts his employees developed as agents for Weichert, and therefore the 25-mile boundary found in the covenants is overly broad.
This is ostensibly a reference to the C D Canal, which is used by some in Delaware as a point of reference.
Despite Young's allegations, he has not presented "specific facts showing that there is a genuine issue of fact for trial." Rather, the record establishes that Weichert offices "above the canal" frequently did, and continue to do, business "below the canal," and vice versa. Indeed, while Young was the manager of the Bear office, he told Weichert it did not need a separate office in Middletown because he could handle any business "below the canal," contradicting his position that areas "below the canal" and "above the canal" are distinct and separate markets. Therefore, the goodwill Weichert developed with customers through its agents extends 25 miles from the Bear office, including Middletown, Delaware and the area "below the canal." In short, Young started companies that compete with Weichert, and used Weichert's contacts to establish the competitors' initial customer bases. Clearly, Weichert has an interest in preventing such conduct.
Id. citing Court of Chancery Rule 56(e)).
See Fizzano Aff. ¶ 3.
See Fizzano Aff. ¶ 3-4.
Young also argues that Weichert's Bear office is now closed, and so Weichert no longer has legitimate interests within 25 miles of the office. However, that the Bear office has closed is no reason for the court to reach a different conclusion. Rather, the record establishes that Weichert continues to offer services in the areas Young now seeks to serve. The record also establishes that there are current Weichert employees and independent contractors located within 25 miles of the former Bear office that Young may attempt to hire. Thus, even though the Bear office is now closed, Weichert has a continued interest in protecting its goodwill, as well as the relationships it has developed with its employees and contractors through years of training, in Middletown, Delaware and the area "below the canal."
See Fizzano Aff. ¶ 3 (stating that in 2007, approximately 20% of the business for Weichert's Pike Creek, Delaware office, which is "above the canal," related to properties "below the canal").
See Fizzano Aff. ¶ 6.
c. Legitimate Business Interest
For the reasons discussed above, Weichert has established that the business interests the covenants seek to protect, i.e. its goodwill and relationships with employees and contractors it has trained, are legitimate.
d. Balance Of The Equities
In the context of enforcing a covenant not to compete, "[e]quity may decline to grant specific enforcement if the interests that the employer seeks to protect are ephemeral in contrast to the grave harm to the employee resulting from enforcing the restriction." In this case, the equities weigh in favor of enforcing the covenants. On the one hand, Weichert required Young to sign covenants not to solicit or hire employees or contractors both as a condition of employment and as a condition to receiving his severance pay. There is no indication that Young did not, or could not, understand the covenants he signed. Further, as established above, the covenants serve to protect Weichert's legitimate business interests. Failing to enforce the covenants would deprive Weichert of the benefits of its bargain.
Tristate Courier Carriage, Inc. v. Berryman, No. 20574-NC, 2004 WL 835886, at *13 (Del.Ch. Apr. 15, 2004) (citing Del. Express Shuttle, 2002 WL 31458243 at *11).
On the other hand, the covenants do not prevent Young from earning a living or continuing to pursue a career in real estate. Rather, Young remains free to hire real estate agents that have not worked for Weichert. Nor do the covenants prevent current Weichert employees and contractors from finding gainful employment with other real estate agencies. Moreover, the covenants Weichert now seeks to enforce allow Young to continue running his business with the six employees he hired in violation of the covenants. Finally, upon the covenants' expiration in less than five months, Young will be free to hire former Weichert employees and independent contractors. With Young having enjoyed the benefits of his breaches for over a year and a half, the court finds no undue hardship to Young from enforcing the covenants. The covenants meet all the elements necessary to be valid, enforceable contract obligations, and Weichert has established the first element of its claims for breach of contract.
2. Breach Of The Covenants
Young concedes that he has hired six former Weichert employees or independent contractors. However, Young argues he has not breached the covenants because he did not solicit or induce these individuals to terminate their relationship with Weichert. Young's argument ignores the plain language of the covenants-that he not "hire or retain the services of any employee or independent contractor of the COMPANY or any affiliate." Simply put, Young breached the covenants when he hired former Weichert employees and independent contractors, regardless of whether or not he solicited them to leave Weichert. Weichert has established the second element of a breach of contract claim.
Mgr.'s Empl. Agmt. ¶ 17(a)(ii); Severance Agmt. ¶ 7.
3. Resulting Damages To The Plaintiff
As discussed more fully below, Weichert has established that it was damaged as a result of Young's breaches. Therefore, Weichert has established all three elements of a breach of contract claim, and established its actual success on the merits.
B. Irreparable Harm
As a result of Young's breaches, Weichert has faced and continues to face the loss of client goodwill as well as loss of employees it has expended not insignificant resources to train. Courts have found that "after-the-fact attempts to quantify the damages from breaches of this kind involve costly exercises in imprecision," and are therefore incapable of being compensated for through money damages. Further, Young's actions will result in future harm to Weichert if left unchecked, as there is no indication that Young is willing to cease hiring Weichert employees or contractors. Therefore, Weichert has established the second prerequisite to obtaining injunctive relief.
Hough Assoc., Inc. v. Hill, No. 2385-N, 2007 WL 148751, at *3 (Del.Ch. Jan. 17, 2007).
C. On Balance. The Equities Weigh In Favor Of Issuing The Injunction
The court has already found that equities weigh in favor enforcing the covenants. Therefore, Weichert has established its entitlement to injunctive relief.
III. Monetary Damages
Because Young has breached the Severance Agreement, Weichert is entitled to damages resulting from that breach. Weichert initially sought monetary damages in the amount of $29,533.69, the amount paid to Young upon his execution of the Severance Agreement. However, Young contends that only $7,541.39 constitutes money he received for executing the Severance Agreement.
According to Young, the remainder was paid to him as compensation for his employment from March 2006 to his termination in April 2006. While this would normally raise an issue of material fact, Weichert has agreed to lower the amount it seeks for breach of the Severance Agreement to the amount that Young has conceded represents severance pay, i.e. the amount he received for agreeing to abide by the restrictions on his post-employment conduct outlined in the Severance Agreement. Because Young has breached the restrictive covenant contained in the Severance Agreement, Weichert is entitled to the $7,541.39 Young received as severance pay.
IV. Attorneys' Fees
Finally, Weichert argues it is entitled to fees it incurred in bringing this action. Specifically, it argues that paragraph 17(f) of the Manager's Employment Agreement provides for this fee shifting.
That paragraph states: "If [Weichert] brings any action(s) (including an action seeking injunctive relief) to enforce its rights [under the restrictive covenant] and a judgment is entered in [Weichert's] favor, then [Young] shall reimburse [Weichert] for the amount of [Weichert's] expenses, including reasonable attorney's fees, incurred in pursuing and obtaining that judgment."
It is settled law that provisions in which one party undertakes to pay attorneys' fees of the other in the event of his own breach is not per se void as against public policy. There is a concern of disparities in bargaining power when such provisions are included in employment agreements, but these public policy concerns are not implicated in this case for two reasons. First, the fee shifting provision does not relate to a breach of any term of the general employment relationship, but rather to Young's knowing and intentional conduct in violation of the covenants not to solicit or hire. Second, this case does not involve "unsophisticated or especially necessitous workers," but parties with extensive experience in the real estate industry, including experience drafting, reviewing, and executing contracts.
Research Trading Corp., 1992 WL 345465 at *15; see also DiSarro v. GNC Franchising, Inc., No. 04-5125, 2007 WL 1521253, at *3 (D.N.J. May 23, 2007) (stating "it is well settled that [New Jersey] courts will enforce contractual fee shifting provisions") (citations omitted).
All Pro Maids, 2004 WL 1878784 at *12; see also Rosen v. Smith Barney, Inc., 925 A.2d 32, 41 (N.J.Super. App. Div. 2007) (stating "the dictates of public policy may require invalidation of private contractual arrangements where those arrangements directly contravene express legislative policy or are inconsistent with the public interest or detrimental to the common good. Our power to declare a contractual provision void as against public policy must be exercised with caution and only in cases that are free from doubt.").
All Pro Maids, 2004 WL 1878784 at *12; cf. Dare v. Freefall Adventures, Inc., 793 A.2d 125, 135-36 (N.J.Super. App. Div. 2002) (invalidating fee shifting provision in a contract because it shifted fees from the tortfeasor to the victim of the tort).
Research Trading Corp., 1992 WL 345465 at *15.
The record does not indicate the amount or reasonableness of the fees Weichert incurred. Within 30 days, Weichert's counsel shall submit an affidavit and appropriate documentation showing the amount and reasonableness of the attorneys' fees and costs Weichert claims. Young may file any opposition to Weichert's application within 45 days of the date of that submission.
V. Conclusion
For the reasons stated herein, Plaintiff Weichert Co. of Pennsylvania's motion for summary judgment is GRANTED. The injunctive relief contained in the June 21, 2006 Stipulation and Consent Order is extended until April 7, 2008, and Weichert is awarded $7,541.39 plus reasonable attorneys' fees and costs to be determined. IT IS SO ORDERED.