In Bessemer Trust Co., N.A. v. Branin, 08-2462-cv(L), 08-2677-cv(XAP) (2d Cir. 2010), the Second Circuit examined New York's Mohawk doctrine, which requires a seller to refrain from soliciting former customers following the sale of the "good will" of the seller's business. See Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981).
In 2000, defendant sold his investment management firm (and good will) to another investment management firm. After the sale, the seller remained as an employee of the purchaser but later left and joined a competitor. While he did not contact his former clients directly prior to departing, he did respond to their inquiries as to his status. He also participated in meetings with at least one client and helped craft his new firm's strategy for soliciting that client's business. When that client and several others stopped doing business with the purchaser, the purchaser brought suit alleging that defendant improperly solicited his former clients in violation of New York law.
After a bench trial, the district court determined that defendant improperly solicited one client but found insufficient evidence of improper solicitation with respect to the others. After a second trial on damages, the district court adopted a "return on capital" measure of damages rather than the "lost profits" measure of damages sought by plaintiff and awarded plaintiff $1,229,173.20 in damages and pre-judgment interest.
On appeal, the Second Circuit reviewed the Mohawk doctrine and noted that, under New York common law, "the right acquired by a purchaser of the 'good will' of a business is a permanent one and is not subject to divestiture upon the passage of a reasonable period of time, since there is a continuing duty upon the seller imposed by law in order to prevent the seller from taking back that which he has purported to sell." The Second Circuit also noted, however, that "this duty of the seller not to solicit customers does not. . . include an obligation not to accept such of his former customers as may choose to follow him to his new employment." So long as the client's decision to follow the seller did not come about through "improper solicitation", the law is not violated and the lost account should not be considered in determining damages.
Here, the evidence showed that defendant took actions to solicit one of his former clients and to frustrate plaintiff's ability to retain that client. The Second Circuit found that New York law was not clear on whether defendant's actions constituted "improper solicitation", however, and certified questions to the New York Court of Appeals regarding the degree of participation necessary to constitute "improper solicitation":
What degree of participation in a new employer's solicitation of a former employer's client by a voluntary seller of that client's good will constitutes improper solicitation? We are particularly interested in how the following two sets of circumstances influence this analysis:
(1) the active development and participation by the seller, in response to inquiries from a former client whose good will the seller has voluntarily sold to a third party, in a plan whereby others at the seller's new company solicit the client, and
(2) participation by the seller in solicitation meetings where the seller's role is largely passive.
Sean C. McPhee, Esq.