No. CV 04-0832322S
February 23, 2005
MEMORANDUM OF DECISION
The plaintiff, Innovative Financial Services, LLC ("IFS") brings this action against a former employee, Shelly Anne Urban ("Urban"), its former client, Law Office of William A. Snider, LLC ("Law Office") and its principal owner, William A. Snider ("Snider") to obtain injunctive relief and damages arising from the hiring of Urban by Law Office, in violation of employment and non-compete contracts entered into between IFS and Urban.
The first count of the Amended Complaint dated April 12, 2004, alleges breach of contract by Urban; the second count alleges tortious interference by the Law Office and Snider with the contracts between IFS and Urban; and the third count charges Snider with making false representations to Urban and Laurie O'Neil ("O'Neil"), owner and president of IFS. The complaint seeks money damages plus attorneys fees and interest as well as an injunction "prohibiting and restraining" employment between Law Office and Urban. Each defendant has filed answers and a number of affirmative defenses and Urban has filed a counterclaim seeking to recover damages from IFS "in making misrepresentations to the Law Office about Urban and attempting to obtain a referral fee for her employment by Law Office."
Trial took place on July 14, August 4, August 26 and September 2, 2004, with subsequent offers of proof filed on September 17 and 24, 2004.
The following facts are not disputed.
Since January 2001, IFS was in the business of providing outsourced bookkeeping, accounting and administrative services and by 2003 had developed relations with approximately forty business customers. On March 24, 2003, Urban, who had been a part-time employee, was hired as a full-time employee by IFS and signed a six-page employment agreement ("Employment Agreement"). The Employment Agreement, which had a term of one year, provided in Section 5.1 entitled "Employment of Clients":
Employee hereby agrees not to accept any type of employment . . . to a client . . . of the Company . . . without the Company's prior written consent.
Section 6.1 of the Employment Agreement provided in part as liquidated damages for employee's breach:
1. $250 for each day that Employee violates this Agreement, to a maximum of $25,000. In addition, employee agreed to pay all fees, etc., received by her in "violation" of the agreement.
Previously on December 5, 2002, Urban and IFS had signed a Confidentiality and Non-Competition Agreement ("Non-Compete Agreement"), which provides in Section 3:
For the period during which you are employed and for a period of one (1) year after your employment . . . you will not:
(a) render any services to, or engage in any activities for, any other person (including any of the Company's past, current or prospective customers) with respect to any of the Company's services in existence or under development during the time of your employment with the Company in any of the following locations:
(i) the following Connecticut counties:
Hartford . . .; and
(ii) the following Massachusetts counties: . . . Middlesex
Both agreements provided that IFS would be entitled to injunctive relief in the event of a breach. The Non-Compete Agreement provided for reasonable attorneys fees to IFS if it was required to enforce its provisions.
In the latter part of 2003, IFS had two employees, including Urban, both of whom worked a few hours a week for various clients, including Law Office, rendering bookkeeping and billing services. Law Office had offices in several locations in Connecticut and Massachusetts with approximately ninety employees. No written agreement was ever made between Law Office and IFS, but in December 2003, Snider telephoned O'Neil inquiring about Urban's future employment situation eliciting a response from O'Neil expressing surprise that Urban had any desire to be employed by Law Office.
On January 1, 2004, Urban gave notice to IFS that she would be resigning effective March 26, 2004. On January 9 and January 16, 2004, O'Neil notified Urban in writing that accepting employment with Law Office would violate her contracts with IFS. On January 16, 2004, after an alleged argument with O'Neil, Urban changed her last day at IFS to January 17, 2004. She began working for Law Office on January 19, 2004, two days after a holiday party on January 17, 2004 hosted by Law Office.
Aside from the above facts there are claims made by the various parties which are vigorously questioned by other parties.
1. Snider and Urban both claim no discussion took place to Urban being hired by Law Office prior to the holiday party of January 17, 2004, at which time after Snider learned that Urban had resigned from IFS, she was hired as personnel director. They claim that no prior discussion took place between them prior to that time either with respect to Urban leaving IFS or Law Office hiring Urban. They claim further that in her position as personnel director, Urban was performing work essentially different from the bookkeeping and billing services she performed as an IFS employee.
2. O'Neil claims she visited Law Office on January 20, 2004, spoke to Snider and left copies of the IFS employment and non-compete agreements with Snider.
3. Urban recalls first discussing her IFS agreements with Snider a few weeks after the party. Snider recalls that he first learned of the agreements a month later.
4. O'Neil claims after Snider's inquiry about Urban in early December, she telephoned him prior to Christmas requesting a referral fee if he hired Urban.
The non-compete agreement was signed approximately on December 5, 2002 and the employment agreement was signed about four months later on March 23, 2003. The non-compete agreement, actually entitled "Confidentiality and Non-Competition Agreement," contains language prohibiting Urban from accepting employment with plaintiff's customers. However, it is an agreement primarily directed to prohibiting competition with the plaintiff's business of supplying temporary help, or working for anyone supplying such competition. Also O'Neil herself interpreted that agreement as essentially prohibiting an employee from "starting up a business to compete against me." The first count of the Amended Complaint, seeking damages from Urban for breach of contract combines the elements of both agreements. Because the plaintiff has not separated its claims under the two agreements, and Urban's employment with Law Office has not been proven by Plaintiff to be similar to that in which Urban was engaged while an employee of IFS and no competing business was set up, plaintiff has not sustained its burden of proving a violation of the non-compete agreement. In view of this conclusion it is not necessary to consider other claims of the defendants that the terms and geographic scope of the non-compete agreement rendered it unenforceable.
The gravamen of plaintiff's complaint under the Employment Agreement proven or subject to reasonable inference is that Urban, during the term of her one year contract, accepted employment with Law Office, a client of plaintiff's that resulted in plaintiff's loss of the client; this whether Urban was hired for the same duties she performed while employed by IFS or not.
The five factors to be considered in evaluating the reasonableness of a restrictive covenant ancillary to an employment agreement are: (1) the length of time the restriction operates; (2) the geographical area covered; (3) the fairness of the protection accorded to the employer; (4) the extent of the restraint on the employee's opportunity to pursue his occupation; and (5) the extent of interference with the public's interests." Robert S. Weiss Associates, Inc. v. Wiederlight, 208 Conn. 525, 530 n. 2, 546 A.2d 216 (1988). "The five-prong test . . . is disjunctive, rather than conjunctive; a finding of unreasonableness in any one of the criteria is enough to render the covenant unenforceable." New Haven Tobacco Co. v. Perrelli, CT Page 4836 18 Conn.App. 531, 533-34, 559 A.2d 715, cert. denied 212 Conn. 809, 564 A.2d 1071 (1989). See also Sabatasso v. Bruno, Superior Court, judicial district of New Haven at Meriden, Docket No. CV 03 0284486 (April 8, 2004, Tanzer, J.) ( 36 Conn. L. Rptr. 851); Group Concepts, Inc. v. Barberino, Superior Court, judicial district of New Haven at Meriden, Docket No. CV 03 0286221 (April 16, 2004, Tanzer, J.) ( 37 Conn. L. Rptr. 9).
It is found that the prohibition against accepting employment with a client like Law Office in its location, was a reasonable restrictive covenant, satisfying the five-prong test set forth above. Ample consideration to Urban consisted of IFS giving her five weeks of training and paying for her Manchester Community College on-line class, this aside from her regular compensation. Although a majority of Superior Court decisions do not consider continued employment by itself to be valid consideration for a non-compete provision, at least one recent decision has ruled that such employment is valid consideration. Pissitelli v. Pepe, 38 Conn. L. Rptr. No. 6 (January 17, 2005 Lopez, J.).
Although injunctive relief was stipulated in both agreements, such relief appears to be more logically directed to an employee engaged in a competing business than to an employee accepting employment not with a competing business, but a former client. If injunctive relief would be granted, it would operate against Law Office but there was no written or oral agreement produced prohibiting Law Office from employing Urban. Moreover, such relief does not appear possible or practical under present circumstances since any prohibition against Urban continuing to work for Law Office would neither restore Law Office as a client of IFS or Urban as an employee. Finally, O'Neil's admitted seeking of a referral fee would indicate that she did not regard Urban's leaving as threatening "irreparable damage" to IFS.
Plaintiff's claim for injunctive relief is denied.
The testimony elicited at trial leads to the conclusion that Urban violated the employment agreement against accepting employment with a client of IFS, during the term of her employment. On January 1, 2003 Urban advised O'Neil that she was planning to seek employment with Snider. On January 9 and January 16 O'Neil advised Urban in writing that such employment would invite legal action. It can only be concluded that the sudden change in her retirement date from March 26, 2004 to January 16, 2004 took place in the context of some understanding with Snider that she would be hired the day afterward. Such action resulted in damages to IFS, but they are difficult to ascertain but there is a provision for liquidated damages. Urban claims that the liquidated damages clause in the employment contract was unreasonable in that it provided for $250 a day plus a disgorgement of any compensation received from prohibited employment. Considering all the circumstances, her yearly compensation of $35,000 and the hourly pay rate of $35 charged by IFS for her services, it is reasonable to apply that portion of the liquidated damages provision of $250 per day, which if multiplied by the 48 working days starting on January 19, 2004 and ending on March 26, 2004 would result in damages of $10,000.
In counts two and three of its amended complaint, plaintiff alleges tortious interference and fraud on the part of Law Office and Snider.
Plaintiff alleges that Snider and Law Office were provided with actual notice of Urban's contracts on January 20, 2004 and also alleges that Urban terminated her employment with IFS on January 16, 2004. Plaintiff alleges that at or about the time that Laurie delivered her notice on January 20, Snider told her he would not be hiring Urban although in fact he had hired her on January 18.
The "Restatement (Second) of Torts, § 774A (1979), provides: `(1) One who is liable to another for interference with a contract or prospective contractual relation is liable for damages for (a) the pecuniary loss of the benefits of the contract or the prospective relation; (b) consequential losses for which the interference is a legal cause; and (c) emotional distress or actual harm to reputation if they are reasonably to be expected to result from the interference.'" Conrad v. Erickson, 41 Conn.App. 243, 247 n. 7, 675 A.2d 906 (1996).
From facts proven or inferred it is concluded that Snider and Law Office intentionally interfered with IFS' business by hiring Urban, with the knowledge that she was employed under a contract with IFS; that cessation of Law Office's utilization of IFS' service was a result of such hiring; that the claim that Urban was hired as personnel director of Law Office at a holiday party, without any prior discussion or written contract and the lack of any particular experience in such a position strains credibility.
In Appleton v. Board of Education, 254 Conn. 205, 212-13 (2000) our Supreme Court stated:
A claim for tortious interference with contractual relations requires the plaintiff to establish (1) the existence of a contractual or beneficial relationship, (2) the defendants' knowledge of that relationship, (3) the defendants' intent to interfere with the relationship, (4) the interference was tortious, and (5) a loss suffered by the plaintiff that was caused by the defendants' tortious conduct . . . Unlike other torts in which liability gives rise to nominal damages even in the absence of proof of actual loss . . . it is an essential element of the tort of unlawful interference with business relations that the plaintiff suffers actual loss . . . Therefore . . . the plaintiff must allege an `actual loss' resulting from the improper interference with her contract . . . [T]he tort is not complete unless there has been actual damage suffered.
Our Supreme Court has also stated "`In an action for interference with a contract by inducing or causing a third person to break the contract with the other, the fact that the third person is liable for the breach does not affect the amount of damages awardable against the actor; but any damages in fact paid by the third person will reduce the damages actually recoverable on the judgment.'" Herman v. Endriss, 187 Conn. 379 n. 7, quoting the Restatement (Second), Torts 774A(2).
The difficulty in this case is ascertaining the actual loss suffered by the plaintiff as a result of the hiring of Urban by Law Office and yet, proof of actual loss is a necessary element in a tortious interference claim.
O'Neil testified that after Urban and Dawn Angel were hired by Law Office she was left shorthanded, unable to service clients and unable to follow a projected growth plan.
Kenneth Cook, a small business consultant, testified that he was working with plaintiff to develop the growth of her business and that the loss of plaintiff's two employees had a devastating effect on the growth plan of her business.
Mr. Cook's testimony appeared to be somewhat speculative because the scenario he painted of the projected growth in IFS business was not based on retention of Urban's continued employment but on a number of factors unrelated to the issues in this case. Urban's employment contract was for only one year and since she was an at-will employee she could have left that employment for a variety of reasons without incurring damages. Moreover, there was some testimony about a second employee of IFS hired directly by Law Office but that was never pleaded or fully developed. Finally, IFS had started as a business as late as 2001, and at first on a part-time basis.
It is concluded that plaintiff failed to prove the amount of any consequential loss suffered by IFS in its future business resulting from defendant's conduct.
The fact that O'Neil solicited a "referral fee" sometimes known as a "buy-out" fee or a "conversion fee" from Law Office for the hiring of Urban, with the unstated inference that such a fee would have satisfied IFS for the loss of Urban, would make the amount of the referral fee a better measure of the loss suffered by IFS, but there was no evidence of the amount requested and, moreover, IFS had no agreement with Law Office to pay such a referral fee, common in such relations between agencies supplying temporary help and their clients. See Professional Employment Temporaries v. Empire Paving, Inc., 2002 Ct. Sup. 16118, judicial district of New Haven No. 01-0458733S (December 13, 2002, Hadden, J.) Shepards Causes of Action Second McGraw-Hill (1994) 4 Conn.2d 653, p. 722.
A third theory of compensation might be based on the difference between the income which would have been realized by IFS if Urban had remained in her employ for the balance of her one year and the actual income received by IFS. Although Snider testified that he was thinking of phasing out his temporary help, there is little reason to believe that he would have dismissed the services provided by IFS through Urban had he not hired Urban directly. However, it is not possible to accurately determine such amount, because it would have to be reduced by the estimated sayings in wages by IFS and might have to be increased by any loss of income suffered by IFS from the loss of other clients resulting from Urban's resignation and there was no competent evidence as to any of these amounts.
As our Supreme Court has stated in Appleton v. Board of Education, supra one essential elements of tortious interference is the proof of actual damages, and since the plaintiff has failed to prove its actual damage, this claim for compensatory damages under the second count must be resolved in favor of the defendant. See also DeNapoli v. Cooke, 43 Conn.App. 419, 428 cert. denied 239 Conn. 951 (1996).
The third count alleging fraud against Snider appears to be based solely on Snider's denial that he was informed by O'Neil on January 20, 2004, of the employment and non-compete agreements and that he did not open the envelope she left containing the agreements until a month later, and that this denial was made in order to prevent IFS from "obtaining an injunction." Aside from the difficult issue of establishing whose testimony should be given credit, this alleged action of Snider and the alleged motive is hardly sufficient to constitute the tort of fraud. Suffield Development Associates v. National Loan Investors, 260 Conn. 766, 777 (2002).
Even if the amount of actual damages claimed under the second count cannot be ascertained, there is no doubt that IFS sustained an actual loss by reason of the tortious interference by Law Office.
Our Supreme Court in Hi-Ho Tower, Inc. v. Com-Tronics, 255 Conn. 20, 34 (2000) stated "An award of compensatory damages is not necessary to establish a cause of action for tortious interference as long as there is a finding of actual loss, and a finding of actual loss may support an award of punitive damages."
Plaintiff has in fact claimed punitive damages by claiming costs, attorneys fees and interest.
Punitive damages may be awarded if defendant exhibited a "reckless indifference" to the rights of IFS or committed an "intentional or wanton violation" of these rights. Id. 255 Conn. 35. An award of punitive damages is justified if defendant was "aware or should have been aware, from his knowledge of the circumstances, that his conduct would naturally or probably harm the plaintiff" Connecticut Jury Instructions (Civil) Wright 8 Ackerman, Fourth Ed. § 256(2). The measure of such damages is the reasonable expense incurred by the plaintiff in prosecuting this action. Id. § 256(D).
The disingenuous conduct of Snider, his reckless indifference and the awareness that his conduct would probably harm the plaintiff may be found from the following evidence.
1. Although Snider had been doing business with IFS for over two years and had a friendly relationship with O'Neil and had initiated a discussion with her about Urban's future,
A. He invited Urban and Dawn Angel to his January 17 party, but failed to invite O'Neil although she had been invited to previous parties in his office.
B. He did not check in any way with O'Neil before hiring Urban to confirm that Urban had resigned or to ascertain whether there were any contractual relations between IFS and Urban to be taken into account or to conclude the discussion pending between him and O'Neil about the requested referral fee.
2. Snider maintained, in sworn testimony, that although O'Neil left an envelope with him on January 20, containing copies of the Non-compete and Employment contracts with Urban, he did not open the envelope until a month later, difficult to believe under all the circumstances, particularly since IFS had requested a referral fee. It is concluded that he knew of the contracts before he hired Urban or by the latest, on the first day of her employment with Law Office.
3. Snider denied ever discussing employment of Urban by Law Office prior to the January 17 party, despite his December 2003, conversation with O'Neil and Urban's written statement on January 1, 2004 that she intended to seek such employment and it is concluded that some discussion of such employment had to take place at some earlier date. This conclusion is supported by the difficulty in believing Snider when he maintains he hired Urban as personnel director for all the branches of Law Office in Connecticut and Massachusetts, involving over ninety employees, at the January 17 party, without any prior discussions or review of her resume. A review of that resume reveals no particular education or work experience which would justify such an on-the-spot hiring and the only tasks Urban had performed at Law Office consisted of bookkeeping and billing.
Accordingly, punitive damages are awarded against Law Office and Snider. It has been stipulated that any judgment against Law Office would be effective against the "S" corporation which was formed after Law Office was dissolved in March 2004.
Since punitive damages are based primarily on the costs of prosecuting this action, the ascertainment of such damages will be made at a separate hearing to take evidence of such costs and whether they were reasonable.
The counterclaim filed by Urban was not pressed at trial and it is found that she failed to sustain her burden of proof with respect to such counterclaim.
Judgment may enter in favor of the Plaintiff against Shelley Anne Urban in the amount of Ten Thousand ($10,000) Dollars, and the Law Office of William A. Snider and William A. Snider are found to be liable for punitive damages, to be assessed at a separate hearing.
Wagner, J. Judge Trial Referee