91 A.D.3d 569
N.Y. App. Div.2012Background
- UMI purchased Luxus membership interest from Kerwin Media for about $1.3 million, payable in installments.
- Roaring Thunder Media was formed by Kerwin principals or former Luxus employees in March 2006 and began competing with Luxus.
- Plaintiffs allege Roaring Thunder copied Luxus’s model and solicited its customers using confidential information.
- Plaintiffs claim Kerwin breached the December 2007 sale agreement by violating implied covenants and a restrictive covenant to refrain from competing or interfering with Luxus’s relationships.
- Defendants moved to dismiss under CPLR 3211, arguing the claims are barred by a February 27, 2009 release and governed by New Jersey law.
- The court granted dismissal but modified to allow a misappropriation of trade secrets claim that postdates the release to survive.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are all claims barred by the release and sale agreement? | UMI asserts release did not bar post-release misappropriation claims. | Kerwin contends the release bars all claims arising from breaches and fiduciary duties. | Most claims barred; misappropriation survives post-release. |
| Can implied covenants read into the contract create non-compete/non-solicit terms? | Implied covenants should forbid competition and protect Luxus’s relationships. | Implied covenants cannot supply non-compete/non-solicit terms where none were agreed. | Implied covenants cannot create non-compete/non-solicit provisions; no such terms present. |
| Do declaratory judgment and tortious interference claims require a breach of contract? | Breaches exist by Kerwin, supporting ancillary claims. | No breach underlying exists to support those claims. | Without a breach, declaratory judgment and tortious interference claims fail. |
| Does the misappropriation of trade secrets claim survive? | Trade secrets were misused post-release to gain competitive advantage. | Release defeats such claims. | Misappropriation claim survives to the extent it postdates the release. |
Key Cases Cited
- Schenck v HJI Assocs., 295 N.J. Super. 445 (App. Div. 1996) (courts cannot supply missing contract terms)
- Graziano v Grant, 326 N.J. Super. 328 (App. Div. 1999) (implied non-compete only where contract contemplates retirement)
- Rycoline Prods. Inc. v. Walsh, 334 N.J. Super. 62 (App. Div. 2000) (trade secrets require clear elements including confidential disclosure)
- Lamorte Burns & Co. v. Walters, 167 N.J. 285 (2001) (implied covenants limited to business efficacy terms)
- New Jersey Bank v. Palladino, 389 A.2d 454 (1978) (restrictive covenants and implied terms under NJ law)
- Schenck v. HJI Assocs.; Sokoloff v. Harriman Estates Dev. Corp., 96 N.Y.2d 409 (2001) (pleading standard for accepting facts as true on CPLR 3211)