83 Misc. 2d 446 | N.Y. Sup. Ct. | 1975
The plaintiff in this action, a shareholder and former employee of the defendant Radiological Health Services, P. C. (RHS), seeks dissolution of the corporation, an injunction against enforcement of the covenant not to compete contained in his employment contract and rescission of an agreement which severed a portion of the corporate medical practice and left it in the hands of former shareholder-employees against whom the restrictive covenant has not been enforced. The corporate defendant has counterclaimed for
THE FACTS
Plaintiff is one of 12 doctors who in 1970 formed RHS as a professional corporation to supplant their then existing partnership in the practice of radiology. Until mid-summer of 1974, the area covered by this practice included most of Suffolk County as well as the eastern portion of Nassau. The shareholders were divided into three "regions” or groups which separately serviced the eastern, central and western portions of the practice and, until plaintiff’s resignation, all of them were under contract as employees of RHS. All of the contracts contained a covenant restricting a withdrawing or terminated employee from. competition for a period of two years.
When plaintiff joined the partnership in 1960 he brought to it the radiological practice he had previously established as an independent practitioner in eastern Suffolk County and thereafter he continued his service as director of radiology at the Southampton Hospital and his association with the Hampton Medical Center and the East Hampton Medical Group. As the practice grew in both forks of the eastern area, the partnership and its corporate successor assigned additional radiologists to serve in that region. A personality conflict which arose between the plaintiff and another partner in the area resulted in the transfer of the defendant Dr. Fiore, in 1968, from the central to the eastern group at plaintiff’s request. Dr. Fiore moved his family to Southampton and, until 1973, plaintiff and he practiced together in relative tranquility. In the summer of 1973, the shareholders decided to explore the feasibility of dissolving RHS and it is apparent from the evidence that from that point forward the plaintiff became concerned that he would be compelled to share the practice in the south fork of Suffolk County with Dr. Fiore in any regional entity which might succeed RHS. In July of 1973, plaintiff made his first complaint to the corporation concerning his colleague and stated he would not accept Dr. Fiore as a partner in the event of dissolution. Plaintiff’s hostility toward Dr. Fiore is the obvious genesis of this litigation.
Although plaintiff disclaimed any charge of incompetence against Dr. Fiore, he testified that he had received various
Although the fact that dissolution was rejected at the same time severance was accepted suggests that the problems in the west were the cause for the interest in dissolution, it is plaintiff’s position that the severance agreement was evolved at "clandestine” meetings and was a part of a conspiracy first to saddle him with Dr. Fiore and then to dissolve. Prior to the vote on the severance issue, plaintiff wrote to the directors of RHS alleging the agreement was illegal but demanding, that he be permitted to resign on the same terms. At the August 15 meeting he cast the only negative vote and resigned as an employee. Attempts to dissuade him were fruitless and on August 19, 1974 the corporate attorney wrote him stating that his employment contract required 90 days’ notice of termination and contained a covenant not to compete and that if any portion of the eastern practice was lost to the corporation legal redress would be sought. Despite the fact that he was still a shareholder and, for another 90 days, a salaried employee of RHS, plaintiff immediately renewed his efforts to secure a separate contract from the Southampton Hospital.
Plaintiff has continued the south fork practice since his resignation and has received proceeds of corporate operations at the East Hampton Medical Group and the Hampton Medical Center and deposited them in a special account in his name, conceding at the trial that some of the funds deposited were for services rendered by Dr. Fiore. Plaintiff has apparently also made disbursements from his special account, allegedly for business purposes, but he testified that he has not cashed the salary checks remitted to him by RHS during the termination period. Payments by the Southampton Hospital have been deposited by the hospital in an escrow account. The parties seek a judicial determination with respect to all of the funds accumulated.
THE DISSOLUTION ISSUE
Plaintiff’s first cause of action demands judgment dissolving the corporation on the ground that it is paralyzed by dissension and is being held together solely for the purpose of forcing an unwanted associate upon him.
There is no explicit statutory authority for judicial dissolution of a corporation at the request of a minority shareholder. Under sections 1102, 1103 and 1104 of the Business Corporation Law dissolution may be decreed only on petition of a majority of the board or of the shareholders or, in the case of a deadlock, on petition of the holder of 50% of the stock. However, relief is available on the petition of a minority shareholder as a matter of judicial sponsorship where it is alleged that the directors and others in control are looting assets thereby enriching themselves at the expense of minority shareholders or are continuing the corporation’s existence for the sole purpose of benefiting those in control at the expense of the minority (Leibert v Clapp, 13 NY2d 313; see, also, Aliotta v Samperisi, 2 AD2d 901; Gross v Price, 284 App Div 964). A heavier burden is required to sustain such an action for dissolution than is required to sustain a derivative action for waste since the purpose of a dissolution action is not to strengthen the corporation but to end its life, a decision which is properly one for the majority to make (Fontheim v Walker, 282 App Div 373, affd 306 NY 926). Where allegations that the corporation is being continued for the sole benefit of
In the instant case, plaintiff has not demonstrated that his colleagues have looted or exploited the corporation for the benefit of the majority. The decision to purchase the shares of the west end practitioners and release them from the obligation not to compete was a business judgment within the power of the majority shareholders to make. RHS is a sounder venture as a result of that judgment and plaintiff, as an east end practitioner, is among the least affected by the continuance in practice of any of the resigning radiologists. Plaintiff’s contention that the severance was accomplished secretly and illegally is belied by his own evidence which establishes that tenative plans were presented to the shareholders at a prior shareholders’ meeting and that more than the requisite vote was recorded on August 15. If in fact the decision constitutes the waste or squandering of corporate assets, plaintiff could bring a derivative action (Abrams v Allen, 297 NY 52) but, as he could not succeed in such an action on the current record, neither can he obtain rescission of the severance agreement nor, under the rule in Leibert v Clapp (supra), secure dissolution.
Nevertheless, asserting that the corporation is in essence a partnership, the plaintiff further argues that the dissolution question should be judged by the equitable standards applicable in the case of partnership dissolution (Partnership Law, §63, subd 1, par [f]). Plaintiff’s authority for this thesis, Matter of Pivot Punch & Die Corp. (15 Misc 2d 713, mod 9 AD2d 861), is inapposite because the plaintiff there held 50% of the corporate stock and the shareholders were deadlocked, thus bringing the case within the ambit of section 1104 of the Business Corporation Law. Judge Fuld has written that a less restrictive reading of Leibert v Clapp (supra) is required to permit judicial dissolution of a close corporation upon a showing by the minority that the corporation no longer serves the
ENFORCEMENT OF THE RESTRICTIVE COVENANT
In plaintiff’s second cause of action, he seeks the enjoinder of the enforcement of the restrictive covenant in his employment contract. RHS has counterclaimed for such enforcement.
The covenant contained in all the corporation employment contracts (which was also part of the previous partnership agreement) restricts a withdrawing employee from practicing medicine "in any area which is located within a five mile radius of any office, hospital, clinic or other facility which the corporation shall maintain” for a two-year period following withdrawal. The contract also provides that the covenant will be enforced against an employee whose employment has been terminated by the corporation only if the holders of four-fifths of the stock outstanding vote to do so.
Basic to a consideration of the enforceability of a covenant not to compete in an employment contract are five factors: (1) the restriction must be necessary for the employer’s protection; (2) the time must be reasonable; (3) the geographical area must be reasonable; (4) the burden of the employee must not be unreasonable; and (5) the general public must not be harmed (Service Systems Corp. v Harris, 41 AD2d 20). An injunction will not issue unless enforcement is necessary and reasonable for the protection of the employer and the conditions are not unreasonable, unjust or oppressive to the employee (Keen v Schneider, 202 Misc 298, affd 280 App Div 954; Foster v White, 248 App Div 451, affd 273 NY 596). Although there are powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood, an employer’s interest in retaining its customers is sufficient to support a covenant not to compete where there is a risk that a former employee may be able to divert part of the business (Service Systems Corp. v Harris, supra; Purchasing Assoc. v Weitz, 13 NY2d 267; I. Edward Brown, Inc. v Astor Supply Co., 4 AD2d 177).
The provisions of the instant covenant do not exceed judi
Plaintiff offered no direct proof on the issue of the hardship which he would necessarily incur should the covenant be enforced but, after 20 years of practice in eastern Suffolk County, it is obvious that a career elsewhere would involve considerable personal disruption even if limited to two years. Nevertheless, plaintiff is a diplómate in radiology and can practice anywhere in the country. Whether opportunities exist in western Suffolk or in Nassau County does not appear in the record but those areas are legally open to him. On the other hand, plaintiff has established through his own testimony that the south fork practice has been a tremendous asset to RHS and that its loss through his competition would result in serious financial injury to the corporation.
While there is no direct evidence with reference to the effect of enforcement of the covenant on the public (a significant factor in the case of a physician: see 14 Williston, Contracts, § 1639), the competition for radiological contracts in Suffolk County appears to be intense and the implication is that there is adequate coverage.
On this record, therefore, the restrictive covenant is prima facie enforceable, but plaintiff’s argument that enforcement is precluded because of the doctrines of waiver and estoppel and because the corporation wrongfully interfered with his practice and profession requires consideration.
Prior to plaintiff's resignation, five employee-doctors of RHS (and, before that, two members of the partnership) had withdrawn from the group practice and in no case was the restrictive covenant enforced. The defendants allege that the circumstances of these departures are distinguishable from that of plaintiff. Of the seven departing doctors, one took up practice in Connecticut, another in Manhattan, and a third purchased the corporation’s former Brooklyn practice when RHS found it had difficulty servicing that area. The covenant was also specifically waived for the three west end practitioners as a term of the severance agreement. In the seventh case, the employment of Dr. Goldstein, a nonshareholder, was terminated by the corporation itself after one year. Dr. Goldstein became an assistant to a radiologist whose office is within two miles of an RHS facility and who services St. John’s-Smith-town Hospital, an institution with which various referring physicians of RHS are affiliated. Plaintiff testified that the covenant was not enforced as to Dr. Goldstein because he threatened "to blow the whistle” on one of the other doctors in the corporation. In any event, no RHS shareholder objected to nonenforcement of the covenant on Dr. Goldstein’s termination and the matter of enforcement was never brought to a vote. It is plaintiff’s contention that by virtue of this policy of selective enforcement, RHS has waived its right to enforce the covenant against him and indeed is estopped from asserting it.
It is fundamental that either party to a contract, may waive any of its provisions made for his benefit (10 NY Jur, Contracts, § 344). Thus an employer waives the right to enforce a negative covenant not to compete executed by a former employee where the employer knowingly aids such an employee in his efforts to obtain competing employment (Sentinel Investigation Serv. v Mercury Intelligence Serv., 34 Misc 2d 50). A waiver, unlike estoppel, is dependent solely on what one party intends to do and there is no need to show reliance by the party asserting it (31 CJS, Estoppel, § 61). There would seem to be no inherent reason why the defense of waiver cannot be asserted by a third person who was not a party to the contract the nonenforcement of which gave rise to the defense. Thus the rights of a manufacturer against a distributor under the fair trade law (General Business Law, § 396-a) can be waived where prior price cutting by other distributors has not been
Integral to the concept of enforcement of covenants not to compete is the balancing of the interest of employer, employee and public welfare in each case (Service Systems Corp. v Harris, supra) and the right to enforce a negative covenant must be determined on an ad hoc basis. Since each case stands on its own particular facts and circumstances (Keen v Schneider, supra), any requirement for uniformity of enforcement would be contrary to the judicially enunciated standard of balancing the interests involved. Even the instant plaintiff testified that he thought the covenant was to be applied solely to protect senior employees from newer men. Since enforcement of negative covenants is permitted solely when stated tests are met, the failure to enjoin all violators is not ipso facto a waiver of the right to enjoin the violators whose competition is offensive.
The essence of waiver is the intentional relinquishment of a known right (American Bridge Co. v State of New York, 245 App Div 535). The intent must be clearly established and cannot be inferred from a doubtful or equivocal act (Cicero Ind. Development Corp. v Roberts, 63 Misc 2d 565) and the burden is on the one claiming the waiver of a right to prove it (92 CJS, Waiver). That burden has not been sustained by this plaintiff. Each case of nonenforcement of the covenant resulted from a business judgment that either there would be no competition or that on balance it would not be offensive. In sum, each case can be justified as being of benefit to the corporation.
As to estoppel, plaintiff has made no showing that he resigned in reliance on the fact that the negative covenant
THE CLEAN HANDS DOCTRINE AS A BAR TO ENFORCEMENT
The clean hands doctrine bars equitable relief for the willful misconduct of a plaintiff which is fraudulent, illegal or unconscionable even though not of such a nature as to constitute a crime or a basis of legal action (30 CJS, Equity, p 1018). Hands do not become unclean, however, while exercising lawful authority or power and ill will existing between the parties to a suit does not constitute inequitable conduct (id., p 1021). In the instant case, the corporation had the power — and indeed the obligation — to protect its business interest from plaintiff’s usurpation. The fact that most of its stockholders appear to have sided with Dr. Fiore in what on this record is primarily a personality conflict does not constitute misconduct sufficient to sustain a clean hands defense.
Nevertheless, plaintiff insists that the corporation "wrongfully” interfered with his efforts to make a separate contract with the Southampton Hospital on the rationale that the south fork practice is "his” since he brought it into the group. If this interference could be deemed a breach of the employment contract, the corporation would indeed be barred from enforcing the covenant (Cornell v T. V. Development Corp., 17 NY2d 69; Millet v Slocum, 4 AD2d 528, affd 5 NY2d 734). Here the employment contract explicitly provided that the employee "engage in the practice of medicine only for the Company” and plaintiff has conceded that the corporation could have assigned him to an area other than that of his prior practice. The general rule is that customers belong to the employer (Molina v Barany, 56 NYS2d 124) and that the employer’s interest in retaining its customers is alone sufficient to support a covenant not to compete (Service System Corp. v Harris, supra; see McCall Co. v Wright, 198 NY 143). Where an employee executes the covenant at the same time he accepts employment, the latter becomes consideration for the promise (Ann., 51 ALR3d 825). Lynch v Bailey (275 App Div 527, affd 300 NY 615), cited by plaintiff, in which an employer was held not entitled to enforce such a covenant
DR. FIORE’S CROSS-MOTION AND HIS STANDING TO ENFORCE THE COVENANT
In a pretrial motion Dr. Fiore sought, inter alia, a preliminary injunction enjoining plaintiff from "continuing to engage in his illegal and unwarranted campaign to discredit, undermine and impune [sic] the professional reputation of the defendant, Americo S. Fiore, M. D.” Although the motion was denied by Mr. Justice Scileppi he referred its issues to the trial court and they will thus be considered. As a general rule, an injunction will not lie to restrain a libel (Advance Music Corp. v American Tobacco Co., 183 Misc 645) except where the publication is made as part and parcel of a course of conduct deliberately carried on to further a fraudulent or unlawful purpose (West Willow Realty Corp. v Taylor, 23 Misc 2d 867). Dr. Fiore has shown neither defamation nor fraudulent or illegal purpose. Plaintiffs trial testimony was absolutely privileged (Pecue v West, 233 NY 316), his presentation of his grievance to the corporation was qualifiedly so (Andrews v Gardiner, 224 NY 440) and little evidence has been produced of statements made outside these two forums. The application for injunctive relief must be denied.
Also reserved by Mr. Justice Scileppi for the trial court was the question of Dr. Fiore’s standing to enforce the restrictive covenant against the plaintiff on his own behalf. Dr. Fiore asserts in his brief that he is entitled to enforcement because he is a creditor beneficiary. A third party is a creditor beneficiary if the promisee’s expressed intent is that the third party shall receive the performance in satisfaction and discharge of some actual or supposed duty or liability of the promisee to the third party (4 Corbin, Contracts, § 779C). "Intent” is the operative word. It is not enough that the contract will benefit the third party (Morgan v Ebco Mach. Corp., 239 App Div 346); there must in addition be a "clear intent” that the
THE ACCOUNTING
In its counterclaim RHS demands an accounting by plaintiff with respect to the funds which have accumulated since his resignation. Since the parties are in a fiduciary relationship and no misconduct on the part of RHS has been proven, it is entitled to an accounting (see 1 NY Jur, Accounts and Accounting, § 20). At issue are the sums received by plaintiff
Settle judgment: (1) dismissing the complaint; (2) granting judgment to the defendant RHS on its counterclaim for enforcement of the restrictive covenant and for an accounting; (3) providing for a reference relative to the accounting itself; and (4) dismissing the defendant’s cause of action for damages.