|The Mohawk Doctrine provides that the seller of a business must refrain indefinitely from soliciting those entities which were customers of the business at the time when the seller sold their interests. Recently, in Bessemer Trust Company v. Branin, in answering a certified question from the Second Circuit Court of Appeals the New York Court of Appeals revisited the Mohawk Doctrine and provided further guidance as to its application.1 Counsel should be ready to guide clients on both sides of such transactions in keeping with this latest decision.
Hypothetical: What is Improper Solicitation of Former Customers? Brendan’s Widget Company was purchased by Patrick’s Widget Company. The purchase agreement did not contain a non-compete or non-solicitation clause nor any other provisions limiting Brendan’s future employment or business opportunities. After closing the deal, Brendan opened a new widget shop and, once again, began to advertise and sell his products to the public.
|Brendan’s counsel received a call from Patrick’s attorney who demanded that Brendan close his new widget shop. Brendan’s counsel pointed out that the purchase agreement did not contain a non-compete or non-solicitation provision and declined counsel’s request.
Two weeks later, Brendan’s counsel received another call from Patrick’s attorney threatening an action for injunctive relief. Patrick’s counsel advised that Brendan has placed a call directly to his largest former customer inquiring about their widget needs.
Assuming for the moment that counsel’s representations were true, Brendan’s counsel, again, pointed out the absence of protective covenants in the purchase agreement and declined counsel’s request that Brendan immediately cease such contact.
Did Brendan’s counsel do the right thing? Well, yes and no.
Mohawk: The Implied Covenant of Non-Solicitation
What evolved over the next century was an implied non-solicitation covenant between the buyer and seller of a business; even if no such covenant was contained in the contract of sale. Importantly, the Mohawk Doctrine does not amount to an implied non-compete covenant. In Mohawk, the Court of Appeals instructed: “This implied covenant restricts the economic freedom of the seller only insofar as it precludes him from approaching his former customers and attempting to regain their patronage after he has purported to transfer their ‘good will’ to his purchaser.”5
In the above scenario, therefore, Brendan’s counsel appears to have been justified in his position during his first call with Patrick’s attorney, though the second call should have been handled more carefully. However, at what point does “economic freedom” end and “solicitation” begin? As is often the case, cut-and-dried answers to such questions are rarely presented.
Bessemer: The Fact-Based Test for Improper Solicitation
Francis J. Branin, Jr. joined the investment management firm of Brundage, Story & Rose, LLC in 1977. He served as an investment portfolio manager for Brundage, rising to the level of principal in 1982 and served as Chief Executive Officer from 1996 through 2000. In 2000 the shareholders of Brundage agreed to sell the assets of the firm, including its client accounts, to Bessemer Trust Company. Branin, along with the other principals of Brundage, took employment positions with Bessemer. The purchase agreement imposed no express restrictive covenants on Branin or the other Brundage principals.
Branin later became disillusioned with his role at Bessemer and in July 2002 resigned and joined the firm of Stein Roe Investment Counsel LLC. After Branin left Bessemer, some of his clients contacted him and ultimately decided to transfer their accounts to Stein Roe. Branin’s largest client at Bessemer, the Palmer family, contacted Branin and requested a meeting with Stein Roe “in order to discuss how their accounts would be handled within your organization.”6v Prior to the meeting, Branin facilitated a “strategy session” with other personnel at Stein Roe at which he described the Palmer family’s investment philosophy and other background information. Branin then attended the meeting with the Palmer family, introduced the participants but played a passive role “occasionally amplify[ing] a point others were making.”7
Eventually, the Palmer family moved its accounts to Stein Roe and Bessemer sued for improper solicitation, breach of loyalty and impairment of good will under the Mohawk Doctrine. Following a bench trial, the district court awarded Bessemer $1.2 million in damages and pre-judgment interest.8 Upon appeal, the Second Circuit found it needed clarification as to New York law and certified the following question to the Court of Appeals: “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?”9
The Court of Appeals held: “There is no hard and fast rule in determining whether a seller of ‘good will’ has improperly solicited his former client … Rather, in making this assessment on a case-by-case basis, the trier of fact must consider the principles underlying the rule in Mohawk and the factors involved within the relevant industry that may impair the ‘good will’ conveyed by the original seller.”10
So, what can Brendan do to develop business for his new widget company without running afoul of the automatic protections provided to Patrick under the Mohawk Doctrine? Although the Court of Appeals declined to establish a “hard and fast rule,” it did provide for some “do’s and don’ts.”
Brendan may not take affirmative steps to directly communicate with his former customers, including, for example, sending targeted mailings or making individualized telephone calls to those former customers informing them of his new widget company. However, Brendan may advertise to the general public so long as such advertisements are general in nature and not specifically aimed at his former customers. Brendan may not “tout” his new widget company simply because a former customer has fortuitously communicated with him.
Nevertheless, all communications are not barred. For example, when contacted, Brendan may provide information to his former customers, including information about his new widget company’s products and services. Under the language used by the Court in Bessemer, the key appears to be that Brendan may answer specific questions posed by Patrick’s new (and Brendan’s former) customers but not go so far as to promote his business.
This seems to be quite a fine line and one that is likely to require greater judicial interpretation. However, it is clear that Brendan may not disparage Patrick’s business or assert that his product is superior.
Complying with Mohawk After Bessemer
The Court of Appeals did not find the strategy sessions that Branin held with others at Stein Roe prior to the Palmer family meeting to be impermissible. Nor did the Court take issue with Branin’s presence at that meeting, though maintenance of a passive or perfunctory role appears critical to staying on the right side of Mohawk’s prohibitions.
The lessons to be gleaned from Bessemer are not limited to the factors elucidated by the Court of Appeals when conducting a Mohawk Doctrine analysis. Rather, the importance of express protective provisions in contracts and other documents concerning the sale of a business, or otherwise, cannot be overestimated. Not only can such provisions provide broader protections, they can be streamlined to the specific situation and industry.11 While the availability of the Mohawk Doctrine was certainly advantageous to Bessemer, it may have been better served by the inclusion of non-compete, non-solicitation or similar protective covenants in their purchase agreement documents with Brundage.12
|Peter J. Mastaglio is the Senior Partner in the Commercial Litigation Department of Cullen and Dykman LLP in Garden City. He may be contacted at email@example.com.
Douglas J. Bohn is an Associate in the Commercial Litigation Department of Cullen and Dykman LLP. He also has extensive experience in the fields of product liability and mass tort law. He may be contacted at firstname.lastname@example.org.
|1. 16 N.Y.3d 549 (2011).
2. 52 N.Y.2d 276 (1981).
3. 200 N.Y. 41 (1910).
4. Id. at 51-52.
5. Mohawk, 52 N.Y.2d at 284.
6. Bessemer, 16 N.Y.3d at 554.
7. Id. at 555.
8. Id. at 555-56. Cf. Bessemer Trust Co., N.A. v. Branin, 544 F. Supp.2d 385 (S.D.N.Y. 2008).
9. Id. at 551. Cf. Bessemer Trust Co., N.A. v. Branin, 618 F.3d 76 (2d Cir. 2010).
10. Id. at 557.
11. Recall the Bessemer Court’s specific instruction, noted above, that “factors involved within the relevant industry” (emphasis added) should be considered.
12. At the time of this writing, the Second Circuit had not issued a further opinion based upon the Court of Appeals’ response to the certified question.
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