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Courts are often called upon to interpret the enforceability of restrictive covenants—such as non-compete, non-solicitation, and non-disclosure clauses—contained in employment agreements.  The vast majority of the case law dealing with the enforceability of these clauses often focuses on whether the restrictions are reasonably limited in time and scope, whether they are necessary to protect the employer’s legitimate business interests, and whether they unfairly restrict the employee from obtaining future employment in his or her chosen occupation.   What makes the recent decision from the Commercial Division in Albany County in Integra Optics, Inc. v. Messina (J. Platkin) interesting is that the focus was not about the terms of the restrictive covenants.  Rather, the issue was whether an otherwise enforceable employment agreement is rendered unenforceable as a result of the employer requiring the employee to sign under the threat of withholding commission payments.  The Court’s answer, in short, was that such threats constitute economic duress and, if proven, render the agreement unenforceable.

Plaintiff, Integra Optics, Inc. (“Integra”) is a designer, manufacturer and distributor of fiber optic networks and components.  Defendant, Jonathan Messina, was hired as an account executive in 2013 and was responsible for managing client accounts and relationships and developing new business and sales strategies.  In 2015 alone, Messina’s accounts brought in more than $6 million in revenue, earning Messina nearly $360,000 in compensation.

As an account executive, Messina had access to the company’s proprietary and confidential information including the company’s product lines, manufacturing costs, pricing policies, discounting policies, and business relationships.  As a result, around September 2014, Integra requested that Messina execute a non-competition agreement.  Although he initially refused, Messina ultimately signed the agreement in September 2015 (“Agreement”).  The Agreement contained a one-year covenant against post-employment competition, which included non-solicitation language, as well as a restriction from using or disclosing any of Integra’s proprietary or confidential information.    

Messina subsequently resigned from Integra effective April 1, 2016 and, about a week later, Integra learned that Messina was considering accepting employment from a competitor who was specifically identified in the Agreement.  Thereafter, Integra commenced this lawsuit and filed an Order to Show Cause seeking a preliminary injunction to, among other things, restrain Messina from working for the competitor.

In defense of the motion, Messina raised the usual arguments about the Agreement being unenforceable because it was overly broad and not necessary to protect Integra’s legitimate business interests, but he also claimed the Agreement was unenforceable because it was the product of economic duress.  At the outset, the Court held that Integra was likely to succeed on its claim that the terms of the Agreement were reasonable in time and scope.

However, with respect to the defense of economic duress, Messina submitted an Affidavit claiming that he initially refused to sign the Agreement on multiple occasions because he felt it was too broad in its restrictions.  In June 2015, Daniel Maynard (“Maynard”) joined Integra as Vice President of Sales.  According to Messina, Maynard immediately began pressuring him to sign the Agreement and threatened Messina on multiple occasions that he would not receive his earned commissions and bonuses unless he signed.  Messina brought the issue to Integra’s Chief Operating Officer, who assured him that the Agreement was just a formality and would not be enforced.  Based on the representations from the COO and his fear that his commissions and bonuses would be withheld, Messina relented and signed the Agreement.  In a separate Affidavit, Maynard denied making the threat about withholding commissions. Based on the contradicting Affidavits, the Court ordered an evidentiary hearing.

At the evidentiary hearing, based on witness testimony from other employees who had received similar threats from Maynard, and other evidence presented at the hearing, including text messages confirming Messina’s account of the underlying facts, it became apparent that Maynard did, in fact, likely threaten to withhold commissions from employees, including Messina, who refused to sign the Agreement.

In its holding, the Court noted that a contract may be voided on the ground of economic duress where a party to the contract establishes that he or she was compelled to sign based on wrongful threats from the other party that precludes the exercise of free will.  805 Third Ave. Co. v. M.W. Assoc., 58 N.Y. 2d 447 (1983).  “Conversely, a party cannot be guilty of economic duress for refusing to do that which he or she is not legally required to do.”  Bechard v. Monty’s Bay Recreation, Inc., 35 A.D.3d 1132 (3d Dep’t 2006).

Here, the Court found that withholding earned commission payments, which for Messina was nearly $100,000, would have been a violation of the Labor Law and thus threatening to do so would be deemed economic duress. Based on the credible testimony and evidence presented at the hearing, the Court held that Messina was likely to succeed on the economic duress defense and, as a result, the Court denied Integra’s motion for a preliminary injunction despite holding that Integra was likely to succeed in establishing that the Agreement otherwise was enforceable.   

While employers are often concerned about ensuring that the restrictive covenant language contained in employment agreements will be enforced if the employer ever has to present it to a Court, this case provides an important example of how it is equally important to ensure that the circumstances under which the employee signs the agreement are entirely voluntary and not under any duress.  Integra likely would have been awarded the preliminary injunction it was seeking in this case if not for the employer’s wrongful threats.

CMM is pleased to announce that Donald J. Rassiger, an experienced corporate attorney with significant in-house experience, has joined the firm as Counsel.  Having served as Chief Legal Officer of four companies and created the General Counsel role at three of them, Don brings the management perspective to all matters he handles.

Don focuses on corporate matters and transactions.  He has significant experience drafting and negotiating numerous contracts including construction, IT, financing, teaming arrangements, and joint ventures, and has successfully closed dozens of M&A deals.  Don has maintained a particular focus on the construction industry, where he has represented clients on all sides of the table including owners, developers, general contractors, subcontractors, engineers, architects, construction managers, and program managers.  His corporate work also includes numerous financing transactions including sale/leaseback, lines of credit, and debt/equity financing.

A resident of Huntington Station, Don previously handled corporate finance matters and commercial transactions for LiRo Group and KeySpan (now National Grid).  Immediately prior to joining CMM, Don served as Senior Vice President and General Counsel of Elecnor Hawkeye, LLC, part of a worldwide conglomerate providing engineering, development, and construction of projects relating to utility infrastructure, new technologies, and renewable energy.

A graduate of College of the Holy Cross and Fordham University School of Law, Don serves on the Board of Directors of the Joe Namath Celebrity Golf Classic for the March of Dimes as well as on the Executive Board of the Crab Meadow Men’s Club.  Don can be reached at drassiger@cmmllp.com or (631) 738-9100, ext. 347.

By Scott Middleton

This past June, Governor Cuomo signed legislation that imposes pre-foreclosure duties on banks and servicing companies. After it goes into effect this December, it is anticipated that a problem that has plagued local municipalities for years with respect to abandoned residential properties will begin to subside.

Now, under the Real Property Actions and Proceedings Law (RPAPL) section 1308, first lien mortgage holders on one- to four-family vacant and/or abandoned residential real property must complete an exterior inspection of the property within 90 days of delinquency to determine if the property is vacant. While the loan is delinquent, the property must be re-inspected every 25 to 35 days.

Once it is determined that property is vacant, the loan servicer must post a notice, with contact information, stating that it is maintaining the property.  If no response is received it now falls upon the mortgage holder to secure and winterize the property, replace broken doors and windows, and fix health and safety issues and any outstanding code violations on the property. The lienholder must continue to maintain the property. As every municipal official knows, the problem has always been that until the bank retakes the property after foreclosure, there was no way to gain compliance with local codes with respect to property maintenance. This problem caused surrounding property owners considerable anxiety and drove down property values in many communities. Residents would often turn to municipalities to do something that was nearly impossible. Hopefully, this new legislation will literally help to change the landscape of many communities plagued by this problem.

Where violations are found, civil penalties of up to $500 per day may be levied against the property. This will enable municipalities to hold the only true party in interest in these situations accountable and put an end to neighborhood blight originally caused by predatory lending by various financial institutions.

Should “goodwill” be a component in in determining the value of a partnership?  The Commercial Division in Albany County recently tackled this issue in the case of Romanoff v. Center for Rheumatology, LLP, et al. (J. Platkin).  The Center for Rheumatology is a medical practice founded in the 1980s and plaintiff Norman Romanoff, M.D. is one of the founding partners.  In late 2013, Dr. Romanoff decided he wanted to retire and sought to dissolve the practice and receive payment for his interest in the practice.  Despite Dr. Romanoff’s attempts to obtain an accounting from his partners, they allegedly refused to comply, so he brought a lawsuit against the practice and the other partners in 2015 under the New York Partnership Law seeking: (1) a valuation and distribution; (2) an accounting; (3) distribution of interest; and (4) winding up of the practice. Before any discovery took place, the defendants, believing the only issue to be determined was whether a value should be placed on the “goodwill” of the partnership, made a motion for summary judgment for a determination on that issue.

In support of their motion, the defendants submitted affidavits from the other partners stating that they never paid any monies toward the goodwill of the practice at any point during the partnership and that Dr. Romanoff was the first partner to leave the practice.  The practice’s accountant also submitted an affidavit claiming that, since he became the accountant in 1993, the practice did not increase the value of goodwill despite the practice’s increase in revenues, profits, and reputation over the years and that the minimal value that was in the practice’s books for goodwill was merely a placeholder.  In opposition, Dr. Romanoff attempted to establish the huge growth of the practice over time, including an additional office, annual revenues over $18 million, increase in employees, increase in services provided, and an extensive professional referral network.  He also provided the affidavit of an accountant who opined that goodwill should be included in valuing Dr. Romanoff’s interest.

The Court, citing Dawson v. White & Case, 88 N.Y.2d 666, 670 (1996), noted in its decision that the term “goodwill,” as it pertains to professional firms, refers to the ability to attract clients as a result of the firm’s name, location, or the reputation of its professionals.  However, “even if a given partnership might be said to possess goodwill, the courts will honor an agreement among partners – whether express or implied – that goodwill not be considered an asset of the [partnership].”  Id. at 671.  In the Dawson case, the Court of Appeals, in finding that the partnership did not assign value to goodwill, specifically relied upon an express agreement among the partners to assign no value to the goodwill of the partnership but also emphasized that the partners’ course of dealing demonstrated that incoming and outgoing partners never paid or received payment for the goodwill of the partnership.

Here, the Court decided that things were still too murky to come to a decision on this issue of “goodwill” so early in the litigation without any discovery.  The Court denied the motion for summary judgment holding that issues of fact remained as to whether the practice has distributable goodwill and whether the practice has the ability to attract patients as a result of its name, location, and reputation.  Importantly, unlike the Dawson case, there was no express agreement among the partners in this case to exclude goodwill as a distributable asset.  The Court also rejected the defendants’ argument that the absence of an express agreement that includes the distribution of goodwill would preclude the plaintiff from obtaining the value of the goodwill because “Goodwill, when it exists as incidental to the business of a partnership, is presumptively an asset to be accounted for.”  Matter of Brown, 242 N.Y. 1, 7 (1926).

The Court did acknowledge that, based on the proof submitted by the defendants, it appeared that there could be an implied agreement among the partners that goodwill would not be considered a distributable asset given their course of dealing and their accounting records.  However, the Court ultimately concluded that, without the benefit of discovery, it was too early to conclusively determine that an implied agreement existed.

Although the Court did not reach a determination one way or the other as to the goodwill of the partnership and whether it is a distributable asset for this practice, this case provides important insight to individuals involved in partnerships as far as what factors courts will consider in reviewing the issue of goodwill as a distributable asset.  As always, if you either want goodwill to be a distributable asset or want it to be excluded, the best approach is always to put it in writing so there can be no doubt as to the parties’ intentions.

By David Winzelberg

Calverton-based Reilly Windows & Doors has been acquired by Pella Corporation in a deal that closed August 1.

Terms of the acquisition were not disclosed.

The Calverton company remains under the leadership of Michael Reilly and its 180 employees will continue making custom windows and doors at the firm’s 192,000-square-foot facility at 901 Burman Blvd.

Reilly’s products will eventually be integrated into the Pella Crafted Luxury collection that is showcased in Pella’s 7,000-square-foot showroom at Chicago’s Merchandise Mart, according to a statement from the Iowa-based window and door giant.

Founded in 1983, Reilly Windows & Doors has worked with architects and custom builders to manufacture architectural windows and doors in wood, bronze, and steel for the residential and commercial sectors.

“From the very beginning, the reputation and breadth of offering from Reilly Windows & Doors has grown due to the beauty and superiority of our products,” Michael Reilly, company founder and president, said in the statement. “Partnering with Pella Corporation allows us to continue that growth as we join the Pella Crafted Luxury collection of brands.”

Reilly’s firm was represented by attorneys Joe Campolo and Vincent Costa of Ronkonkoma-based Campolo, Middleton & McCormick in the acquisition.

Pella, founded in 1925 and headquartered in Pella, Iowa, has more than 7,500 employees and a dozen manufacturing facilities throughout the U.S.

Pella acquires LI manufacturer

By Scott Middleton

A recent New York State Court of Appeals decision, Aetna Health Plans v. Hanover Insurance Company (NY Slip Op 04658, June 14, 2016), creates yet another worry for doctors and patients with respect to medical billing and ultimate responsibility for those bills.

The issue presented is whether a health insurer that pays for medical treatment that should have been covered by the insured’s no-fault automobile insurance carrier may maintain a reimbursement claim against the no-fault insurer within the framework of the Comprehensive Motor Vehicle Reparations Act (New York Insurance Law section 5101).

The insured in this case, Luz Herrera, sustained personal injuries while operating a vehicle insured by defendant Hanover Insurance Company. At the time of the accident, Herrera had private health insurance through plaintiff Aetna. The Aetna plan was an ERISA-based plan, which means that any payments made by the plan are subject to a lien against any third party recovery.

Some of Herrera’s medical providers submitted bills to her Aetna health plan as opposed to the Hanover no-fault insurance policy. Aetna wrote to Hanover seeking reimbursement for medical bills erroneously paid by Aetna that should have been billed to the no-fault carrier. Simultaneously, Aetna filed a lien for reimbursement should Herrera be successful in resolving the personal injury case. Herrera herself sent bills that were erroneously paid by Aetna to Hanover demanding reimbursement. Hanover did not respond to either request.

Herrera demanded arbitration pursuant to her policy with Hanover, claiming that she was entitled to no-fault benefits based upon Aetna’s lien. The arbitrator ruled against Herrera, stating that she lacked standing because Aetna paid the bills and Aetna’s lien was unsatisfied at the time.

Initially, medical bills totaling over $19,000 were incorrectly submitted to Aetna. Herrera’s medical providers continue to submit additional medical bills to Aetna, incorrectly, totaling another $23,500. Herrera then assigned her rights against Hanover to Aetna. Aetna then commenced the action against Hanover seeking reimbursement for the amounts paid on Herrera’s behalf.

Aetna conceded that as a health insurer or plan, it was not a provider of health services as contemplated by the insurance regulations, which permit only an insured or providers of health services to receive direct no-fault payments. Because Aetna is not a healthcare provider, Herrera could not assign her rights.

The court concluded that because Aetna is not a healthcare provider under the no-fault statute, it was not entitled to direct payment of no-fault benefits. Furthermore, the court held that Aetna was “not in privity of contract with Hanover and had not shown that it was an intended third-party beneficiary of Hanover’s contract with Herrera.” Finally, the court determined that Aetna could not sustain a cause of action under subrogation principles because there was no authority permitting a health insurer to bring a subrogation action against the no-fault insurer for sums the health insurer was contractually obligated to pay its insured.  Judge Stein aptly points out in her concurring opinion that Aetna should have denied and not paid the benefits.

The decision does not go into any detail with respect to whether Herrera satisfied the lien out of any third party recovery relating to her personal injury case. This decision, however, raises interesting questions. Assuming Herrera was successful in her personal injury case, she would be contractually obligated to repay Aetna based upon the lien. Does she now have a claim against her no-fault carrier for reimbursement or does she have a claim against her medical providers for incorrectly billing her health insurance plan? Judge Stein asked a similar question in her concurrence. Does Aetna now have a cause of action against the providers who incorrectly and improperly billed Aetna as opposed to the no-fault carrier?

In any event, the medical providers, due to a mistake in billing practices, may be exposed to litigation. Doctors, healthcare providers, and medical billers are therefore cautioned to obtain the appropriate information from the patient when it comes to submitting bills to the proper insurance carrier or health plan. It would appear that even an honest mistake could expose the medical provider to otherwise unnecessary litigation.

By Christine Malafi

Fireworks.  Barbecues.  Lemonade.  A refreshing dip in the pool.  Summer has a way of bringing out the “sunshine” in everybody.  Hosting a summer event is a fun, enjoyable way to thank employees for their efforts and celebrate the pleasures of summer on Long Island.  But before you dive in, it’s important to consider potential legal issues that could quickly make you forget the fun.

Serving alcohol is always a risk, raising the potential for accidents and injuries, as well as inappropriate behavior and lawsuits.  But employers can reduce risk through advanced planning.  While liability generally does not attach to “social hosts” for accidents or injuries suffered off-premises by third parties as a result of alcohol served by the host, at least in New York, if an employee leaves an office party and travels directly to another state, New York law may not prevent liability.  Additionally, no one under the age of 21 may be served alcohol at a party, or the host may be held liable if someone is injured by that underage drinker.  The safest way to prevent potential liability relative to physical injuries involving alcohol use at a summer office party is to hire bartenders to serve the alcohol and ensure that alcohol is not served to underage party guests.

Another risk associated with alcohol consumption is the level of “celebration.”  As an employer, you do not want managers and/or supervisors acting inappropriately or provocatively, or flirting, with your staff.  The warm weather and laid back atmosphere of summer can make some people feel it’s okay to act inappropriately in a party setting.  It’s not.  The same workplace standards of a non-hostile work environment and non-harassing conduct apply to and should be enforced at all office gatherings.  On a related note, if the party will have music, employers should check the song list for offensive material.

Employers are also advised to carefully consider the nature of the party itself.  Depending on the size and dynamics of your group, it may not be worth the headaches and potential exposure (literally) to have a pool party, which comes with its own set of issues involving appropriate clothing/swimsuit choices, as well as safety risks.  An outdoor picnic with a casual dress code may be a better option.  You don’t want to return from July 4^th weekend facing a lawsuit alleging a hostile work environment or discrimination.

Additionally, it is probable that a court would find that employees’ attendance at an office party relates to their employment, even if attendance is voluntary, potentially triggering workers’ compensation benefits for injuries sustained during the party (and potentially afterwards).  To avoid potential wage claims, if attendance is required, the party should be held during normal work hours.  Employers must take reasonable steps to protect their employees and guests from injury, whether at the workplace or an off-site location where the party is held.

To help set your mind at ease before your summer event, consider doing the following:

• Skip pool-related events
• Have transportation to and from the party available
• Hire a professional bartender or caterer with sufficient liability insurance
• Provide non-alcoholic drinks
• Have management/supervisors at the party on the lookout for excessive drinking and/or inappropriate behavior
• Invite employees’ family members to participate
• Make sure employees know that they are not required to attend

A little advance planning can go a long way.  If you have any questions, please feel free to contact us.