ELITE PROMOTIONAL MKTG. INC. v. STUMACHER

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Docket Number

2003-04778.

Attorney(S)

Kirkpatrick Lockhart, LLP, New York, N.Y. (Christine Button of counsel), and Patrick McElhinny and Dianna Snyder Karg, Pittsburgh, Pa., for appellant (one brief filed). Ettelman Hochheiser, P.C., Garden City, N.Y. (Mark S. Pomerantz of counsel), for respondents.

Judges

William F. Mastro
Reinaldo E. Rivera

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Smart Summary

Factual and Procedural Background

In two related actions joined for trial, Rhina International Direct, Inc. (Rhina) appealed from a judgment entered by the Supreme Court, Nassau County, which was in favor of Credit Card Promotions, Inc. (CCP) and against Rhina in the principal sum of $305,933. CCP commenced Action No. 1 to collect fees for services under the GTE contract, pursuant to which CCP agreed to solicit credit card applications for GTE Credit Card Services, Inc. Rhina claimed it was entitled to withhold payment of certain invoices under the GTE contract on the basis that CCP and Elite Promotional Marketing, Inc. (Elite) breached confidentiality and non-solicitation agreements by soliciting work from Discover Card, a competitor. Rhina commenced Action No. 2 to recover damages for breach of those agreements. The two actions were joined for trial.

Legal Issues Presented

Whether the restrictive covenants in the confidentiality and non-solicitation agreements were enforceable against defendants who solicited a competitor.
Whether the GTE contract and the confidentiality/non-solicitation agreements were separate and independently enforceable contracts or parts of a unified transaction.
Whether Rhina's breach of the GTE contract affected the enforceability of the restrictive covenants.

Arguments of the Parties

Appellant's Arguments (Rhina International Direct, Inc.)

Rhina contended it was entitled to withhold payment under the GTE contract due to CCP and Elite’s breach of the confidentiality and non-solicitation agreements by soliciting Discover Card.
Rhina argued that the agreements were separately enforceable contracts.
Rhina maintained that the restrictive covenants should bar solicitation of Discover Card despite any pre-existing relationships.

Respondents' Arguments (Credit Card Promotions, Inc. and Others)

The respondents contended that the restrictive covenants must be strictly construed and were not violated by solicitation of Discover Card, with whom Horowitz had a pre-existing relationship.
They argued that the GTE contract and the confidentiality/non-solicitation agreements were parts of the same transaction and should be read together.
Respondents also asserted that Rhina’s refusal to pay invoices constituted a breach that rendered the restrictive covenants unenforceable against them.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gramercy Park Animal Ctr. v. Novick, 41 N.Y.2d 874	Restrictive covenants must be strictly construed and not extended beyond their literal terms.	The court applied this strict construction standard to the restrictive covenants in the agreements.
Reed, Roberts Assoc. v. Strauman, 40 N.Y.2d 303, 307	Restrictive covenants must be reasonable and no greater than necessary to protect legitimate interests.	The court held that solicitation of a client with a pre-existing relationship was not barred by the covenant.
BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-389	Legitimate interests protected by restrictive covenants are limited to trade secrets, confidential customer lists, or unique employee services; covenants must be reasonable in scope.	The court found the covenant was not enforceable to bar solicitation of Discover Card.
American Para Professional Sys. v. Examination Mgt. Servs., 214 A.D.2d 413	Restrictive covenants must be reasonable in temporal and geographic scope.	The court considered these limits in evaluating the covenant’s enforceability.
Nancy Neale Enters. v. Eventful Enters., 260 A.D.2d 453	Contracts are separate unless a unified intent and subject matter show otherwise; interpretation depends on parties’ manifested intent.	The court determined the GTE contract and the agreement were parts of the same transaction to be read together.
Doldan v. Fenner, 309 A.D.2d 1274	Supports the principle of reading related contracts together when intended as a unified transaction.	Reinforced the court’s finding of unified intent between the contracts.
DeCapua v. Dine-A Mate, Inc., 292 A.D.2d 489, 491	A party benefiting from a restrictive covenant who breaches the contract cannot enforce the covenant against the other party.	The court ruled Rhina’s breach by withholding payment invalidated its ability to enforce the restrictive covenant.

Court's Reasoning and Analysis

The court first applied the established legal standard that restrictive covenants must be strictly construed and limited to protecting legitimate interests such as trade secrets or confidential customer lists. It found the solicitation of Discover Card, with whom Horowitz had a pre-existing relationship, was not prohibited by the covenant. The court then analyzed whether the GTE contract and the confidentiality/non-solicitation agreements were separate contracts. Based on the parties’ intent and the conditional nature of the GTE contract upon execution of the agreements, the court concluded these documents formed a unified transaction to be read together. Finally, the court considered Rhina’s breach of the GTE contract by refusing to pay invoices, applying precedent that a party who breaches a contract containing a restrictive covenant cannot enforce that covenant. Thus, the restrictive covenant was unenforceable by Rhina on this additional basis. The court rejected Rhina’s remaining contentions as without merit.

Holding and Implications

The judgment of the Supreme Court, Nassau County, is affirmed, with costs.

The court’s decision upholds the enforceability principles of restrictive covenants, emphasizing strict construction and protection of legitimate interests only. It clarifies that solicitation of a competitor with a pre-existing relationship is not barred by such covenants. The ruling also confirms that related contracts intended as a unified transaction must be read together. Importantly, it establishes that a party who breaches a contract containing restrictive covenants cannot enforce those covenants against the other party. This decision directly affects the parties by affirming the judgment for Credit Card Promotions, Inc., but does not establish new legal precedent beyond the application of existing case law.

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ELITE PROMOTIONAL MARKETING, INC., ET AL., respondents, v. JAN STUMACHER, ET AL., defendants, RHINA INTERNATIONAL DIRECT, INC., appellant. (Action No. 1). RHINA INTERNATIONAL DIRECT, INC., appellant,

DECISION ORDER

ORDERED that the judgment is affirmed, with costs.

Credit Card Promotions, Inc. (hereinafter CCP), commenced Action No. 1 to collect fees for services related to an agreement (hereinafter the GTE contract) with Rhina International Direct, Inc. (hereinafter Rhina), whereby CCP agreed to solicit credit card applications. The applications were solicited for nonparty GTE Credit Card Services, Inc. (hereinafter GTE), a credit card company which retained Rhina to conduct a marketing program. Rhina claimed that it was entitled to withhold payment of certain invoices payable under the GTE contract on the ground that CCP and its related entity, Elite Promotional Marketing, Inc. (hereinafter Elite), breached two separately-executed confidentiality/non-solicitation agreements (hereinafter collectively the agreement) executed by their principals, Howard Horowitz and Brett J. Whiton by, inter alia, soliciting work from another credit card company, Discover Card. Rhina commenced Action No. 2, inter alia, to recover damages for breach of the agreement. The actions were joined for trial.

Contrary to Rhina's contention, the Supreme Court applied the correct standard regarding the enforceability of restrictive covenants not to compete. A covenant against competition must be construed strictly and should not be extended beyond the literal meaning of its terms ( see Gramercy Park Animal Ctr. v. Novick, 41 N.Y.2d 874; Reed, Roberts Assoc. v. Strauman, 40 N.Y.2d 303, 307). The restraint must be reasonable such that it "is no greater than is required for the protection of the legitimate interest" of the party seeking enforcement ( BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388). Legitimate interests are limited to "the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary" ( BDO Seidman v. Hirshberg, supra at 389). A restrictive covenant against competition must also be reasonably limited temporally and geographically ( see American Para Professional Sys. v. Examination Mgt. Servs., 214 A.D.2d 413). The Supreme Court properly determined that the solicitation by the defendants in Action No. 2 of Discover Card, with which Horowitz had a pre-existing relationship, was not barred by the restrictive covenant in the agreement barring them from soliciting Rhina's clients ( see Reed, Roberts Assocs. v. Strauman, supra).

There is also no merit to Rhina's contention that the agreement and the GTE contract were separately enforceable contracts. "As a general rule, contracts remain separate unless their history and subject matter show them to be unified . . . The primary standard is the intent manifested, viewed in the surrounding circumstances . . . The nature of the obligation undertaken depends upon the parties' intention, and where that intention may be gathered from the four corners of the instrument, interpretation of the contract is a question of law" ( Nancy Neale Enters. v. Eventful Enters., 260 A.D.2d 453 [citations omitted]). The record shows that the GTE contract was conditioned on the execution of the agreement. Accordingly, since the GTE contract and the agreement were parts of the same transaction and the parties were, for all practical purposes, the same entities, "there was clearly a manifest intent on the part of the parties that the agreements should be read together" ( Nancy Neale Enters. v. Eventful Enters., supra; see also Doldan v. Fenner, 309 A.D.2d 1274).

In addition, "[w]hen a party benefiting from a restrictive covenant in a contract breaches that contract, the covenant is not valid and enforceable against the other party because the benefiting party was responsible for the breach" ( DeCapua v. Dine-A Mate, Inc., 292 A.D.2d 489, 491). Thus, in light of Rhina's initial breach of the GTE contract by refusing to pay the invoices payable thereunder to Horowitz, the Supreme Court also properly determined on this additional basis that the restrictive covenant was unenforceable by Rhina ( see DeCapua v. Dine-A Mate, Inc., supra).

Rhina's remaining contentions are without merit.

FLORIO, J.P., SCHMIDT, MASTRO and RIVERA, JJ., concur.