In Totaro, Duffy, Cannova and Co., L.L.C. v. Lane, Middleton & Co., L.L.C., 191 N.J. 1 (2007), the Supreme Court of New Jersey considered how damages should be calculated in connection with an accountant’s breach of a non-solicitation agreement. The departing accountant claimed that damages should not be assessed against him because his clients would inevitably have followed him after they learned of his departure from the fi rm; thus, the fi rm could not prove that any damages resulted from his breach of the non-solicitation agreement. The Court disagreed, fi nding: “the issue is not whether the [plaintiff’s] clients would have left eventually, but whether they would have left when they did” – in this case, upon receiving Lane’s letter soliciting their business.
Merritt Lane, an accountant with a longstanding practice, ceased performing compliance work in 1996 and instead focused his practice on estate and fi nancial planning. In January 1997, Lane joined David Middleton in a new fi rm named Lane, Middleton & Company, LLC. (LMC), under a fi ve-year consulting agreement.
In 2000, Middleton sold the LMC practice to Totaro, Duffy, Cannova & Co., LLC (“TDC”). Lane refused to sign a non-compete agreement but did agree not to solicit compliance work from any of LMC’s clients for four years. In exchange, TDC paid Lane the $112,500 due under his contract with Middleton and provided him with free offi ce space for one year. After the February 2, 2001, closing date, TDC began to provide accounting services to all of LMC’s clients. Lane continued to provide other services to LMC’s clients, but quickly became unhappy with TDC. In early May 2001, Lane terminated his relationship with TDC and opened his own accounting practice across the hall from TDC’s offi ces.
Prior to leaving TDC, Lane obtained a list of TDC’s clients from its computer and, using that information, created a mailing which he sent to approximately 150 of TDC’s clients on June 28, 2001. The recipients included many clients which Lane himself had developed and serviced over the years. The mailing announced Lane’s new practice, provided a comprehensive fee schedule (including for compliance work), enclosed a “disengagement” letter to be mailed to TDC and an “engagement” letter to be returned to Lane, and provided a pamphlet on recent tax law changes. Ultimately, TDC received 159 disengagement letters and 140 of the clients who were solicited retained Lane to perform compliance work for them.
TDC sued Lane alleging breach of the non-solicitation agreement and breach of his common law duty. The trial proceeded only on the breach of contract theory. Both sides presented testimony from some of the clients, all of whom said that they had developed a relationship with Lane, considered him to be their accountant and would not have remained clients of TDC once they learned Lane had left the fi rm. The trial court ruled that Lane had indeed breached the non-solicitation agreement and awarded compensatory damages of $65,885.40. The court reached that fi gure as follows: fi rst, the court identifi ed each of the “lost” clients and determined the revenues that would have been produced by those clients. Next, the court discounted the total of the revenues by the 35-40% attrition that TDC itself expected. The court then applied TDC’s 53% profi t margin to that amount, which resulted in a fi gure of $21,961.80. Because the client defection came after TDC had already rendered compliance work for 2001, the court did not fi nd any loss in the fi rst year. However, because the non-solicitation agreement bound Lane for four years, the court found that damages would continue in each of the remaining three years of the agreement. A split panel of the Appellate Division affi rmed the decision.
The Supreme Court thus had to consider whether TDC had proven the appropriate causal relationship between the conceded breach and the asserted loss of clients – in other words, whether the mailing itself was the proximate cause of the client defections. The Court held that TDC “had only to demonstrate that the breach caused the clients to leave when they did, that is, as soon as they received the offending solicitation letter.” TDC had carried its burden of proof, according to the Court, by showing that a large number of clients responded immediately to Lane’s solicitation and used Lane’s disengagement letter to transfer their business. “[T]he fact that the clients would have ultimately left only bears on the calculation of damages.” Because the undisputed evidence showed that all of the solicited clients would have left TDC for Lane once they became aware he had left the firm, there was no support for the trial court’s decision to award damages for each of the remaining three years of the non-solicitation agreement. Rather, the record only supported a damage award of $21,961.80 for losses sustained by TDC in the year after Lane left because, absent the improper solicitation, the clients would have left when they learned of his departure.
The TDC case illustrates the diffi culty of applying a lengthy non-solicitation agreement to prevent the natural migration of clients developed by a professional. As TDC shows, fi rms may not be able to count on the ability to recover signifi cant damages even where there is a clear breach of such provisions.