Customer goodwill, the lifeblood and soul of any business, has long been defined in Massachusetts as “all that goes with a business in excess of its mere capital and physical value, such as reputation for promptness, fidelity, integrity, politeness, business sagacity and commercial skill in the conduct of its affairs, solicitude for the welfare of costumers and other intangible elements which contribute to successful commercial adventure.” Martin v. Jablonski, 253 Mass. 451, 457 (1925).
Goodwill is a well-recognized property right.
But in the context of enforcing non-competition agreements and other restrictive employment covenants, Bay State courts have struggled with the question: “whose goodwill is it, anyway?”
Does customer goodwill belong to sales or account executives – often the only “face” of the corporation known to the consuming public? Or does it belong to the corporation, which provides and produces the desired services, products and know-how, albeit often “behind the scenes?”
Or is goodwill some unique proprietary hybrid, the product of symbiotic relationships not easily divisible like tangible business assets?
Massachusetts trial courts have struggled with the question of goodwill ownership while seeking to strike a balance between the various competing interests involved. The results have not always proven consistent.
Carefully drafted non-competition and non-solicitation agreements can go a long way toward minimizing conflicts over the provenance and ownership of customer goodwill. As the Massachusetts Superior Court cases discussed below illustrate, however, until the appellate courts issue some “bright line” rules, the outcome of the continued imbroglio over customer goodwill promises to remain somewhat unpredictable.
In American Express Financial Advisors, Inc. v. Walker, 9 Mass L. Rep. 242, 1998 Mass. Super. Lexis 577, American Express sought to enforce certain restrictive covenants prohibiting its financial advisors for a one-year period after termination from “directly or indirectly offer[ing] for sale, sell[ing] or seek[ing] an application for any Product or Service issued or provided by any company to or from a Client you contacted, dealt with or learned about while you represented [American Express].”
Several financial advisors left American Express to start their own financial advisory business. They planned to offer the financial and investment products of a broker-dealer entirely unrelated to American Express.
On their way out the door, the departing financial advisors sent thinly veiled solicitations to their current American Express clients, informing them of their new venture. A number of American Express clients subsequently transferred their accounts worth millions of dollars to the new broker-dealer so they could continue receiving financial planning advice from the departing American Express advisors.
American Express sued the departing employees to bar them from accepting any business from their former clients for a period of one year.
The Massachusetts Superior Court recognized that American Express had a legitimate business interest in the clients that had switched over to the new venture, i.e., protection of its own goodwill.
It did so even while noting the financial advisors themselves were encouraged by American Express to be one-on-one “personal” advisors and planners, who cultivated and maintained these sensitive financial relationships.
Nevertheless, the court found that American Express had developed its own goodwill with these clients by: 1) offering a wide range of financial products to them albeit through the conduit of the financial advisors; 2) providing important investment information and analysis “gathered and conducted by its ‘back-room’ employees”; and 3) appropriately supervising and training the financial advisors.
The court recognized that “[f]inancial advisors will look good to their clients only if the clients’ portfolios prosper, and those portfolios will not prosper unless the information and analysis furnished to the financial advisors by American Express is sound and the investment vehicles offered by American Express perform as promised.”
Conversely, no matter how good American Express’ “back room” may be, it will have no “loyal clients unless those clients are satisfied with the advice, attention and ‘bedside manner’ of their financial advisor.”
The court also recognized that the financial advisors had particularly close and sensitive relationships with these clients that warranted a large degree of deference despite the restrictive covenants. Moreover, because of the close nature of the advisor/client relationship, the court was loath to issue an order that in effect prevented the client from using the financial advisor of its choice.
The court noted that “[w]hile the relationship may not be as intimate as that of a doctor and patient or attorney and client…it is plainly a valuable and important personal and financial relationship whose significance…the common law should not categorically ignore.”
Ultimately, in balancing the competing interests of American Express, the personal financial advisors, and the clients themselves, the court enjoined the advisors for four months from contacting their former clients – a period long enough “to allow American Express to demonstrate to its clients that the goodwill generated by the departing financial advisor was attributable more to American Express than to the particular skills of that individual.”
Face time with clients
Not all customer goodwill is recognized as belonging to the employer simply because it may have been developed during the employee’s tenure. In William Gallagher Associates Insurance Broker, Inc. v. Everts, 13 Mass. L. Rep. 716, 2000 Mass. Super. Lexis 705, the Massachusetts Superior Court, when asked to enforce certain non-compete and non-solicitation covenants against a former salesman, seemed to discount substantially the company support and “back room” aspects of company goodwill expressly recognized in American Express.
Everts was a long-time salesman for the William Gallagher company, an insurance broker. During his tenure, Everts serviced more than two dozen accounts. When he left William Gallagher to work for a competing company, 13 of these customers followed him.
Of these, Everts himself had procured the business of ten anew while employed with William Gallagher. Two other customers Everts had brought with him to William Gallagher from a previous employer. The remaining customer had been a William Gallagher house account.
William Gallagher promptly sued Everts and his new employer over the loss of these 13 customers, and the company goodwill ostensibly associated with them.
William Gallagher argued the goodwill associated with these customers belonged to it, not Everts, for numerous reasons. As Evert’s employer, William Gallagher had provided the clerical staff, supplies and customer service representatives needed to service these customers’ accounts. The company had also sponsored Evert’s attendance at certain sales training programs, and Everts had been accompanied on various sales calls by the company’s CEO, as well as a young assistant.
The Superior Court, however, rejected all of these arguments, saying: “While hiring an employee and providing him with an infrastructure necessary for him to do his job undoubtedly gives an employer significant rights to control the employee’s conduct, this does not mean that the good will which develops belongs to the employer. There is no evidence … this type of support served to enhance plaintiff’s reputation with its customers in such a way as to generate good will.”
The court found that when Everts left he did not disparage his ex-employer, or otherwise tell these customers that his new employer was superior in the products or services it offered.
That these customers followed Everts upon his mere announcement of resignation did “not show that plaintiff’s support created any loyalty to plaintiff. To the contrary, it tends to indicate trust in Everts,” according to the court.
As to the ten customers Everts had solicited and developed himself while employed by William Gallagher, the court said the goodwill was of “Everts’ own making, which he had developed with customers as a result of his own enthusiasm, personality and abilities.’” The court pointed out that “[t]he objective of a reasonable noncompetition clause is to protect the employer’s good will, not to appropriate the good will of the employee.”
Confidential customer information
More recently, the Superior Court in RIS Paper Company, Inc. v. Wave Graphics, Inc., 2006 Mass. Super. Lexis 446, grappled with both the provenance and ownership of customer goodwill in a dispute over misappropriation of allegedly proprietary customer information.
In 1989, a man named DeStefano incorporated a small commercial printer eventually called Wave Graphics, Inc. When the company went bust in late 2003, its name, goodwill and customer lists were auctioned off to Unigraphics, Inc., another commercial printer for which DeStefano and several former Wave Graphics’ salesmen had gone to work.
Two of Wave Graphics creditors mounted a legal challenge to the sale of its customer information to Unigraphics, claiming the information was confidential and proprietary to Wave Graphics, and shouldn’t be used by DeStefano and the other former Wave Graphics salesmen to generate sales for a competing entity.
But the Superior Court disagreed.
Analyzing the practice in the commercial printing business, the court noted it was “customary for salesmen in the industry to change employment and to go with another competitor, taking their customers with them.”
In fact, a departing salesman would typically take up to 80 percent of his customers to his new employer. The court concluded that, at least in the commercial printing industry, “What is valuable is not the identity of a customer as such, but rather a salesman’s personal relationship with such a customer.” These personal relationships “were not a proprietary asset of Wave Graphics” but had been properly acquired by Unigraphics through the hiring of DeStefano and the other former Wave Graphics salesmen, none of whom had signed any form of restrictive employment covenants with Wave Graphics.
There was no misappropriation of trade secrets, proprietary information or goodwill by DeStefano and his new employer, the court ruled.
The court’s reasoning seems to echo that of Richmond Brothers, Inc. v. Westinghouse Broadcasting Company, 357 Mass. 106, 111 (1970) where the Supreme Judicial Court, citing Club Aluminum Co. v. Young, 262 Mass. at 226-227, wrote: “[A]n employer cannot by contract prevent his employee from using the skill and intelligence acquired or increased and improved through experience or through instruction received in the course of the employment. The employee may achieve superiority in his particular department by every lawful means at hand and then, upon the rightful termination of his contract for service, use that superiority for the benefit of rivals in trade of his former employer.”
Andrew P. Botti is a partner at Donovan Hatem LLP where he advises in-house counsel and corporate executives on a wide range of business litigation and employment matters. He can be reached at 617.406.4527 or firstname.lastname@example.org.