An Unusual Restrictive Employment Covenant Opinion From the Appellate Division

Accounteks.net, Inc. v. CKR Law, LLP, ___ N.J. Super. ___ (App. Div. 2023). The Appellate Division sometimes publishes one version of an opinion and designates as unpublished a longer version that contains discussion of one or more issues not deemed worthy, for whatever reason, of appearing in a published opinion. That was the case with this opinion by Judge Smith.

The case involved breach of a restrictive employment covenant by a former employee of plaintiff, Montes, an information technology consulting firm, and his new employer, CKR Law, LLP (“CKR”), a law firm customer of plaintiff, which hired Monte as an in-house IT technician. That hire occurred even though plaintiff put both Montes and CKR on notice of the restrictive covenant, which barred Montes, for one year after leaving plaintiff, from providing IT consulting services to “any business or any individual from any business who is or at any time was a customer of [plaintiff].”

Plaintiff won a bench trial and was awarded damages and attorneys’ fees as the prevailing party, as allowed by plaintiff’s agreement with Montes. Defendants appealed, and the Appellate Division affirmed in part and reversed in part. The panel affirmed the merits ruling in favor of plaintiff that enforced the non-compete provision and awarded judgment on other legal theories, including tortious interference, dismissed CKR’s counterclaims, and held that plaintiff could get attorneys’ fees from CKR. Reversed, however, was the amount of the fee award. The court remanded for recalculation of the fee award.

Judge Smith’s opinion began with a detailed recitation of the facts and procedural history. He then described the relevant standards of review. Those included deference to a trial judge’s factual findings if supported by “sufficient credible evidence in the record,” no deference to the trial court’s “court’s interpretation of the law and the legal consequences that flow from established facts,” de novo review of a trial court’s “interpretation of a contract,” and the enforceability of a restrictive employment covenant “so long as it simply protects the legitimate interests of the employer, imposes no undue hardship on the employee, . . . is not injurious to the public[,] and the particular restrictions imposed are reasonable as to duration, area, and scope of activity.”

The next two sections of the court’s opinion, which contained its discussion of how the standards were applied to the facts here, were omitted from the published opinion at the panel’s direction. So we learned that the Appellate Division affirmed the Law Division’s ruling in favor of plaintiff and the proper standards that the panel applied, but not how the standards led to the affirmance. One can learn that by reading the unpublished version of the opinion, but it seems curious that the panel would publish the recitation of standards that are relatively well-known but not the result of the application of those standards, apart from the bottom line.

The next section of the opinion addressed an issue that is likely the reason why any part of this decision merited publication. Judge Smith noted that “Montes’ non-compete agreement included an express fee-shifting provision. However, CKR, the only defendant against whom there was a fee award, was not a party to the contract. Nonetheless, the judge awarded plaintiff attorney’s fees as the prevailing party against CKR by finding the award of fees and costs constituted ‘additional damages’ flowing from CKR’s tortious interference. The judge’s findings do not explain the legal basis for her ruling.”

Judge Smith supplied that rationale. Citing a Supreme Court case and the Restatement (Second) of Torts, he invoked an exception to the American Rule that each party normally bears its own attorneys’ fees. “One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.”

But there was a wrinkle. The quoted principle applied to seriatim litigation, as shown by reference to “the earlier action.” Here, however, “the litigation with the tortfeasor [CKR] and third party [Montes was] simultaneous,” and Judge Smith observed that New Jersey courts have never addressed an award of fees under the Restatement principle in that particular context. He cited a Colorado case that had done so, and he followed that ruling while recognizing that there was disagreement among other jurisdictions on this question. “It stands to reason that the prevailing party should be able to recover those attorney’s fees reasonably attributable to its prosecution of claims against the third party within a single action. A plaintiff should not have to file two lawsuits, one against the party that breached the contract, and a separate one against the tortfeasor, to recover attorney’s fees against the tortfeasor in an action for damages to enforce a non-compete agreement.”

This was the right result. Though Judge Smith’s detailed reasoning, quoted only in part in the preceding paragraph, did not mention the entire controversy doctrine, that principle in essence reflects what Judge Smith was saying. There was no reason that a party that filed all its claims against both potential parties in a single case should fare worse than one who sues in two different cases.