Enprotech Corp. v. Renda

87-1444 (U.S. Dist. Ct. D. N.J. 1997) (Unpublished)
  • Opinion Date: November 7, 1997

EMPLOYER-EMPLOYEE; FIDUCIARY DUTY; NON-COMPETITION—While still working for their employer, an officer and co-worker started a competing business. This case addresses the measure of damages (including punitive damages) arising out of this breach of fiduciary duty and tells how they extend even into the post-employment time period despite absence of a non-competition agreement.

A company served as a distributor of industrial equipment for a Japanese manufacturer. While still employed, a Vice-President of the company and one of his co-workers started their own business as the U.S. subsidiary of the manufacturer. Within weeks, they were able to divert sales from the company to their new business. The company sued the Vice-President, his co-worker, the manufacturer, and the manufacturer’s President, and obtained an injunction prohibiting them from assisting in the solicitation of business from the company’s current and prospective client lists. Claims against the Vice-President and his co-worker were settled. The manufacturer and its President filed numerous counterclaims, all of which were dismissed by the trial court without prejudice, giving them the opportunity to replead. The relevant issues on this motion for summary judgment were lost profits, punitive damages, and setoff.

First, the defendants claimed that damages should be limited to profits from sales to the company’s existing customers that were diverted to the subsidiary, but only: (1) while the Vice-President was still employed by the company, (2) from the time of the injunction, and (3) if the Vice-President or his co-worker played a part in those sales. The United States District Court held that in breach of fiduciary duty cases, damages may be awarded based on future lost profits even where there was no binding commitment regarding future sales. The Court also stated that damages may be awarded based on projected future customers and that the fact there was no binding distribution agreement between the company and the manufacturer did not mean the company could not recover damages. The Court refused to limit the time period for consideration of lost profits or the scope of any lost profit inquiry since there was evidence that the defendants did not comply with the terms of the injunction. The District Court concluded that the company was entitled to recover all lost profits proximately caused by the defendants’ conduct.

Citing Circuit Court precedent, the defendants alleged they were not liable for punitive damages as a matter of law since those damages require “such wrongdoing as to involve a high degree of moral culpability.” Whitney v. Citibank, N.A., 782 F.2d 1106, 1118 (2d Cir. 1986). Even though the manufacturer’s President stated that he thought it was immoral for the Vice-President to collect pay from the company while marketing the equipment for his own subsidiary, the defendants continued to help the Vice-President solicit business from the company’s customer lists. Accordingly, the Court refused to dismiss the company’s punitive damage claim because a fact finder could conclude that the defendants had the high degree of moral culpability required to hold them liable for punitive damages.

The defendants further asserted they were entitled to a setoff equal to the larger of either the amount of damages multiplied by the percentage of fault attributable to the Vice-President, the co-worker and the subsidiary, or the amount actually paid to the company in settlement by the Vice-President, the co-worker and the subsidiary. Applying New York law, the District Court stated that while a joint tortfeasor must plead setoff as an affirmative defense (which the defendants in this case failed to do), a later claim of setoff is permissible if there is no prejudice to the other party. Since the harm caused by all the original defendants was the same, and the settlement payments compensated the same injuries being asserted against the defendants, the Court granted the defendants’ claim of setoff.

Finally, the company moved for dismissal of some of defendants’ counterclaims on the ground the statute of limitations had run. The District Court applied the doctrine of relation back, whereby the timeliness of an amended claim is determined according to the date the claim was first raised. The rationale for this doctrine is that one who has been given adequate notice of litigation concerning a transaction has been provided with all the protection that statutes of limitation are designed to afford. In re Chaus Securities Litigation,801 F. Supp. 1257 (S.D.N.Y. 1992). Other courts have even applied this doctrine to claims first asserted after the original pleading, stating that if the original pleading gave notice that the conduct or transaction was of a continuing nature, the other party should be prepared to defend against all claims arising out of it, whether those claims arose before or after the original pleading was filed. The District Court ultimately permitted claims of abuse of process and tortious interference with economic advantage made by the defendants after the original pleading. The Court felt that raising these claims in the original pleading gave notice that the wrongful conduct was of a continuing nature such that any future claims could be said to arise out of the same conduct or transaction set forth in the original pleading. However, defendants’ defamation claim was time barred based on a plethora of case law holding that every libelous writing or slanderous statement gives rise to a separate cause of action, rather than a continuation of the old cause of action.