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Tomasso v. Tomasso

A-1445-95T3 (N.J. Super. App. Div. 1997) (Unpublished)

PARTNERSHIPS; NON-COMPETITION—The Court found that a former partner breached a non-competition agreement, but not with respect to his new employer’s customers that had not been processed through the partner’s own efforts. With respect to those, there was no breach even though they had been clients of the partner’s former partnership. The liquidated damages provision was found to be a penalty and therefore not enforced.

An unhappy partner filed suit to dissolve a partnership. The suit was settled by buying out the disgruntled partner. The buy-out agreement contained a restrictive covenant prohibiting the departing partner, in his new employment with a competitor, from conducting business with the partnership’s customers within a specific geographic area for a certain period of time. Three years later, the partnership filed suit claiming the former partner breached the covenant not to compete. The buy-out agreement called for liquidated damages of $150,000 for breach of this covenant. The trial judge found the restrictive covenant to have been breached, but ruled that the liquidated damages clause was intended to be a penalty, and was thereby unenforceable. However, the partnership was allowed to prove damages and the trial judge awarded the partnership approximately $10,600. The partnership appealed, claiming the liquidated damages provision should have been enforced or, alternatively, that it was entitled to damages greater than it had been awarded.

The Appellate Division began its opinion by rejecting the partnership’s contention that the former partner violated the restrictive covenant simply by working for a competitor that breached the covenant (to which it was not bound). To violate the restrictive covenant, the former partner had to aid or assist his new employer in obtaining the partnership’s customers in a way that resulted in losses to the partnership. The Appellate Court upheld the trial court’s finding that the liquidated damages provision was intended as a penalty, was therefore unenforceable because: (1) the actual damages were extremely disproportionate to the amount of liquidated damages; (2) there was no basis set forth in the agreement for calculating the liquidated damages amount; and (3) the covenant applied even in the event of a threatened breach, thus further supporting a conclusion that this provision was a penalty. The Appellate Court found the amount of damages awarded by the trial court to be a reasonable approximation of actual damages.


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