July 6, 2007
RICHARD A. ROMAGNOLA, PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
GILLESPIE, INC., RICHARD GILLESPIE, AND THE INTERPUBLIC GROUP OF COMPANIES, INC., DEFENDANTS-APPELLANTS/CROSS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Civil Part, Somerset County, L-1182-01.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: October 24, 2006
Before Judges Kestin, Weissbard and Graves.
This appeal and cross-appeal are rooted in a February 10, 1998 transaction involving a contract for the purchase and sale of a business and an employment agreement.
Plaintiff, Richard A. Romagnola, owned an advertising agency, R.A.R. & Associates, Inc. (RAR), with clients in the pharmaceutical industry. Defendant Richard Gillespie owned a larger advertising agency, defendant Gillespie, Inc. (Agency), and was seeking a foothold in the pharmaceutical advertising market. The Agency purchased RAR in an asset purchase agreement that absorbed RAR into the Agency, designating it as part of the Gillespie/RAP Healthcare Group (Group).
The contract provided that the Agency would employ Romagnola in a salaried managerial position pursuant to an employment agreement. The purchase price was to be paid partially by a lump sum and partially through "earn out" and bonus payments to be made over a three-year period beginning in February 1998. The employment agreement included a provision that prohibited Romagnola, for two years following termination of his employment with the Agency, from soliciting his fellow Agency employees for employment with other advertising employers.
Shortly after purchasing RAR, Gillespie sold the Agency, including the interests acquired from RAR, to defendant Interpublic Group of Companies (IPG). Gillespie became an employee of the Agency/IPG venture.
The calculation of Gillespie's earn-out remuneration from the Agency/IPG venture conflicted with the calculation of Romagnola's earn-out remuneration under his employment agreement with the Agency. The more money Romagnola received from the Agency, the less Gillespie received from the Agency/IPG venture. Also, it is clear that Gillespie sold the Agency to IPG without first obtaining Romagnola's consent, as required under the asset purchase agreement between RAR and the Agency.
The relationship between Romagnola and Gillespie deteriorated over time as Romagnola sought to address the inherent conflict between his earn-out compensation and Gillespie's. Romagnola's attempt to renegotiate the terms of his earn-out package with IPG failed and, shortly thereafter, in May 2000, Gillespie discharged him.
In accordance with the employment agreement, the Agency paid Romagnola his salary for the remaining months of the three-year period established in the employment agreement. At the time of his dismissal, however, Romagnola was still owed earn-out and bonus remuneration for the years 1999 and 2000. Also, at that time, in contravention of the employment agreement, Romagnola had solicited Agency employees to join him as employees of another advertising company.
Romagnola filed suit against defendants, including claims for breach of contract and for breach of the implied covenant of good faith and fair dealing, seeking to recover the unpaid earn-out and bonus remuneration for the years 1999 and 2000, as well as damages for lost prospective compensation. Defendants filed a counterclaim asserting, inter alia, that Romagnola had breached the employment agreement's anti-solicitation provision.
A period of discovery and motion practice ensued, during which the trial court, on untimeliness grounds, barred plaintiff from using both the testimony and the expert report of an economist, Dr. Frank Tinari, at trial. Also during the pre-trial phase, plaintiff served defendants with an offer of judgment in the amount of $1,165,000 pursuant to R. 4:58-1. Defendants did not act on that offer.
Following a nine-day bench trial, the trial court, based upon the findings and conclusions set out in an extensive written decision, awarded $1,315,909.63 in damages to plaintiff for the years 1999 and 2000. The findings included determinations that defendants had breached the asset purchase agreement, the employment agreement, and the implied covenant of good faith and fair dealing. The court dismissed defendants' counterclaim, determining that their breach of the employment agreement precluded enforcement of the anti-solicitation provision against plaintiff.
In rendering its decision, the trial court recognized the pendency of a motion filed by defendants to dismiss, as speculative, plaintiff's claim for additional damages for the years 2001 and 2002, and the court reserved on that issue. Eventually, the trial court granted defendants' motion in that regard for failure of proof and because "at no time prior to trial did [p]laintiff indicate to [d]efendants his theory of calculating damages[,]" notwithstanding that "[d]efendants [had] specifically asked for such information in interrogatories."
Also post-trial, defendants moved for a new trial or reconsideration of the judgment entered, and plaintiff moved for awards of prejudgment interest, counsel fees and litigation costs. In another comprehensive written opinion, the judge rejected defendants' arguments that they had not breached the terms of the asset purchase agreement or the implied convenient of good faith and fair dealing. The judge decided, however, that she had erred in determining, on defendants' counterclaim, that plaintiff's breach of the employment agreement's anti-solicitation provision had been excused because of defendants' prior breach of that contract. Nevertheless, the judge ruled that the dismissal of the counterclaim would stand because defendants had failed to prove any damages resulting from plaintiff's breach of the anti-solicitation provision.
The judge granted plaintiff's motion for prejudgment interest, but did not award the amount of interest that plaintiff sought. Instead, the judge awarded $58,612, which was the amount of interest earned on monies escrowed earlier by IPG for payment to plaintiff if he prevailed in his lawsuit. Additionally, the judge denied plaintiff's motion for the awards of counsel fees and costs available under the offer-of-judgment rule, R. 4:58-1 and -2, reasoning that the amount of plaintiff's damages recovery did not meet the minimum requirements for an award that prevailed at the time of decision. Ultimately, the court entered judgment awarding plaintiff $1,374,521.63 in damages and pre-judgment interest.
On appeal, defendants argue that the trial court erred in failing to award damages on their counterclaim; in concluding that they breached the asset purchase agreement and the implied covenant of good faith and fair dealing; in accepting plaintiff's expert's calculation of plaintiff's earn-out and bonus remuneration entitlement for 1999; in not making a specific deduction from plaintiff's 1999 earn-out remuneration; in awarding plaintiff certain bonus compensation that was purportedly stipulated by the parties; and in failing to award defendants their counsel fees and costs on the counterclaim based on the employment agreement.
At issue in plaintiff's cross-appeal is whether the trial court erred in declining to award counsel fees pursuant to R. 4:58-2; in its determination of the proper amount of damages for defendants' breaches of the asset purchase agreement and the implied covenant of good faith and fair dealing; in determining that defendants' breaches of the asset purchase agreement, the employment agreement, and the implied covenant of good faith and fair dealing did not preclude their enforcement of the employment agreement against plaintiff; in the amount of its award of prejudgment interest; and in barring the expert testimony and report of Dr. Tinari.
We have analyzed the extensive record in the light of the written and oral arguments of the parties and prevailing legal standards. With the exception of the rulings discussed below, we affirm the trial court's determinations for the reasons stated in the judge's comprehensive written opinions, because her findings and conclusions are supported by substantial credible evidence, Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974), and because we discern no error or misapplication of discretion in the judge's evaluations and rulings. We also affirm, for the reasons stated on the record, a different judge's pre-trial ruling barring the expert testimony and report of Dr. Tinari.
The trial judge's opinion recounts the facts in detail. We will not rehearse them here except for those necessary to discuss the particular issues we conclude require further exploration and in each instance, but one, reconsideration by the trial court.
The first of these issues bears upon one aspect of defendants' counterclaim, their claim for recovery of $163,200 in salary paid to plaintiff from the date of his dismissal on May 12, 2000, until the end of his contractual employment term on January 31, 2001. Plaintiff does not dispute that he was paid this amount, and he has acknowledged his understanding that the employment agreement specifically prohibited him from soliciting employees away from the Agency during his employment with the Agency and for a period of two years following the end of his employment.
The trial court found that plaintiff had been terminated from his Agency employment without cause. The employment agreement explicitly provided that the Agency's obligation to pay plaintiff's salary following termination without cause "shall terminate immediately upon Employee's violation of the provisions of Section 11" of the agreement, subsection 11.5 of which dealt with the prohibited solicitation of other employees.
This aspect of the counterclaim dealt with plaintiff's conduct in soliciting Lawrence Peck and Martin O'Brien, two Group employees who had been hired and employed by plaintiff at RAR. Both prior to plaintiff's termination from the Agency and following the termination, plaintiff solicited them to work with him at another company. Plaintiff induced that other company to make attractive offers to Peck and O'Brien. On the basis of those offers, Peck and O'Brien were successful in negotiating new, more remunerative employment contracts with the Agency. Although we conclude that the trial judge did not err when she determined there had been a failure of proof concerning the amount of bonus-increase damages the Agency had incurred in respect of Peck and O'Brien and concerning the issue of whether the increases in their salaries and bonuses were the result of plaintiff's solicitation, we discern that the situation is different regarding defendants' claim to recover as damages the $163,200 in salary paid to plaintiff from May 12, 2000 to January 31, 2001. Defendants have asserted that plaintiff's breach of the non-solicitation clause had the effect of canceling defendants' obligation to pay plaintiff's salary during that period.
As with the damages claim involving the salary and bonus increases Peck and O'Brien received, the trial court did not expressly address the extent of damages, if any, defendants incurred by reason of the Agency's continued payment of plaintiff's salary, which payment may have been excused by plaintiff's breach of the non-solicitation clause. In considering plaintiff's claim for salary and bonuses for the years 2001 and 2002, the trial court stated that "[c]ertainly, after a showing that [d]efendants had breached the implied warranty of good faith and fair dealing, [p]laintiff would be entitled to the expectations which he reasonably anticipated under the contract." This single statement, however, falls far short of a reasoned consideration of whether defendants were contractually obligated to pay plaintiff's salary following his own breach of the employment agreement. Although the trial court found that plaintiff's breach of the solicitation provision could not be excused, the court failed to consider explicitly defendants' claim of entitlement to recover the $163,200 in salary paid by the Agency to plaintiff before the Agency learned of his breach.
We, therefore, reverse, in part, the judgment entered, and remand so that the trial court may consider the issue of the restitution/interest damages claimed by defendants to have resulted from their allegedly mistaken payment of $163,200 in salary to plaintiff. The amount of damages due, if any, is uncertain. Defendants insist they should be awarded the entire $163,200 in salary that the Agency paid to plaintiff. A complication arises, however, because both plaintiff and defendants were in breach of the employment agreement.
Where restitution/interest contractual damages are sought by a party who is in breach of a contract, the Restatement (Second) of Contracts § 374(1) (1981), provides that "the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach."
The Supreme Court has adopted "the modern approach" of § 374(1). Kutzin v. Pirnie, 124 N.J. 500, 516 (1991). In that case, the would-be buyers of residential real estate breached the purchase contract. Id. at 502-03. The trial court awarded the sellers less in damages than the amount of the buyers' earnest money deposit, but, on appeal, we awarded the sellers the full amount of the deposit. Id. at 502-06. The Supreme Court reversed the award of the entire amount of the deposit monies, determining instead that the buyers "are entitled, under the Restatement formulation of damages, to restitution for any benefit that they conferred by way of part performance or reliance in excess of the loss that they caused by their own breach." Id. at 516.
Applying the Kutzin rationale, it is clear defendants are entitled to claim restitution/interest damages by reason of their continued payment of plaintiff's salary after May 12, 2000. There is an open question concerning by how much, if at all, those damages should be reduced because of defendants' own breach of the employment agreement. Accordingly, we remand so that the trial court may consider this discrete question, along with the related issue of the extent to which any party may be entitled to a contractually allowed counsel fee award, if any, to the extent he or it is determined to have prevailed on this issue.
We also discern that the trial court erred in not deducting from the amount of the judgment reflecting plaintiff's entitlement to his 1999 earn-out/bonus payment, an undisputed cash advance of $66,706 made to him by the Agency. Explicitly set out in defendants' calculations of the remuneration payable to plaintiff for 1999 is a provision for the deduction of "Advanced Payments" of $66,706, which were apparently made in 1999 and 2000, and which were evidently part of a bonus arrangement that plaintiff had with Group employees.
In her opinion, the trial judge recognized the existence and validity of the advance payments, indicating that plaintiff "was advanced $66,706 of the anticipated earn-out payment, which is a deduction on any monies owed [to plaintiff by defendants] as a result of the Court's decision." Thereafter, however, the court adopted as its own the calculations of a former Agency accounting employee regarding the remuneration due plaintiff, but did not adjust those calculations to reflect the $66,706 deduction that the court had, earlier in its decision, recognized as necessary.
Because it is apparent that plaintiff's damages award should have been reduced by the amount of the advance payment-- an argument that plaintiff does not dispute--we remand, as well, so that the trial court may make the necessary reduction in damages, and an appropriate adjustment of the amounts of prejudgment and post-judgment interest on this account, also.
In respect of plaintiff's cross-appeal, we agree with the trial court's application, in the circumstances, of the time-of-decision rule in denying plaintiff's request for counsel fees and other awards under the offer of judgment rule, Rule 4:58, specifically Rule 4:58-2.
Plaintiff served an offer of judgment upon defendants, dated March 20, 2002, offering to settle his legal action against all defendants in exchange for $1,165,000 and the withdrawal of all of their claims against him. In his offer, plaintiff explicitly indicated that, "if defendants do not accept this offer, and plaintiff obtains a verdict or determination at least as favorable as this offer, plaintiff shall apply for costs, interest and attorneys' fees in accordance with Rule 4:58-2." We note, parenthetically, that almost a year later, on March 4, 2003, defendants also made an offer of judgment, to pay $900,000, which was not acted upon by plaintiff.
Under Rule 4:58-2 as it read in March 2002, when plaintiff made his offer, a claimant could obtain litigation expenses, prejudgment interest at the rate of eight percent, and reasonable counsel fees, if the defendant rejected the offer and if the claimant thereafter obtained a money judgment at least as favorable as the rejected offer. Defendants implicitly rejected plaintiff's offer of judgment when they did not act upon it within the ninety-day period for acceptance provided in Rule 4:58-1. Thus, at that juncture, plaintiff was entitled to litigation expenses, counsel fees, and prejudgment interest pursuant to R. 4:58-2 if the judgment turned out to be $1,165,000 or more.
The bench trial commenced on October 21, 2003, and ended on March 24, 2004. Six months later, on September 24, 2004, the trial court entered judgment in plaintiff's favor in the amount of $1,315,909.63, well over the $1,165,000 set out in plaintiff's offer of judgment.
In the interim, on September 1, 2004, about three weeks before the trial court rendered its decision, an amendment to R. 4:58-2 had become effective. Under the amendment, a money judgment was required to be at least 120% of the offer, "excluding allowable prejudgment interest and counsel fees," in order for a claimant to be entitled to an award of litigation expenses, counsel fees, and prejudgment interest under the rule.
Thus, plaintiff had to have obtained a judgment for damages in the amount of $1,398,000 or higher to qualify for the benefits of R. 4:58-2 under the current formulation. His damages award of $1,315,909.63 fell short of this amount by about $82,000.
Several months after the trial court's decision, on February 2, 2005, plaintiff moved, inter alia, for an award pursuant to R. 4:58-2. The trial court decided the motion in a written opinion dated April 15, 2005. The court denied plaintiff's motion on the ground that the amount of plaintiff's damages recovery did not meet the current minimum requirements for monetary awards under R. 4:58-2, as recently amended.
The court reasoned that, under controlling legal precedent, an amendment to a procedural rule like R. 4:58-2 should be applied to all judgments subject to that rule that are entered after the date the amendment becomes effective. Applying this reasoning, the court concluded that the rule amendment to R. 4:58-2 that became effective on September 1, 2004, applied to the judgment entered in plaintiff's favor on September 24, 2004.
We reject plaintiff's argument that controlling legal precedent disfavors the retroactive application of procedural rule amendments in situations like this. The case law plaintiff relies on, limiting the retroactive application of statutory and regulatory amendments, is inapposite. The trial court was correct that case law pertaining to procedural changes, i.e. rule amendments, clearly establishes that, normally, the rule in effect on the date a judgment or order is entered will govern. See Farrell v. Votator Div. of Chemetron Corp., 62 N.J. 111, 120 (1973) ("[Rule 4:26-4], being procedural, is in general to be deemed applicable to actions pending on its effective date as well as those instituted thereafter."); Feuchtbaum v. Constantini, 59 N.J. 167, 172 (1971) ("We see no reason to deny the application of R. 4:4-4(i) [now R. 4:4-4(b)(1)(C)(3)] to claims for relief which antedated it. The rule is purely procedural. Procedural statutes and rules of court are given retrospective application if vested rights are not thereby disturbed."); Shimm v. Toys From The Attic, Inc., 375 N.J. Super. 300, 304-05 (App. Div. 2005) (stating in dictum that an amendment to another provision of the offer-of-judgment rule, Rule 4:58-3, could have been applied retrospectively in that case to deny the defendant any relief); Simons v. Saaz, 147 N.J. Super. 143, 145 (App. Div. 1977) ("Basically the [prejudgment-interest] court rule is one of procedure. Such a rule usually is retrospective in operation, absent a provision to the contrary. * * * The rule applicable at the time judgment is entered will govern."); Paulison Ave. Assoc. v. Passaic City, 18 N.J. Tax 101, 113-14 (Tax 1999) ("Rule 8:7(e) is a rule of procedure, and, therefore, applies retrospectively to this action which was pending as of the September 1, 1998 effective date of the Rule.").
Rule 4:58-2 is a procedural rule with remedial effect, set in place by the Supreme Court to promote early settlements. Crudup v. Marrero, 57 N.J. 353, 361 (1971). Because it is a rule of procedure, the version in effect on the date the trial court issued its decision awarding plaintiff damages governs. Therefore, the trial court did not err when it applied the rule as amended, and determined that plaintiff's damages recovery fell short of the amount necessary to obtain relief under then-prevailing offer-of-judgment standards. See Farrell, supra, 62 N.J. at 120.
Plaintiff argues that, through no fault of his own, he was unfairly and unjustly denied the benefits of the prior version of Rule 4:58-2, and was powerless to avoid the detriment visited upon him by the amendment to that rule. The trial court understood the argument and expressed concern for plaintiff's position, concluding, however that "controlling precedent" furnished "no other choice" than to deny the relief plaintiff sought.
With the same concern, we agree with the trial court on this point. Plaintiff had no vested right in the pre-amendment operation of Rule 4:58-2, and the time that passed between the close of evidence and the trial court's decision in the matter, though extended, was understandable given the length of the trial, the volume of the proofs, and the complexity of the issues. We see no basis in the interests of justice to relax the newly-arrived-at standards of the rule. See R. 1:1-2. To do so in order to recognize plaintiff's entitlement to the awards authorized by the Rule would subject defendants to an increased judgment through no fault of their own. When a rule is amended, every party in pending litigation is potentially affected one way or another; some parties receive a procedural or substantive benefit, others suffer a concomitant detriment. A straightforward application of time-of-decision principles has the merit, in all events, of holding all parties to the same external standard.
In summary, as to the appeal, we remand a) for reconsideration and possible modification of the judgment in respect of defendants' entitlement to restitution/interest damages in connection with the salary continuation paid to plaintiff; and b) for recalculation of damages to reflect the advance payment to plaintiff of an earn-out/bonus entitlement, and such modification of the judgment as that recalculation requires. On remand, the trial court shall also consider the extent to which the issues reconsidered should result in adjustment of the entitlement to prejudgment interest already adjudicated. Except for the need to consider making such discrete adjustments, we affirm the trial court's ruling on prejudgment interest for the reasons stated. In all other respects, both in the appeal and the cross-appeal, we affirm substantially for the reasons stated by the trial court.
Affirmed in part; reversed in part, and remanded.
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