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Kadi v. Massotto

November 10, 2008

GARY KADI, PLAINTIFF-APPELLANT,
v.
MICHAEL MASSOTTO, DEFENDANT-RESPONDENT.



On appeal from the Superior Court of New Jersey, Chancery Division, Passaic County, C-101-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted October 7, 2008

Before Judges Winkelstein, Fuentes and Chambers.

Plaintiff Gary Kadi and defendant Michael Massotto jointly owned a dental consulting business. In April 2004, plaintiff sold defendant his one-half share of the business pursuant to the terms of a written agreement. After a dispute arose concerning the agreement's restrictive covenant, defendant demanded arbitration seeking, among other things, damages and injunctive relief. Plaintiff filed a cross-demand for arbitration seeking to vacate the restrictive covenant contained in the agreement.

Following two days of testimony, the arbitrator issued an award on March 29, 2007, granting defendant's request for injunctive relief, but denying the parties' remaining requests for relief. The injunction prohibited plaintiff from providing competing dental consulting services directly or indirectly with defendant: (1) until April 13, 2014 in New York, New Jersey, Connecticut, and Pennsylvania (the New York metropolitan area); and (2) until April 13, 2009 in any state east of the Mississippi, excluding the New York metropolitan area. Plaintiff filed a complaint in the Superior Court seeking to vacate the arbitrator's award, asserting that the arbitrator exceeded her powers by not applying New Jersey law pursuant to the terms of the agreement. On November 5, 2007, Judge McVeigh issued an opinion and entered an order affirming the arbitrator's award. She subsequently denied plaintiff's motion for reconsideration. It is from Judge McVeigh's orders that plaintiff has taken an appeal. We affirm.

I.

Plaintiff and defendant met in 1997. Plaintiff had been a consultant in the dental industry, helping dental offices market and build a practice, while defendant had been doing similar consulting work for chiropractors. Until 2001, they shared office expenses and worked together, but maintained separate businesses.

In 2001, they became equal partners in a new business known as Staff Driven Practices (SDP), limiting their consulting work to the dental industry. To promote their business, plaintiff and defendant gave seminars, wrote articles, and wrote a book entitled 25 Sure-fire Ways To Ruin Your Dental Practice. They established numerous contacts in the dental, legal, accounting and financial areas. The SDP office was located in Wayne, and plaintiff and defendant focused on promoting their business within the New York metropolitan area. SDP earned $450,000 in gross sales in 2001, and by 2003 it generated over $600,000 in sales. Plaintiff and defendant each earned twelve to fifteen thousand dollars per month.

In 2003, the parties' relationship became strained. After plaintiff told defendant that he wanted to leave the business, they agreed that defendant would purchase plaintiff's interest in SDP. Consequently, over several months, the parties negotiated a purchase price and the scope of a restrictive covenant. SDP's major asset was its goodwill, its clients, and its "unique methodology." It did not have many "hard assets"; aside from furniture and computers, it had about thirty to fifty thousand dollars in cash in its operating account.

Plaintiff initially wanted $750,000 for his share of the business. Ultimately, the parties stipulated that the value of the company was $1.2 million and they agreed to a purchase price of $600,000 plus a $150,000 "incentive payment" that plaintiff would receive if the company's average gross revenue for the three years following his departure was at least $1.4 million.

Defendant initially requested that the agreement include a nationwide restrictive covenant, which would have prohibited plaintiff from working in the dental consulting industry for ten years. Defendant wanted this broad restrictive covenant because he was "mortgaging [his] life" to purchase plaintiff's share of the business. After paying the $600,000, he would have "zero" personal resources. Although the then current market for the company was the New York metropolitan area, defendant planned to expand the company into other markets throughout the country.

The agreement ultimately included the following restrictive covenant: 6.01 Restrictive Covenants. Each of the Company, Remaining Member [defendant] and Seller [plaintiff] agree that (a) Remaining Member would not have purchased Sellers' Interests at the Purchase Price unless and until Seller agreed to the restrictions that follow and (b) the future success of the Company depends that clear and concise restrictions on Seller's future activities be delineated. . . .

6.02 Non-Compete. Seller shall not, directly or indirectly, coach, consult with, be employed by or own any entity that provides coaching or consulting services ("Services") to the Business nor shall Seller directly or indirectly as a principal, owner, employee, shareholder or consult engage in the Business:

1. For a period of [ten] (10) years in the states of New York, New Jersey, Connecticut and Pennsylvania ("New York Metropolitan Area").

2. For a period of five (5) years in any state east of the Mississippi River, excluding the states in the New York Metropolitan Area;

3. For a period of three (3) years in any states west of the Mississippi River, excluding Arizona.

These restrictions shall not apply to Services that Seller provides to dental practices only in the State of Arizona who are not Customers and other clients who are not Customers of the Company on the Effective Date regardless of the field. Except as described in the sentence that follows this one, communications from Arizona to dental practices or with clients outside the State of Arizona shall not constitute a competing Business or providing Services if such dental practices or dental clients are not Customers of the Company. However, Seller's direct or indirect provision of marketing materials to dental practices, dental clients, dental practice staff members, dental industry professionals, dental industry networks and dental industry referral sources in the New York Metropolitan Area, whether or not the foregoing are Customers, shall constitute a violation of these non-competition, non-solicitation provisions. For purposes of this restrictive covenant, a competitive company or firm is any business organization or sole proprietorship that operates in the Territory and whose activities include the Business of the Company as described herein. Seller may engage in any consulting activities in connection with any business or profession other than Business of the Company so long as such activities do not include Customers.

Defendant understood the covenant to mean that for three years, plaintiff had "no right to work with any client outside the State of Arizona" or provide marketing materials to clients outside of Arizona. Plaintiff understood the covenant to mean that as long as he had an office in Arizona, he could conduct business with any state outside of the New York metropolitan area.

The agreement also contains a nonsolicitation clause, which states that plaintiff "shall not, directly or indirectly, pirate or attempt to pirate or solicit for himself or any other company any current employee or independent contractor, Customer, referral source or industry contact of the Company" for ten years. Attached to the agreement were lists of the company's customers, its industry contacts, and members of its referral network. The agreement prohibited plaintiff from "contact[ing] any Customer under any circumstances," aside from obtaining a reference or a testimonial.

The agreement also contained an arbitration clause, which provided that the "award [of the arbitrator] shall be final and binding upon the parties." The agreement further provided that "the construction and enforcement of [the agreement's] terms and the interpretation of the rights and ...


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