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In a ruling of first impression in the area of employment law, an appellate court last week threw out a $600,000 jury award won by an employee of a financial company who started his own business with a potential client of the firm. The unanimous ruling from New York’s Appellate Division, 2nd Department, marks the first time that the court has compared how the law of damages applies to employees who breach the duty of loyalty versus those who violate non-compete agreements. If followed strictly, according to attorneys who handled the dispute, at the heart of the ruling, the court’s decision could give employers a significant upper hand in litigation against employees who defect to start their own businesses. The decision centers on a dispute between Christian H. Gomez and his former employer, Bicknell Advisory Services Inc., where Gomez began working in 1995. He signed a non-compete agreement covering two years following his termination for any reason. Two years later, Gomez demanded a salary of $200,000, to which Bicknell agreed. He also claimed that Bicknell had orally agreed to a 50/50 split of profits with him on a transaction-by-transaction basis. Gomez also said that Bicknell had agreed to a 50 percent split in equity of the firm, and threatened to resign when Bicknell resisted his claim. As the dispute between Gomez and his firm became more heated, Bicknell was about to receive payment for a successful acquisition deal by Sigma Marketing Group Inc., based in Atlanta. The president of that firm, David Stirling, told Gomez that he knew of another prospective merger client, but that he would not reveal the company’s name until the Sigma deal closed. Gomez relayed this information to Bicknell, but, according to the 2nd Department, later learned the name of the prospective client from Stirling and had a 90-minute conversation with officials at the company from his home. Five days later, in June 1998, the Sigma deal closed and Gomez resigned. The Sigma deal paid Bicknell $500,000. Gomez had also helped close two other transactions that year, but had received no equity and no payout of profits. Weeks after he resigned, he secured a contract with Gordon Bailey & Associates, the client referred by Stirling, and later earned a gross fee of $353,000. Gomez also sued Bicknell, claiming breach of his employment agreement and a right to half of Bicknell’s profits on a transaction-by-transaction basis. Bicknell counterclaimed that Gomez had breached his duty of loyalty by diverting a business opportunity, and that he had violated the non-compete agreement he had signed in 1995. In a trial presided over by Westchester Supreme Court Justice Kenneth W. Rudolph, a jury awarded Gomez more than $600,000 after finding that his employment agreement had been orally amended to include profit-sharing, and that the agreement was then violated. The jury also awarded Bicknell $5,000 on its counterclaim that Gomez had breached his duty of loyalty. VERDICT REVERSED Bicknell appealed, and the 2nd Department substantially reversed the jury’s verdict, finding that Gomez’s recovery was “not supported by legally sufficient evidence.” More significantly, it also ruled that Rudolph had erred on his charge to the jury and ordered a new trial on damages for Bicknell’s counterclaim alleging breach of duty of loyalty. Justice Rudolph told the jury that “[I]f there’s a breach of duty of loyalty, on the damages you must consider the profit of Gomez, and that would be the measure of damages for the defense.” An attorney for Bicknell objected, arguing that the measure of damages would be exactly what Gomez earned from the deal. Writing for the court in Gomez v. Bicknell, 321/00, Justice Stephen G. Crane said the jury charge was “erroneous” and “deprived [Bicknell] of the choice it had to select the measure of damages.” Crane emphasized that the choice of remedy for disloyalty lies with the employer, and should either be disgorgement of the employee’s profit or a calculation of what the employer would have earned had it been given the diverted corporate opportunity. Crane added that Bicknell’s counterclaim for breach of a non-compete clause was unsupported because Bicknell did not prove its own loss of profits from the Gordon Bailey transaction. But, he said, “for disgorgement of Gomez’s profits stemming from disloyalty, all [Bicknell] needed to show was the gross fee Gomez received.” The judge rejected arguments that Gomez was not disloyal to his firm because he waited several weeks before re-establishing contact with Gordon Bailey. The judge said that “to adopt such an argument would license any faithless employee to steal a corporate opportunity but conceal the theft until he or she has departed from employment.” Scott T. Horn of New York’s Mischel, Neuman & Horn, who represented Bicknell, described the ruling as an important clarification of several legal principles that “were relatively unsettled.” “It is now clear that as long as he or she is employed, the employee cannot lay the groundwork for diverting a corporate opportunity away from the employer and he or she will be held accountable even if that ‘groundwork’ consists of a single telephone call,” Horn said in a faxed statement. Edward J. Boyle of New York-based Wilson, Elser, Moskowitz, Edelman & Dicker, who represented Gomez, said he would seek clarification or reargument, and, if necessary, leave to appeal to the New York Court of Appeals. “I think the court did not clearly see some of the issues before it,” Boyle said. “As a result, I think they incorrectly set aside a verdict of eight jurors after a four-week trial.” When asked about the legal significance of the ruling, Boyle said: “I think it has tremendous impact. You no longer need a non-compete agreement.” Peter J. Larkin of Wilson Elser also represented Gomez. Justices Sandra J. Feuerstein, Robert W. Schmidt and Thomas A. Adams concurred with Justice Crane’s opinion.

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