Recently, the United States Court of Appeals for the Second Circuit held that a seller of the “good will” of a business is not barred from answering the factual inquiries made by the former client as long as the seller’s responses are within the scope of the information sought by the former client. Bessmer Trust Co v. Branin, 16 N.Y. 3d 549 (2011).
Branin worked as an investment portfolio manager at Brundage, Story & Rose, LLC (Brundage). While working at Brundage, Branin became the favorite of one of Brundage’s clients, the Palmer family. Eventually, Brundage sold its assets, including client accounts and related good will, to Bessemer. For a while, Branin continued to work for Bessemer. Eventually he resigned from Bressemer to join Stein Roe. Before leaving Bessemer, Branin prepared a list of his clients to help Bessemer transition the accounts to other investment advisors at the firm. Branin did not notify his clients about his decision to join Stein Roe. Thus, he did not actively solicit any of his former clients. In spite of this, several of Branin’s clients decided to transfer their accounts to Stein Roe. The Palmers were among them.
Before transferring their accounts to Stein Roe, the Palmers had a separate meeting with each of the firms to discuss how the firms would handle their accounts. Branin participated in the meeting between Stein Roe and the Palmers, but only as a passive participant. Finally, after meeting with both the firms, the Palmers decided to transfer their accounts to Stein Roe. Based on this, Bressemer, Branin’s former employer brought an action for breach of good will against Branin. The United States District Court for the Southern District of New York found that “Branin ‘improperly induced the Palmer account to leave Bessemer and that this inducement in fact caused the Palmer account to leave Bessemer and join Stein Roe’ in violation of New York law.” Id at 555.
Branin appealed and the Court of Appeals barely provided anything useful other than the basic principles regarding solicitation of former clients. The Court not only acknowledged the absence of a specific rule to determine whether a seller of “good will” has engaged in improper solicitation of his former clients, but also declined to create one. The Court held that “while a seller may not contact his former clients directly, he may, ‘in response to inquiries’ made on a former client’s own initiative, answer factual questions. Furthermore, under the circumstances where a client exercising due diligence requests further information, a seller may assist his new employer in the ‘active development . . . [of] a plan’ to respond to that client’s inquiries. Should that plan result in a meeting with a client, a seller’s ‘largely passive’ role at such meeting does not constitute improper solicitation in violation of the ‘implied covenant.’ As such, a seller or his new employer may then accept the trade of a former client.” Id at 560.
The lesson of this case is to tread very carefully when one could be accused of backtracking on the sale of business good will.
© 2011 Nissenbaum Law Group, LLC