When dealing with the breach of an agreement to sell a business that is backed by a non-compete clause, such as where A sells B his business, including A's "good will," i.e., his client base, how can B establish his damages if A violates this agreement? In other words, what, if anything, can B recover for A's tortious interference with the client base he just paid for?
Lest you think that this is a straightforward question, consider this:
Some of the Challenges Inherent to Proving Damages for Diverted Clients
On some, elemental level, it may be inherently challenging to prove concrete damages, because many of these "good will" customers may not have had existing, long-term agreements with A; they may be purchasers who conduct business individual purchase order by purchase order. Another example would be patients of a medical practice, who also have no long-term contract with their doctor.
How Some Sellers Have Tried to Get Around the Problem of Proving Damages in the Event of a Breach of the Agreement
For this reason, many asset purchase agreements will contain a liquidated damages clause that attempts to fairly represent a measure of damages that bears some relationship to the anticipated damages that would, or could, be caused by the seller's breach of the agreement.
But what if there is no liquidated damages clause, and the purchaser paid, in large part, for the "goodwill" of the business? Can you still recover under New York law?
The Mohawk Doctrine
In short, the answer is yes. And here's why:
"[When] the APA is silent with respect to damages, we apply a "commonsense rule" to determine "what the parties would have concluded had they considered the subject" (Kenford Co. v County of Erie, 67 NY2d at 262; see Ashland Mgt. v Janien, 82 NY2d at 404) ... A purchaser of goodwill " 'acquires the right to expect that the firm's established customers will continue to patronize the business' " (Bessemer Trust Co., N.A. v Branin, 16 NY3d 549, 557 [2011], quoting Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 285 [1981])."
In other words, this rule, also known as "The Mohawk Doctrine," basically states that we're not going to allow the seller of a business to effectively get paid for handing over their client base, only to then take it away - and thereby abscond with the entire value of the deal - telling the buyer, "sue me; good luck trying to prove your damages."
The Underlying Rationale for the Mohawk Doctrine
This general rule, also known as the "Mohawk Doctrine," has been around for quite some time; in fact, as noted by New York State's highest court, the origins of this rule are traced back to English common law:
"[A] man may not derogate from his own grant; the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant, on the sale of good will, that the vendor does not solicit the custom which he has parted with; it would be a fraud on the contract to do so. . . . It is not right to profess and to purport to sell that which you do not mean the purchaser to have; it is not an honest thing to pocket the price and then to recapture the subject of sale; to decoy it away or call it back before the purchaser has had time to attach it to himself and make it his very own' " (Von Bremen, 200 NY at 50-51, quoting Trego v Hunt, [1896] AC 7, 25; see also Mohawk, 52 NY2d at 286; Bessemer Trust Co., 618 F3d at 86).
Granted, the language is a bit dated (then again, this was written in 1910), but the message is clear: you, as the seller, don't get to have the benefit of being paid for your business if you have no intention of actually conveying it. It would be a clear violation of fiduciary duty.
How Long Does the Seller's Ban on Soliciting Old Customers Last?
Interestingly - and importantly - the Court of Appeals explained that in the absence of an agreement limiting the time that a seller is barred from solicting its old clients, the seller's "implied covenant" not to solicit his former customers is
"[A] permanent one that is not subject to divestiture upon the passage of a reasonable period of time" (Mohawk, 52 NY2d at 285). Indeed, we have recognized that upon the sale of "good will," a "purchaser acquires the right to expect that the firm's established customers will continue to patronize the business" (id., citing People ex rel. Johnson Co. v Roberts, 159 NY 70, 80-84 [1899]). This is so because "[t]he essence of [these types of] transaction[s] is, in effect, an attempt to transfer the loyalties of the business' customers from the seller, who cultivated and created them, to the new proprietor" (id.).
In other words, even if the agreement for the sale of the business doesn't spell this out, you, as the seller still can't solicit the clients whose goodwill you just sold to the purchaser. Moreover, your ban on soliciting these customers is not bounded by time. It's forever.
