Court Rejects Client Reimbursement Provisions

By Dan L. Goldwasser, Esq., Vedder, Price, Kaufman, Kammholz & Day

Earlier this year the NYSSCPA filed an amicus brief in support of BDO Seidman's efforts to uphold the enforceability of a clause requiring a firm manager to reimburse it for clients which he took when he left the firm. The Supreme Court for Erie County had refused to enforce the clause which required the manager to pay BDO Seidman an amount equal to 150% of the annual billings of the roughly 80 clients which the manager continued to serve after he left BDO Seidman. The court concluded that "the restrictions against the defendant [the former manager] are over broad. Plaintiff [Seidman] is over protected and the defendant is unreasonably limited."

The Society submitted an amicus brief to the Appellate Division (Fourth Department) in support of BDO Seidman's appeal of the lower court's decision. In its brief, the Society argued that not only are such clauses fair and reasonable, but they are necessary for CPA firms to remain economically healthy and to satisfy the public's need for quality and independent audit services. The Society pointed out that the courts' aversion to all forms of post-employment restrictions was inappropriate in this context because there is no need to increase competition among small CPA firms, while there is a serious need for more mid-size firms capable of performing audit services for businesses seeking access to the nation's capital markets.

Traditionally, the courts have disfavored all forms of restrictive covenants under the belief that they tend to stifle competition. Accordingly, courts commonly refuse to enforce covenants not to practice within a given geographic area and covenants not to service clients of the former employer. The client reimbursement provision being reviewed by the court, however, included neither of these prohibitions, but rather simply required the departing manager to compensate BDO Seidman for clients which the manager continued to serve after leaving the firm. Moreover, the amount and terms of the required payment were consistent with the price for which small accounting practices are customarily bought. Thus, BDO Seidman's clause did not seek to penalize the former employee, but only to require a fair payment for the value of the clientele appropriated by the departing manager.

The Society filed its amicus brief out of a belief that accounting firms must be able to legally protect their most valuable assets (their clients) from the acts of disloyal employees just like other business enterprises must be able to protect themselves against employee thefts. Without those protections, CPA firms might be reluctant to invest in the development of new business strategies and client services if the fruits of their efforts could be freely stolen away by senior level employees to whom they have entrusted their clients.

In taking this position, the Society carefully weighed the interests of its many members who work as employees of CPA firms and who might be affected by the court's decision. It concluded, however, that the BDO Seidman clause imposed no greater burden upon the departing employee than CPAs routinely and voluntarily accept when they purchase the practices of other CPAs. Moreover, by having the court declare that such a clause was enforceable, other firms might be encouraged to adopt this least burdensome form of covenant, rather than more onerous provisions which might eventually be invalidated.