KPMG Peat Marwick LLP v. Fernandez

Citations: 709 A.2d 1160; 1998 Del. Ch. LEXIS 6; 1998 WL 8850Docket: Civil Action No. 15570

Court: Court of Chancery of Delaware; January 5, 1998; Delaware; State Appellate Court

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KPMG Peat Marwick LLP has filed a motion to enforce a settlement agreement from August 7, 1997, claiming that former partners (Respondents) breached its terms. KPMG seeks to conduct discovery to assess the nature of the alleged breach and requests a six-month extension of the non-compete provisions outlined in the agreement. Under Delaware law, non-compete agreements can be enforced if they protect the legitimate interests of the employer. However, the Vice Chancellor found insufficient evidence to support KPMG's claims of a breach, interference with its business interests, or any material competitive injury resulting from the Respondents’ actions. Consequently, KPMG's motion is denied.

The context involves Respondents leaving KPMG to form a competing consulting firm, AnswerThink Consulting Group Inc. The KPMG partnership agreement includes a non-compete clause prohibiting partners from soliciting or servicing clients for two years post-departure, which was reiterated in the Settlement Agreement. Additionally, the Settlement Agreement restricts Respondents from hiring KPMG personnel for two years, while KPMG is also restricted from soliciting personnel from AnswerThink.

The confidentiality of KPMG’s client lists is not addressed in the Settlement Agreement, likely because KPMG's audit relationships with its major clients are publicly known. Respondents are permitted to solicit clients not specified in Article III, Section 9(b)(i) of the partnership agreement. KPMG claims that Respondents have violated the Settlement Agreement in five instances and seeks a broad interpretation of Article III, Section 9(b)(i) to restrict Respondents from contacting any clients they serviced in the three years before their termination, or clients serviced within seventy-five miles of their KPMG office. KPMG also alleges Respondents solicited KPMG employees, violating the Settlement Agreement. Respondents counter that the agreements should be interpreted narrowly to only include clients with whom they had significant relationships, arguing that incidental work done at a geographically distant office should not restrict their ability to solicit those clients. The analysis finds KPMG's broad interpretation too restrictive and Respondents' interpretation potentially allows undue competition against KPMG’s interests. Regarding employee solicitation, KPMG's claim stems from a September 30, 1997 voicemail from a recruiting firm retained by AnswerThink, which is assumed to seek KPMG employees. However, affidavits from AnswerThink’s executives deny solicitation instructions, and the recruitment firm was subsequently terminated. The evidence does not support a violation of the Settlement Agreement by AnswerThink or Respondents.

On September 9, 1997, Dun, Bradstreet (D.B.), a client of KPMG since 1993, sought KPMG's consent to retain AnswerThink for its Year 2000 project, emphasizing that D.B. initiated contact with AnswerThink. KPMG refused consent, asserting that AnswerThink's actions violated the Settlement Agreement and harmed its relationship with D.B. KPMG contended that despite D.B. making the first contact, AnswerThink's subsequent engagement constituted solicitation, as it pursued the business opportunity. Respondents countered that their actions did not violate the Settlement Agreement since D.B. initiated contact, and legal precedents support the notion that responding to unsolicited inquiries does not equate to solicitation. The excerpt also notes the complexity of distinguishing between solicited and unsolicited business, underscoring that in this instance, D.B.'s initial contact was not influenced by prior interactions with Respondents. Consequently, it was concluded that Respondents did not solicit work from D.B. KPMG's supplemental motion also referenced another incident involving Crown, Cork, Seal (C.C.S.), where KPMG claimed Respondent Kelly invited C.C.S.'s CIO to a conference, though this was acknowledged as not violating the Settlement Agreement.

KPMG has not provided specific allegations regarding the conference or direct solicitation of work from C.C.S. However, KPMG's motion indicates that this situation illustrates the Respondents' ongoing disregard for the Settlement Agreement. Respondents, through Mr. Kelly's affidavit, detail a phone call inviting Mr. Julian to a Continuous Improvement Center workshop, which is affiliated with AnswerThink. Kelly clarified that he did not solicit business from C.C.S., and Julian declined the invitation. The workshop involved around thirty representatives from similar corporations discussing business practices and technology.

The Court is tasked with determining the breadth of the Settlement Agreement's prohibition against indirect solicitation. The Court declines to interpret this prohibition so broadly as to prevent all professional or social interactions between Respondents and KPMG clients, even if these interactions may lead to future business relationships. Key reasons include the temporary nature of the Settlement Agreement, which expires on December 31, 1998, allowing Respondents to eventually seek work from KPMG clients. Furthermore, the Agreement prohibits work for covered clients without KPMG's consent, distinguishing this case from others where only solicitation is restricted.

The Court notes that Respondents lack incentives to solicit invitations for work, given the prohibitions in place. Additionally, there is no evidence of bad faith by Respondents in creating situations that would force KPMG into difficult decisions regarding client relationships. The only relevant issue is a prior incident (the D.B. incident) that was not solicited by Respondents. 

Regarding Visa International, AnswerThink and Respondents solicited work from Visa, aware it was a KPMG client. However, after KPMG objected and provided evidence of substantial prior work, AnswerThink ceased its solicitation efforts. The record does not confirm whether any Respondents had previously worked with Visa or maintained any professional connections there. Respondents contend they believed Visa was a client of KPMG's San Francisco office for the purposes of the Settlement Agreement.

Respondents argue they are entitled to solicit Visa's business since no AnswerThink employee resigned from KPMG’s San Francisco office or a nearby office. They contend that any minor projects performed for Visa in other KPMG offices are irrelevant. However, KPMG asserts that the Settlement Agreement's language indicates the non-compete obligation applies to any clients worked with by any office during the three years prior to termination, without limiting the scope to a single office. KPMG's interpretation, while supported by the literal language of the Settlement Agreement, poses challenges for Respondents, who lack access to detailed records of relevant client work. This absence of information complicates their ability to assess compliance with the agreement, raising concerns about competition and the reasonableness of the restraint on their ability to compete for KPMG clients with whom they have no prior relationships. Delaware law allows injunctive relief against former employees competing with clients with whom they had established relationships, but there is less justification for restricting competition regarding clients that other KPMG partners have relationships with. 

A specific incident involved Respondents soliciting work from First Union Insurance Group, which KPMG claimed was linked to First Union, a KPMG client. KPMG informed Respondents that the non-compete clause applied due to services rendered for First Union by its offices within the last three years. After KPMG's counsel indicated this, Respondents ceased their solicitation efforts. KPMG supported its motion for enforcement of the Settlement Agreement with an affidavit from a partner involved in the First Union relationship.

Mr. Licari’s affidavit indicates that KPMG has been serving First Union since 1969, providing unspecified services from various offices (Atlanta, Chicago, and Radnor). First Union, a holding company with banking and non-banking subsidiaries, treats its divisions, including Insurance Group, as a single client. Notably, projects requiring significant approval are sanctioned by First Union’s President. The affidavit does not confirm that any Respondents directly served First Union or Insurance Group or had professional relationships with them.

Respondents argue their solicitation of Insurance Group did not breach the Settlement Agreement, claiming First Union is a client of KPMG's Charlotte office. They assert that work done outside of Charlotte was merely incidental. Additionally, they argue that First Union and Insurance Group do not constitute a single "organization" under the Settlement Agreement. However, the record lacks evidence that KPMG has a legitimate interest in enforcing the non-compete provision against Respondents for their efforts to solicit Insurance Group, as it does not show any substantial connection between Respondents and either entity.

The analysis concludes that, although Insurance Group operates under the umbrella of First Union, it is appropriate to view them as part of a single organization for the Settlement Agreement's purposes. Consequently, Respondents' arguments fail, leading to the denial of Plaintiffs' motions to enforce the Settlement Agreement and indicating insufficient evidence of misconduct by Respondents that would warrant discovery into their business activities.

Three out of the five incidents identified by KPMG were determined not to violate the Settlement Agreement. The remaining two incidents, involving Visa and First Union, require interpretation of the Settlement Agreement's language to avoid imposing excessive restrictions on the competitive activities of the Respondents. The evidence does not suggest that the Respondents acted in bad faith in their competitive efforts. Consequently, KPMG's requests for discovery and an extension of the Settlement Agreement for six months are denied. Additionally, it is assumed, without a definitive ruling, that it is permissible for an accounting partnership to impose restrictions on members' professional practices post-withdrawal; however, similar restrictions in the legal profession are deemed against public policy, as they infringe on professional autonomy and client choice. This is supported by Delaware Lawyers’ Rules of Professional Conduct Rule 5.6, which prohibits agreements that restrict a lawyer's right to practice after leaving a firm, barring specific exceptions.