LENEL SYSTEMS INTERNATIONAL INC v. SMITH

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Supreme Court, Appellate Division, Fourth Department, New York.

LENEL SYSTEMS INTERNATIONAL, INC., Plaintiff-Appellant-Respondent, v. Richard Todd SMITH, Defendant-Respondent-Appellant.

Decided: November 17, 2006

PRESENT:  SCUDDER, J.P., MARTOCHE, CENTRA, AND PINE, JJ. Nixon Peabody LLP, Rochester (Robert B. Calihan of Counsel), for Plaintiff-Appellant-Respondent. McConville, Considine, Cooman & Morin, P.C., Rochester (Jason S. Di Ponzio of Counsel), for Defendant-Respondent-Appellant.

 Plaintiff commenced this action seeking rescission of three Incentive Stock Option Agreements (Option Agreements) that grant defendant options to purchase shares of plaintiff's common stock.   The terms of the Option Agreements provide that, “[i]n consideration of the grant of [the options],” defendant agrees that he shall not “directly or indirectly, as an ․ employee ․, conduct business in competition in any way” with plaintiff or its products while employed by plaintiff and for a period of time after his employment with plaintiff ends.   Plaintiff alleges in its complaint that defendant became employed by a competing corporation within three weeks of resigning from his position with plaintiff.   Defendant answered and asserted a counterclaim seeking payment of dividends on shares of plaintiff's stock allegedly owned by defendant.   Plaintiff moved for summary judgment rescinding the Option Agreements.   Defendant cross-moved for summary judgment dismissing the complaint and for summary judgment on his counterclaim awarding him dividends and directing plaintiff to issue “the outstanding stock certificates to him.”   Supreme Court properly denied the motion and cross motion.

 In analyzing the motion and cross motion, the court referred to cases where companies attempted to enforce contractual forfeiture-for-competition clauses (see e.g. Kristt v. Whelan, 4 A.D.2d 195, 164 N.Y.S.2d 239, affd. 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116;  Computer Task Group v. Ehlke, 286 A.D.2d 973, 974, 731 N.Y.S.2d 422).   Here, however, the Option Agreements do not contain forfeiture clauses.   Plaintiff is seeking to rescind the Option Agreements altogether.  “As a general rule, rescission of a contract is permitted ‘for such a breach as substantially defeats its purpose.   It is not permitted for a slight, casual, or technical breach, but ․ only for such as are material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract’ ” (RR Chester, LLC v. Arlington Bldg. Corp., 22 A.D.3d 652, 654, 803 N.Y.S.2d 100, quoting Callanan v. Keeseville, Ausable Chasm & Lake Champlain R.R. Co., 199 N.Y. 268, 284, 92 N.E. 747).   We conclude that the court properly denied the motion and cross motion because there are questions of fact whether defendant breached the Option Agreements and, if he did, whether that breach was so substantial that it defeated the object of the parties in making the contracts.

It is hereby ORDERED that the order so appealed from be and the same hereby is unanimously affirmed without costs.

MEMORANDUM: