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$2.7M damage award against former execs for breach of restrictive covenants upheld

By Ronald Miller, J.D.

The Tenth Circuit affirmed a $2.725 million jury award in a title company’s favor on its claims of breach of contractual and fiduciary duties against former employees who left to form a competing company and encouraged former coworkers to join them. It was clear that the jury believed that the defendants’ conduct altogether caused the employer to lose more than $2.7 million in profits. Because the damages were lost profits, the nature of the case did not allow pinpointing any particular act by any particular defendant as the cause of any particular dollar of lost profits. Under such circumstances, the appeals court concluded that the jury made an informed judgment of how to apportion the loss among causes of action and defendants, and there was no duplication of damages (First American Title Insurance Co. v. Northwest Title Insurance Agency, October 9, 2018, Hartz, H.).

Individual defendants. The individual defendants worked in executive positions for Equity Title Insurance Agency. Michael Smith served as chief operating officer and general counsel. Kristi Carrell was a vice president and manager of an Equity branch office. (A third executive, Jeffrey Williams, who served as the senior VP for escrow operations, was not a party to the appeal.) All signed employment agreements with Equity containing various noncompete clauses as well as nonsolicitation clauses.

Merger. Between 2003 and February 2009, First American acquired all of Equity’s stock. After the final purchase, Equity became a wholly owned subsidiary of First American. In November 2012, Equity and First American filed a merger plan with state regulators.

Competing company. In late 2014, Smith began efforts to create Northwest Title Insurance. On March 9, 2015, Northwest opened for business and Smith quit his job with First American. The following day, Carrell resigned and started at Northwest. Within two weeks, at least 25 other employees had defected as well. First American promptly sued Northwest and the individual defendants, alleging breach of contract against the three former employees, tortious interference with a contract, and breach of fiduciary duty, among other claims.

District court rulings. The district court dismissed some of First American’s claims and granted the employer’s motion for partial summary judgment on others, holding that: (1) the Equity employment contracts had legally transferred to First American; (2) Williams and Carrell had breached the noncompete provisions of their employment contracts; and (3) Smith and Williams had breached the nonsolicitation provisions of their employment contracts.

In the liability and compensatory damages phase of the trial, the jury found Smith, Williams, and Carrell liable for breach of contract, Smith liable for breach of fiduciary duty, and Smith and Northwest liable for tortious interference with contract. It awarded First American $1.625 million from Smith; $50,000 each from Carrell and Williams; and $1 million from Northwest. After a second phase of trial addressing punitive damages, First American was awarded an additional $500,000. The court later awarded First American attorney fees of almost $2.9 million.

Standing. As an initial matter, the Tenth Circuit rejected the defendants’ claim that the plaintiffs failed to establish constitutional standing to bring their claims. The appeals court concluded that all three elements of constitutional standing were clearly satisfied for the Utah title company that lost key employees and clients to Northwest. There was evidence that its business was injured, the injury was caused by the defendants, and damages would provide redress for the injury. There may be some question as to what entity speaks for that Utah title company, but that raised a question of who is the real party in interest, which was not a jurisdictional issue. Moreover, to the extent that the defendants were raising a real-party-in-interest issue, they waived that issue by including only a fraction of the trial transcript in the appendix on appeal, and for trial purposes, they treated First American and its subsidiary as one entity.

Contract enforceability. The defendants next challenged the district court’s ruling that their signed employment contracts with Equity were still in effect when they quit their jobs to work for Northwest. However, the appeals court was not persuaded the holding was in error. The validity of the contracts was not affected by First American’s purchase of Equity’s stock or the merger of Equity and First American. Nothing in the Equity employment agreements or the circumstances surrounding their execution indicated that the contracts were dependent on who owned Equity.

The defendants next argued that First American made an admission establishing that the noncompete contracts did not bar the defendants from joining Northwest. They contended that First American made a binding judicial admission that their employment with Equity ended in October 2008, when First American completed the acquisition of all of Equity’s stock, so the one-year restriction on competition ended years before they left for Northwest. However, even if this complaint allegation could be considered a binding judicial admission, the court declined to treat it as an admission because it was a statement of law rather than fact, and “admissions” of law are ordinarily not binding.

Finally, defendant Carrell asserted that the district court failed to recognize that the stock purchase agreement did not identify her employment contract as an enforceable employment agreement. Although the employment contracts of Smith and Williams were on a list entitled “Material Contracts,” Carrell’s contract was not. The purpose of the Material Contracts subsection was to inform First American of potential obligations of Equity arising from contracts to which it was a party, the appeals court pointed out. Nothing in the section indicated an intent to disclaim any contracts. Moreover, even if First American was wrong in omitting that agreement from the schedule, that error did not free Carrell from the rights and duties established by the agreement.

Damages. After disposing of the defendants’ complaints about the jury instructions, the appeals court turned to their challenge to the damages award. First, the defendants claimed that the district court committed error in failing to apportion damages between the two plaintiffs. However, the court pointed out that the parties tried the case without distinguishing between the two entities. Moreover, because the defendants never made this segregation argument below, the issue was waived. Next, they complained that First American’s evidence did not apportion the damages by cause of action or defendant. However, the appeals court noted, when the damages are lost profits, the nature of the case does not allow pinpointing any particular act by any particular defendant as the cause of any particular dollar of lost profits. All a jury can do is make an informed judgment of how to apportion the loss among cases of action and defendants. That was exactly what the jury did in this case. After setting forth the total damages suffered by First American, the jury then divvied that sum up among the various causes of action and defendants. There was no duplication of damages in this case.

Accordingly, the judgment of the district court was affirmed, and the jury’s award to First American in the amount of $2,725,000 was upheld.