Justices split 3-2 on employment noncompete damages, remand case

A divided Indiana Supreme Court has affirmed the denial of summary judgment to an Indianapolis-based civil engineering firm, finding an issue of material fact remains as to whether the firm’s former employees tortiously interfered with their contracts not to recruit.

Marlin Knowles agreed that for two years after leaving civil engineering firm American Structurepoint, Inc., he would not recruit ASI employees away from the company or solicit business from clients he had any business contact with while at ASI. If he did recruit and breached the contract, Knowles agreed to pay liquidated damages amounting to 45% of all fees and other amounts billed by ASI to the customer during the year prior, as well as 50% of the employee’s pay from ASI during that time.

A similar agreement was made with ASI employees Jonathan Day and David Lancet, who agreed to pay 100% of liquidated damages of a recruited employee’s pay from ASI if the contract was breached.

Knowles resigned from ASI in May 2014 and began working for competitor HWC Engineering as vice president of operations, prompting a series of resignations of employees who moved from ASI to HWC. Day and Lancet later joined Knowles, successfully recruiting seven ASI employees to work for HWC. Additionally, after joining ASI, Knowles networked with various ASI client contacts and signed various contracts with them.

ASI sued all three men and their new employer, alleging, among other things, breach of contract and tortious interference with ASI’s contractual and business relationships. The Marion Superior Court granted summary judgment for Knowles, Day and Lancet on the issue of liquidated damages, finding that the liquidated damages clauses were unenforceable as a matter of law. But while it granted judgment on ASI’s tortious interference with a contractual relationship claim pertaining to Day, the trial court found an issue of material fact regarding ASI’s contracts with Knowles and Lancet.

A divided Indiana Court of Appeals affirmed the trial court on its tortious interference issue, but reversed on the issue of liquidated damages after finding those provisions were enforceable. Judge Margret Robb wrote for the appellate majority that the ASI employment agreements were individually negotiated and specific to each employee, while the actual damages ASI suffered were difficult to ascertain due to the relational nature of the business. However, dissenting Judge Patricia Riley agreed with the trial court that the liquidated damages ASI sought were disproportionate.

In a split decision Wednesday, a majority of the Indiana Supreme Court held that the liquidated damages provisions in the employees’ contracts were unenforceable penalties. Finding the provisions to be facially problematic for several reasons, the majority first noted that it would be highly unlikely to cost ASI 250% of a recruited employee’s salary to replace them, the amount ASI was essentially seeking from their respective salaries.

“As discussed by Judge Riley in her dissent, ASI is seeking damages for contracts it was ineligible for and the contracts gained by HWC involving ASI clients are far less valuable than those ASI previously had with the client,” Justice Steven David wrote for the majority. “Thus, this liquidated damages provision is a penalty meant to secure performance and one that is not proportional to ASI’s actual losses.

“… With regard to American Structurepoint, Inc.’s tortious interference claims, we find that the trial court correctly held that summary judgment was not appropriate because there remains an issue of material fact,” David continued. “… As our Court of Appeals majority aptly noted, there is both evidence that HWC has a legitimate business purpose in recruiting ASI employees and also evidence that HWC targeted ASI for an improper purpose.”

The majority thus found the trial court properly denied summary judgment on ASI’s claims of tortious interference, affirming the trial court and remanding in American Consulting, Inc. d/b/a American Structurepoint, Inc. v. Hannum Wagle & Cline Engineering, Inc., d/b/a HWC Engineering, Inc., Marlin A. Knowles, Jr., Jonathan A. Day, David Lancet, et al., 18S-PL-437.

In a partially dissenting opinion joined by Justice Mark Massa, Justice Geoffrey Slaughter disagreed that ASI could not enforce its contracts and collect the liquidated damages at issue. He argued that at bottom, the issues of causation, value, damages and different treatment “are factual questions for a factfinder to decide at trial, not legal questions for our Court to decide summarily as a matter of law.”

Additionally, the dissenting justices argued that HWC needed to establish both that the liquidated damages are “grossly disproportionate” to ASI’s likely loss resulting from the breach and that ASI could not sustain its burden at trial of proving a correlation between the liquidated damages and its actual losses.

“If we are going to make wholesale changes to the law of liquidated damages, we should move in the opposite direction from the course today’s opinion charts,” Slaughter wrote. “Rather than condemning such damages when judges conclude they are facially problematic, courts should get out of the business of deciding whether the parties’ estimate of the harm underlying liquidated damages is reasonable.”

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