Punitive Damages Awarded For Breach Of Restrictive Covenant
In the employment law and business litigation case of B.G. Balmer & Co. vs. Frank Crystal & Co., Inc., PICS Case No.16-1355 (Pa. Super. Sept. 9, 2016) the Honorable Victor P. Stabile, writing on behalf of the Pennsylvania Superior Court, held that the trial court did not abuse its discretion in awarding punitive damages for breach of restrictive employment covenants where the trial court found outrageous conducts in appellants’ conspiracy to set up a separate business in competition with their employer.
Appellants appealed from the judgment of the trial court awarding compensatory and punitive damages in favor of appellee insurance broker, Barry G. Balmer & Co., upon a finding that the individual appellants conspired with appellant Frank Crystal & Co. to breach the non-solicitation and confidentiality provisions in their employment agreements with Balmer to set up a competing branch of Crystal, hire away all of Balmer’s sales and marketing staff and utilize Balmer’s client information and trade information to solicit Balmer’s client’s to come to Crystal.
On appeal, appellants first challenged the trial court’s award of punitive damages, arguing that the trial court abused its discretion in finding that appellants’ conduct was so outrageous as to warrant punitive damages. However, the court agreed with the trial court that appellants’ conduct was sufficiently outrageous to support an award of punitive damages. The court noted that the individual appellants, knowing they were subject to restrictive covenants, conspired among themselves and with appellant Crystal to open a Crystal office in competition with Balmer’s, hire away Balmer’s sales and marketing staff and utilize Balmer client information and trade secrets to solicit Balmer’s clients to the new Crystal office, and used Balmer’s company time and resources to organize this conspiracy. The court further noted that appellants’ action after leaving Balmer resulted in Balmer’s loss of many of its clients, including its largest and most lucrative client, directly due to appellants’ solicitation efforts.
The court next declined to address appellants’ issue that the trial court’s compensatory damages award was erroneous because it was based on an expert report that should have been rejected. The court held that appellants failed to identify where in the trial court proceedings they objected to the expert report or how they had otherwise preserved the issue for appeal. As a result, the court determined that appellants’ issue was waived.
The court further rejected appellants’ argument that punitive damages should have been barred, pursuant to the gist of the action doctrine. Although the court acknowledged that the gist of the action doctrine prohibited breach of contract claims from being recast as tort claims, the court held that appellant’s actions constituting breach of their contractual obligations did not occur until after they left Balmer, at which time the restrictive covenants in their agreements went into effect. However, the court found that Balmer additionally alleged actions by appellants that occurred prior to the resignations that constituted breach of common law duties. As a result, the court held that such tort claims were not barred by the gist of the action doctrine.
The court also rejected appellants’ argument that the punitive damages award, at a ratio with compensatory damages of 1.88 to 1, violated the single digit ratio rule. Finally, the court rejected appellants’ apparent contention that lost profits and diminution of value could never be recovered together, holding that it was not always automatic that lost profits and diminution of value were duplicative of one another.
Reference: Digest of Recent Opinions, Pennsylvania Law Weekly, 39 PLW 920 (September 27, 2016)
Filed Under: Breach of Restrictive Covenants, Award of Punitive Damages, Employment Contract Covenants
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