Former employees of a title agency that was bought by a title insurer who left to form a competing title agency appealed to the 10th U.S. Circuit Court of Appeals a large jury award based on breaches of the former employees’ contractual and fiduciary duties.
The case is First American Title Insurance Co.; First American Title Co. LLC v. Northwest Title Insurance Agency; Michael Smith; Kristi Carrell and Jeff Williams (10th U.S. Circuit Court of Appeals, No. 17-4086).
Michael Smith, Kristi Carrell and Jeffrey Williams originally worked for Equity Title Insurance Agency Inc., working as chief operations officer and general counsel, vice president and manager of the company’s office in West Jordan, Utah; and senior vice president of escrow operations, respectively. Each signed an employment agreement that contained a noncompete clause and Smith and Williams’ employment agreements also included nonsolicitation clauses as well.
Between 2003 and February 2009, First American Title Insurance Co. acquired all of Equity’s stock. After the final purchase in 2009, Equity became a wholly owned subsidiary of First American. Equity and First American Title Co. LLC filed a merger plan with Utah regulators in November 2012 to become First American Title Co. LLC, a subsidiary of First American Financial Corp.
Smith began taking steps to create Northwest Title Insurance Agency in 2014. The company opened for business on March 9, 2015 and Smith quit his job at First American Title Co. LLC. Carrell resigned the next day and began working at Northwest. Twenty-five employees left First American Title Co. LLC for Northwest within two weeks.
First American sued Northwest, Smith, Carrell and Williams, alleging “1) breach of contract against Smith, Carrell, and Williams (based on their Equity employment agreements, the Employee Handbook, and the Code of Ethics); (2) tortious interference with contract against Northwest, Smith, Williams, and Carrell; (3) breach of fiduciary duty against Smith; (4) tortious interference with economic relations against Northwest; and (5) civil conspiracy against all the defendants.”
First American agreed to dismiss some claims and the district court granted summary judgment against First American on the tortious interference claims against Carrell and Williams. The court then granted First American partial summary judgment by holding that “(1) the Equity employment contracts had legally transferred to First American; (2) Williams and Carrell—but not Smith—had breached their employment contracts’ noncompete provisions; and (3) Smith and Williams had breached their employment contracts’ nonsolicitation provisions. The court clarified, however, that it had not ‘resolve[d] all issues related to validity of the contracts, such as reasonableness of scope and duration; First American’s performance; or whether First American suffered damages.’”
A jury then found Smith, Williams and Carrell liable for breach of contract and Smith and Northwest liable for tortious interference with contract. It did not find Northwest liable for tortious interference with business relations and found the defendants not liable for civil conspiracy. It awarded First American $1.65 million from Smith; $50,000 each from Carrell and Williams and $1 million from Northwest. It later awarded First American attorney fees of almost $2.9 million. The defendants appealed.
The appellate court affirmed the district court’s opinion, addressing first the defendants’ argument that First American failed to establish constitutional standing to bring their claims.
The court found 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, which the jury believed, that its business was injured, the injury was caused by defendants, and damages would provide redress for the injury,” the court stated. “We have before us a proper Case or Controversy. There may be some question as to what entity—FA Company, FA LLC, or both—speaks for that Utah title company (although the portion of the record before us shows that the business was part of FA LLC). But that raises the question of who is (are) the real party (parties) in interest, which is not a jurisdictional issue.
“To the extent that defendants are raising a real-party-in-interest issue, they have waived that issue—in two ways,” the court continued. “First, by including only a small fraction of the trial transcript in its appendix on appeal, they have precluded this court from examining the factual basis for the real-party-in-interest status of either plaintiff. Second, the parties saw fit to treat both FA LLC and FA Company as one entity, at least for trial purposes, and so stipulated.”
The defendants also argued that the noncompete and nonsolicitation clauses were no longer valid and enforceable at the time they began working at Northwest. The court disagreed.
“To begin with, the validity of the contracts was not affected by FA Company’s purchase of Equity’s stock or the merger of Equity into FA LLC,” the court stated. “When FA Company purchased some, then most, then all of Equity’s stock, the change in the ownership of Equity’s corporate stock did not affect Equity’s contract rights or liabilities.
“Nor does a merger ordinarily in itself affect the rights, liabilities, or validity of a corporation’s contracts,” the court continued. “At the time of the merger Equity was a Utah corporation and FA LLC was a Delaware limited-liability company. The merger agreement stated that the two entities were being merged ‘into a single entity pursuant to [the merger agreement] and the applicable laws of the States of Utah and Delaware.’ The merger agreement provided that ‘[a]ll the assets, rights, privileges, powers, immunities, purposes and property (real, personal, intellectual and mixed), of [Equity and premerger FA LLC], and all debts due to either of them, shall be transferred to and vested in the [postmerger FA LLC entity].’ This provision aligns with the corporate law of both Utah and Delaware.”
The defendants also raised numerous complaints about the jury instructions, including that the district court failed to include all or part of their proffered instructions. The court said it did not need to address the substance of the instructions because “the defendants did not properly object in district court to their omission.”
“Defendants’ challenges to the instructions that were given fare no better. First, they complain about Instruction Nos. 10 and 29. But their opening brief makes no effort to show that they preserved their challenges below. And their effort to do so in the reply brief comes up far short. Some of the record citations they provide in support do not even plausibly deal with Instruction Nos. 10 and 29. And of the remaining four citations, two reference their early objections to the Plaintiffs’ proposed jury instructions, not the court’s instructions; the third is to their pleading entitled ‘Defendants’ Corrections to Proposed Jury Instructions,’ which nowhere specifically discusses Instruction Nos. 10 and 29; and the fourth is to a posttrial new-trial motion, a filing too late to contain a proper Rule 51 objection. “
The court also rejected the defendants’ challenges to the damages award.
“In the Summary of Damages section of the special-verdict form, the jury set forth the total damages suffered by Plaintiffs as $2,725,000. It then divvied that sum up among the various causes of action and defendants,” the court stated. “There was no duplication of damages in this case. If the jury had awarded any duplicative (overlapping) damages, the total amount of damages to be awarded to Plaintiffs would have been less than the sum of the component awards. For example, if the jury thought that the total award against Northwest for tortious interference with contracts ($1 million) encompassed the same damages as those awarded against Smith for tortious interference ($525,000), then it would have reduced the total amount of damages to be awarded to First American by $525,000 ($2,200,000 instead of $2,725,000). True, the district court instructed the jury that it ‘may take action to ensure that double recovery does not occur,’ but there was no need for the jury to take the court up on that offer. The verdict form makes clear that the jury itself was intent on avoiding double recovery. If the court were to reduce any of the component awards on the ground that there was duplication, then First American would not be awarded the total damages found by the jury.
“Defendants do make some reasonable observations about the jury awards,” the court continued. “They note that the jury awarded $600,000 in lost profits against Smith for breach of fiduciary duties, $525,000 for lost profits against Smith on the tortious-interference claim against him, and $1 million against Northwest for tortious interference with contract, when all three claims are “premised on the same conduct—Smith’s breach of fiduciary duty.” Perhaps it would have been more logical for the jury to award $1,125,000 against Smith for breach of fiduciary duty and the same amount against Northwest for tortious interference. (The tortious-interference judgment against Smith would necessarily be lower because he could not interfere with his own contract. But where is the prejudice to Defendants? The jury clearly tried to apportion all the damages to avoid any duplication. If it had done what Defendants apparently would have preferred, each of them would have been jointly and severally liable for a significantly larger judgment. Indeed, Smith and Northwest could each be liable for Plaintiffs’ total damages of $2,725,000 (although the court would have to protect them against double recovery once the full amount had actually been paid). That could hardly have been in the interest of any defendant.”