Pa. Superior Court Affirms Punitive Damage Award in Breach of Noncompetition Agreement

Ballard Spahr LLP

Ballard Spahr LLP

The Pennsylvania Superior Court has affirmed a lower court ruling that assesses punitive damages against several individuals and their new employer resulting from their en masse departure from a previous firm and, in the process, violation of nonsoliciation agreements they had signed. The decision, B.G. Balmer & Co., Inc. v. Frank Crystal & Company, Inc., et al., serves as important reminder for Pennsylvania employers to approach individuals they may wish to recruit from competing entities cautiously, mindful that overaggressive actions on the part of the sought-after personnel may lead to hefty penalties.

The decision explained that, beginning in 2003, the individual defendants—then working for the Balmer Agency and subject to valid nonsolicitation agreements that took effect upon their departure—began working with a recruiter who put them in touch with Frank Crystal & Company (Crystal). Over the course of the next six months, they planned a move to Crystal with the explicit purpose of soliciting and obtaining the business of existing Balmer clients. To do so, they shared Balmer’s trade secrets with the recruiter and compiled lists of contacts and other protected information about Balmer clients for their future use. In early July, they resigned or were terminated simultaneously, and immediately began operating as a Crystal satellite office.

Among their first actions were contacting Balmer clients and attempting to draw their business away from Balmer. The Superior Court took particular note of their efforts to draw away Balmer's biggest client, including several meetings during which the defendants criticized Balmer and levied personal attacks on its president. While unsuccessful in obtaining that client's business, the defendants' actions did cause the client—and others—to cease doing business with Balmer, which was eventually sold.

Soon after the employees left, Balmer filed a multicount complaint against both the former employees and Crystal alleging violation of the former employees' nonsolicitation agreements, breach of fiduciary duty, tortious interference with contractual relations, unfair competition, and other claims. The court found in Balmer's favor on a majority of the claims and assessed $2.4 million in compensatory damages and $4.5 million in punitive damages. The defendants appealed the punitive damages award, arguing that the court failed to identify clear and convincing evidence demonstrating that their conduct was outrageous or malicious.

The Superior Court disagreed. Instead, it cited to multiple actions on defendants' part that, it determined, were sufficiently outrageous to justify the award. These actions included:

  • Disclosing Balmer trade secrets to a recruiter while still employed by the agency;
  • Working in concert with the recruiter, Crystal, and each other to target for employment nearly all of Balmer's sales and marketing staff;
  • Arranging details about their future employment with Crystal using Balmer resources, such as computers and office phones, while on Balmer time;
  • Leaving Balmer with personnel files and client files that would be useful in soliciting Balmer clients; and
  • Immediately soliciting Balmer clients upon leaving the company, including its largest client, which ceased to do business with Balmer soon thereafter.

In fact, all of the defendants' first year business revenue came from former Balmer clients. The court took particular notice that this all occurred while Crystal knew about the individual defendants' nonsolicitation agreements. Based on these facts, the Superior Court determined the trial court appropriately concluded that the defendants' behavior was sufficiently outrageous to warrant punitive damages. Indeed, it opinioned, "when a company hires essentially all of the sales/marketing staff of one agency, the purpose in doing so is to induce the clients of that agency to move their business with that sales force." Therefore, it determined that defendants' conduct was outrageous and the lower court verdict was affirmed.

The decision should put employers in Pennsylvania on notice to take caution in their recruiting tactics so as to avoid costly mistakes in the future. For example, careful consideration of any nonsolicitation and noncompetition agreements to which prospective employees may be bound and warning recruited employees to avoid competing against their current or previous employers until their relationship ends can protect a new employer from claims like those raised in Balmer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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