Trial Court Affirms Damage Award of $2.4 Million Plus Punitive Damages To Employer against Employee for a Breach of Duty of Loyalty
One of the most damaging events for a small business is misconduct by a former employee stealing its customers and valued employees. This issue was addressed in a recent court decision.
On December 10, 2014, in the matter of Balmer Company, Inc., v. Frank Crystal and Company, Inc., the Honorable William P. Mahon of the Court of Common Pleas of Chester County, Pennsylvania, reaffirmed a compensatory award of damages to an employer in the amount of $2.4 million against its former employees for, among other claims, a breach of fiduciary duty of loyalty. In the Balmer case, former employees sought to solicit the Balmer employees, customers, and clients and to conspire with a new company to create a competing insurance agency by disparaging the employer and through stealing its customers. Other former employees also conspired with the Defendants which eventually resulted in a failed attempt to decimate the sales and marketing capabilities of the Plaintiff-Employer by soliciting its employees, customers, and clients and by breaching or interfering with both employment agreements and fiduciary obligations owed by these employees to the Plaintiff-Employer.
The Plaintiff-Employer filed suit for claims of breach of contract, breach of duty of loyalty, breach of fiduciary duties such duty of loyalty, unfair competition and civil conspiracy. The Plaintiff-Employer also sought punitive damages. The court awarded $2,391,569 in compensatory damages for lost revenue based upon the Plaintiff-Employer’s expert witness. These losses represented lost revenue as a result of the former employee-Defendant’s conduct.
The court focused on the breach of contract action, breach of fiduciary duty of loyalty, and civil conspiracy claims. The breach of contract claim was based upon contracts that the former Defendant-Employees had signed which were incidents of their employment relationship with the Plaintiff-Employer. There were certain restrictions imposed which were reasonably necessary for the protections of the Plaintiff-Employer. Such agreements must be reasonably limited in duration and geography, and the court found this to be the case in the Balmer case. Where a former employee breaches such an agreement, the Plaintiff-Employer may seek a preliminary injunction, permanent injunction, and damages. A preliminary injunction is a motion filed at the beginning of a case which essentially halts the Defendant’s unlawful conduct based upon certain conditions that must be met and preserves the status quo. A permanent injunction permanently enjoins or stops former employees from taking actions such as soliciting customers, etc. Damages are monies awarded by a court or a jury for losses sustained by a Plaintiff-Employer.
As to the breach of fiduciary duties/breach of duty of loyalty, this is a recognized claim in Pennsylvania. Under Pennsylvania Law, employees of a business have a fiduciary duty of loyalty to their employer that arises out of the employer/employee relationship prior to the termination of that employment relationship. This has been recognized for some time in Pennsylvania, including the case of Reading Radio, Inc., v. Fink, 833 A.2d 199, issued by the Pennsylvania Superior Court in 2003. Individual Employee-Defendants violate these fiduciary obligations to the employer by using the employer’s employment time, telephones, printers, fax machines, and/or trade secret information against the interest of their employer. Such was the case in the Balmer case and lead to the decision in favor of the employer.
The court also found against the Defendant-Employees for the claim of unfair competition. Where former employees systemically induce employees to leave their employment when the purpose is to cripple or destroy their former employer, rather than to obtain their services of that particular skill of employee, such conduct constitutes unfair competition. In the Balmer case, the Defendant-Former Employees attempted to solicit the employer’s sales/marketing force for the purposes of crippling the Plaintiff-Employer.
In addition, the court found that the Defendants had participated in a civil conspiracy. In order to prosecute a claim of civil conspiracy, Plaintiffs must show that two or more persons or entities combined or agreed to do an unlawful act or to do an otherwise lawful act by unlawful means. The Plaintiff must show proof of malice, must show that the malice is without justification, and that some overt act was done in furtherance of the common purpose or design and actual legal damages resulted. This has been long recognized in Pennsylvania, including the 1979 Pennsylvania Supreme Court decision Thomas and Coal Company v. Pike Coal Company, 412 A.2d 466.
If your business has been the victim of a breach of contract, breach of fiduciary duty, unfair competition, or civil conspiracy by former employees, contact the law firm of Carmody & Ging at 412-281-2929. You may have a civil remedy against your former employees who have wrongfully stolen customers, employees, trade secrets, or customer lists. These are well-recognized business torts and remedies are available to employers even in situations where they do not have a written employment contract.