ARTHUR J. GALLAGHER & COMPANY; Gallagher Benefits Services, Incorporated, Plaintiffs-Appellees, v. Clayton L. BABCOCK; Denise J. Alexi; Marie G. Hardouin; Kristy Copeland, Defendants-Appellants. Clayton L. Babcock, Plaintiff-Appellant, v. Arthur J. Gallagher & Company, Defendant-Appellee.
No. 11-30452.
United States Court of Appeals, Fifth Circuit
Dec. 18, 2012.
703 F.3d 284
Virgil A. Lacy, III (argued), Michelle Andrina Beaty-Gullage, William H. Reinhardt, Jr., Blue Williams, L.L.P., Metairie, LA, Douglas L. Grundmeyer, Jonathan C. McCall, Chaffe McCall, L.L.P., New Orleans, LA, for Defendants-Appellants.
Philip Anthony Franco (argued), Leslie A. Lanusse, Elizabeth Anderson Roussel, Adams & Reese, L.L.P., New Orleans, LA, for Plaintiffs-Appellees.
Before HIGGINBOTHAM, GARZA and CLEMENT, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This diversity suit seeks money damages for breach of restrictive employment agreements under Louisiana law, presenting issues of their scope and the measure of damages.
I
Arthur J. Gallagher & Co. (“Gallagher“) provides insurance-related services throughout the country. Its subsidiary, Gallagher Benefits Services, Inc. (“GBSI“), handles Gallagher‘s employee-benefit insurance programs. In November 2003, GBSI purchased Babcock Consulting, Inc., a business owned by Louisiana insurance broker Clayton L. Babcock. Pursuant to the purchase agreement, Babcock received $1.8 million in cash and stock, plus $980,000 in “earn out,” a figure based on profits generated by the book of business that he transferred.
In addition to the purchase agreement, Babcock signed an employment agreement. In it, he agreed—among other things—to work as a vice president for GBSI in New Orleans. Denise J. Alexi and Marie G. Hardouin, two of Babcock‘s
As part of their agreements with GBSI, Babcock, Alexi, Hardouin, and Copeland (collectively, “Defendants“) each agreed to restrictive covenants. Babcock‘s were contained in his purchase and employment agreements, the others signed executive agreements limiting their non-GBSI employment. Between December 2007 and January 2008, Defendants left GBSI for Ellsworth Corporation, one of Gallagher‘s competitors. Thirteen of Gallagher‘s Louisiana clients—former clients of Babcock Consulting, Inc.—followed Defendants to Ellsworth.
Gallagher and GBSI (collectively, “Plaintiffs“) filed a civil suit for injunctive relief and damages in the Eastern District of Louisiana and moved for a preliminary injunction.1 Plaintiffs argued, among other things, that the agreements signed by Defendants contained covenants not to compete. The district court found the provisions unenforceable because they were geographically overbroad—purporting to cover every parish in Louisiana. On appeal, we disagreed, holding that the agreements were not per se overbroad merely because they named every Louisiana parish.2 We vacated the district court‘s judgment and remanded for further proceedings, including a consideration of the nature and scope of Gallagher‘s business in Louisiana.
On remand, the district court concluded that, while the purchase, employment, and executive agreements contained valid and enforceable non-competition and non-solicitation clauses, they reached beyond the geographic scope of Gallagher‘s relevant business—nine parishes should have been covered, not every parish in Louisiana as claimed. The court therefore limited the application of the restrictive covenants to the nine parishes where Gallagher provided employee-benefit insurance services.3
A two-day jury trial followed. After Plaintiffs stipulated that subsidiary GBSI alone would receive damages and attorneys’ fees, the court dismissed the parent company as a plaintiff. It then granted judgment as a matter of law to GBSI on the issue of breach of the non-competition provisions, entered a directed verdict of liability against all four Defendants, and submitted the issue of damages to a jury, which awarded $1.2 million in damages and $310,000 in attorneys’ fees.
Defendants appealed. They claim that the district court erred by (1) finding that their contracts contained valid and enforceable non-competition provisions; (2) directing a verdict of liability against them; and (3) admitting certain testimony regarding Plaintiffs’ damages. They further contend that the jury (4) awarded damages in an amount unsupported by the evidence; and (5) erroneously, or at least excessively, awarded attorneys’ fees. Plaintiffs disagree, and claim additional attorneys’ fees incurred in defending this appeal.
We affirm the district court‘s directed verdict on the breach of competition agreement, but set aside the damages. We conclude that the district court abused its discretion in admitting certain evidence on
II. The Restrictive Covenants
Defendants argue that their employment agreements do not contain valid and enforceable non-competition provisions, both because of (1) their language and (2) their geographic scope. We are not persuaded.
We review de novo the enforceability of a contract as a matter of law.5 In Louisiana, the words of a contract “are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning,”6 and, “[w]hen [they] are clear and explicit and lead to no absurd consequences,”7 no further search for intent is required.
Restrictive covenants, such as non-competition and non-solicitation agreements, are narrowly construed under Louisiana law.8 The governing statute is
A. (1) Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, except as provided in this Section, shall be null and void. However, every contract or agreement, or provision thereof, which meets the exceptions as provided in this Section, shall be enforceable.
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C. Any person ... who is employed as an agent, servant, or employee may agree with his employer to refrain from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment.
The Purchase Agreement by which Clayton Babcock sold the business book of Babcock Consulting, Inc. to Gallagher includes Section 7(f), entitled “Non-Competition,” which states:
For a period of two years ... after the date of the termination of his employment with Gallagher or any of its subsidiaries ... Babcock will not, directly or indirectly, solicit, serve, sell to, divert, receive or otherwise handle insurance-related business with any individual, partnership, corporation or association that (a) is, or within the last two (2) years was, a client or customer of [Babcock Consulting] or (b) is a prospective client or customer of [Babcock Consulting] in those parishes and municipalities designated on Addendum II attached hereto.
Babcock‘s Employment Agreement, Section 8, entitled “Protection of Corporation‘s Business,” provides that Babcock:
understands and agrees that for a period of two (2) years following the termination of this employment for any rea-
son whatsoever, he will not, directly or indirectly, solicit, place, market, accept, aid, counsel or consult in the renewal, discontinuance, or replacement of any insurance (including self-insurance) by, or handle self-insurance programs, insurance claims, risk management services or other insurance administrative or service function for, any Corporation account for which he performed any of the foregoing functions during the two year period immediately preceding such termination in those parishes and municipalities designated on Addendum II attached hereto.
The Executive Agreement signed by Alexi, Hardouin and Copeland, Paragraph 14, entitled “Post-Employment Obligations of the Parties,” provides that the employee:
understands and agrees that for a period of two years following the termination of his employment for any reason whatsoever, he will not (i) directly or indirectly solicit, place, market, accept, aid, counsel or consult in the renewal, discontinuance or replacement of any insurance or reinsurance by, or handle self-insurance programs, insurance claims or other insurance administrative functions (“insurance services“) for, any Company account or actively solicited prospective accounts for which he performed any of the foregoing functions during the two-year period immediately preceding such termination or (ii) provide any employee benefit brokerage, consulting, or administrative services in the area of group insurance, defined benefit and defined contribution pension plans, individual life, disability and capital accumulation products, and all other employee benefit areas (“benefit services“) the Company is involved with, for any Company account or actively solicited prospective accounts for which he performed any of the foregoing functions within the Acquired Business Area during the two-year period immediately preceding such termination.... The term “Acquired Business Area” shall mean those parishes and municipalities designed on Exhibit A attached hereto.9
Addendum II/Exhibit A, referenced in the agreements, listed all 64 parishes of the state of Louisiana.10
1
Defendants argue that the agreements only prohibit solicitation or, alternatively, that combining non-competition and non-solicitation language created a restriction not permitted by
The agreements unambiguously prohibit Defendants from competing against Gallagher or soliciting its clients for two years after the termination of their employment. Defendants agreed not to “solicit” certain of Gallagher‘s existing and prospective clients. And they agreed they would not “serve,” “sell to,” “market,” “accept,” “aid,” “consult,” “place,” “counsel” or “consult” regarding insurance-related services with customers (or prospective customers) of Gallagher on whose accounts they had worked while employed by Gallagher. We are not convinced that these
Defendants further argue that, even if this language prohibits competition and not just solicitation, the provisions are invalid because Louisiana courts do not permit parties to combine non-competition and non-solicitation language. This claim is without merit. It appears that Louisiana courts have never invalidated a restrictive covenant governed by
In the alternative, Defendants argue that the particular manner in which the agreements combine non-competition and non-solicitation provisions has impermissibly created a new and broader kind of restriction than is allowed by Louisiana law. Section 23:921 allows non-competition agreements that prohibit a former employee from “carrying on or engaging in a business similar” to that of the employer, and allows non-solicitation agreements that prohibit a former employee from “soliciting customers of the employer.”13 The provisions in these agreements, Defendants point out, created a hybrid restriction prohibiting employees from, among other things, “accepting,” “handling” or “servicing” certain of the employer‘s current and prospective customers. This is impermissible, they contend, because the Louisiana legislature has created an all-or-nothing system: an employer can forego imposing non-competition restrictions on its employees, or can prohibit its employees from competing in the same business as the employer for up to two years. It may not do anything else, such as forbidding employees only from competing against the employer vis-a-vis certain of the employer‘s clients.
This argument finds no support in Louisiana law. Louisiana does, of course, restrict and narrowly construe non-competition agreements.14 As the Louisiana Supreme Court has explained, this policy “is based upon an underlying state desire to prevent an individual from contractually depriving himself of the ability to support himself and consequently becoming a public burden.”15 But over time, the Legislature has broadened the kinds of non-competition agreements into which employers and employees may enter.16
The provisions at issue here are less restrictive than allowed under state law. Instead of preventing its former employees from engaging in a similar business, Gallagher prohibits employees from competing for accounts on which they actually worked while at Gallagher, a restriction perhaps uncommon, but not unenforceable.
Defendants’ position would require employers seeking the protection of non-competition agreements always to impose the broadest available restrictions on their employees’ future employment options, undermining the stated policy of
Finally, Defendants claim the non-competition clauses are too ambiguous to be enforced, pointing to language such as “prospective” customers and “actively solicited prospective” accounts; categories, Defendants contend, that suffer impermissibly ambiguous scopes. Because Defendants raise this argument for the first time on appeal, it is forfeited. But even if considered, the argument would fail. First, these agreements apply only to some “prospective” customers, e.g., “actively solicited prospective accounts” on which certain defendants actually worked. Second, Defendants overlook the agreements’ severability clauses. Regardless of whether restrictions on “prospective” customers are enforceable, here, Defendants worked on thirteen existing accounts. We therefore turn to the geographic scope of these non-competition agreements.18
The district court found that the non-competition clauses, though otherwise enforceable, were geographically overbroad as written. It therefore relied on the agreements’ severability clauses, reducing the number of parishes to which the non-competition provisions applied.
Under Louisiana law, non-solicitation and non-competition clauses must be limited to geographic areas in which the employer conducts “a like business,” and the agreement must make this limitation clear by specifying the “parish or parishes, municipality or municipalities, or parts thereof” in which the employer operates.19 A court may, however, rely on a contractual severability clause to excise the geographic areas in which an employer does not conduct such business.20
The agreements in this case incorporated the geographic limitations of “Addendum II” and “Exhibit A,” which named all sixty-four of Louisiana‘s parishes. Before the district court, Defendants contended this scope was overbroad. They pointed out that Defendants worked for Gallagher subsidiary GBSI, providing life and health insurance services as part of the company‘s employee-benefit program. Gallagher provided life and health insurance services in only nine parishes, so, the argument went, the agreement should have been limited to those areas. Gallagher responded that specifying all sixty-four parishes was proper because the company provides insurance services in each one.
The district court agreed with Defendants and eliminated the fifty-five parishes in which Gallagher did not provide life and health insurance services. This was not error. We have already made clear that these provisions were not invalid merely because they attempted to reach every Louisiana parish.21 Similarly, Defendants may not defeat restrictions on competition in these nine parishes by showing that the restrictions were not enforceable in other parishes.22
Defendants contend that Gallagher‘s naming all sixty-four parishes was so egregious that it renders the covenant invalid as to all sixty-four parishes instead of just the fifty-five as noted by the district court. This argument is not without force. But, at minimum, listing all sixty-four parishes, unlike claiming a geographic scope of “anywhere the employer does business,” makes clear to employees that they are being asked not to compete anywhere within the State of Louisiana.23 And Defendants suggest no principled way to determine how many stricken parishes is “too many” to leave valid, remaining parishes unaffected. As do Louisiana‘s courts, we decline to authorize such collateral attacks.
III. Directed Verdict
We review de novo a district court‘s grant of a directed verdict, apply-
The contracts, as we have explained, contained valid and enforceable non-competition clauses prohibiting Defendants from providing insurance services to clients on whose accounts they worked while at Gallagher. As Plaintiffs point out, and Defendants do not contest, Defendants admitted at trial that they had worked on the thirteen disputed client accounts while at Gallagher, and then handled those same clients for Ellsworth in the same parishes in which they had serviced them for Gallagher. Given this admission, a reasonable jury could not have found in favor of Defendants on the issue of breach. We affirm the district court‘s directed verdict.
IV. Proof of Damages
Defendants next challenge the jury‘s award of $1.2 million dollars in damages. They argue that the district court abused its discretion by admitting the evidence proffered by John Caraher, Gallagher‘s chief financial officer. Caraher provided the jury with two different estimates of GBSI‘s “lost profits” resulting from the breach.
Admissibility lies within the sound discretion of the district court, whose evidentiary rulings we review only for an abuse of discretion.27 Expert opinion evidence must be based on reliable principles and methods, and assist the trier of fact.28
Under
The jury heard evidence on the issue of damages from John Caraher, Gallagher‘s chief financial officer and a CPA. The court admitted his testimony, stating:
I‘m going to qualify the witness as an expert in the field of accounting. To the extent that he valued the business, he can testify as a fact witness subject to cross-examination. The jury can determine whether or not the methodology he used in calculating the value of this business on behalf of his employer was valid or not.
Caraher testified that GBSI sustained losses between $1,301,343 and $2,876,000 as a result of Defendants’ breach of contract. In estimating these losses, Caraher relied on formulas similar to those he uses when valuing a business that Gallagher is considering buying, on the basis that the value of a business is tied directly to the profits it will generate. He presented two calculations to the jury for purposes of estimating the lost profits.
Caraher calculated GBSI‘s lost profits based on what the fair selling price of GBSI‘s partial book of business would have been had Babcock sought to re-purchase the client relationships GBSI lost as a result of Defendants’ breach. To do this, Caraher looked at the average annual profits earned by Babcock‘s group for the three years preceding Defendants’ departure, then subtracted the profits earned from the clients that remained with GBSI after Defendants’ departure. The remainder was the annual average profits earned by GBSI from the lost clients. Caraher multiplied that number by 6.5, the approximate number of years any particular client remains with GBSI. The final number was $2,699,552.
Caraher also estimated lost profits by calculating what the expected investment return was for GBSI when it entered into its purchase agreement with Babcock in 2003. To do this, Caraher looked at the profit margins GBSI expected over ten, thirteen, and fifteen years based on the new book of business it acquired from Babcock Consulting, since GBSI generally retains clients for ten to fifteen years following a merger. The calculation assumed that profits from existing clients would diminish gradually over time as those clients left GBSI. From the resulting number, Caraher subtracted profits actually made by GBSI from the purchase agreement until January 1, 2008, since the Defendants were still employed at Gallagher during that time. Caraher also subtracted expected profits on business retained by GBSI after Defendants left. In projecting what profits GBSI would have made after 2008 had Defendants not breached their contracts, Caraher used GBSI‘s New Orleans office‘s 2007 profit margin of 38.9%. The final estimation was that over the fifteen-year period, GBSI would suffer $2,876,008 in lost profits, over the thirteen-year period $1,952,015 in lost profits, and over the ten-year period $1,301,343 in lost profits.
The jury ultimately awarded $1.2 million in damages. The jury interrogatory did not ask the jury to identify which of those damages arose from clients GBSI lost to others than Defendants. Rather, the jury was asked: “What amount, if any, do you find will fairly and adequately compensate the plaintiff, Gallagher Benefits Services, Inc., for the total damages it suffered[?]” The amount of the award indicates that the jury likely adopted the ten-year calculation in Caraher‘s second calculation and made some downward adjustments. The
At least two of Defendants’ contentions are without merit. First, Defendants claim that Caraher should have based his calculation of lost profits on the amount of net profits actually earned by Ellsworth on the thirteen clients who followed Defendants from GBSI to Ellsworth, rather than on the amount of profits GBSI expected to earn from those clients. But the amount of profits lost by Plaintiffs does not need to equal the amount of profits gained by Defendants. If Plaintiffs would have obtained greater profits (in the absence of a breach) than the Defendants actually did (as a result of the breach), Plaintiffs are entitled to those larger profits.35 Louisiana courts, moreover, permit projections of future profits to be used as evidence of lost profits, so long as there is a reasonable basis for making those projections, such as the business‘s past performance.36 Courts recognize that there remains an inherent degree of speculation in such projections, but that they are not so speculative or conjectural as to be inadmissible when calculating the damages owed by the party whose failure to perform was the cause of the damages’ speculative nature.37
Second, Defendants claim Caraher erred by calculating lost profits based on the New Orleans‘s office‘s 2007 profit margin of 38.9%, rather than on its much lower 2008 profit margin of 13.1%. They likewise claim Caraher erred by using GBSI‘s historical retention rates, instead of the retention rates actually experienced in the New Orleans office after Defendants left in 2008. These arguments are also unavailing. Plaintiffs explain that Caraher did not use the 13.1% profit margin or the post-2008 retention rate because Defendants’ breach almost certainly deflated those numbers. Those numbers, in other words, likely do not reflect what GBSI would have earned if Defendants had not breached.
Defendants’ next argument, however, exposes a critical flaw in Caraher‘s methodology. Caraher estimated the profits that GBSI would have made from Babcock‘s book of business. He then subtracted the profits that GBSI expected to make from clients that GBSI retained. This calculation reduced the lost-profit projection to clients who left GBSI after the breach. The problem is that the group of clients who chose to leave is not the same as the group of clients who followed Defendants to Ellsworth. Of the nineteen clients who left GBSI, only thirteen followed Defendants.38
Plaintiffs contend that Defendants’ breach caused the six remaining clients to
V. Attorneys’ Fees
Having vacated the damages award, we likewise vacate the award of attorneys’ fees for reassessment. Plaintiffs-appellees seek an order requiring Defendants to pay all of the attorneys’ fees that Plaintiffs incurred in defending this appeal. Because Plaintiffs were only partially successful in their defense of the judgment below, we decline to award fees at this juncture. We leave to the district court on remand the matter of whether such fees ought be awarded and their amount.
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We AFFIRM the judgment insofar as it directs a verdict against the Defendants. We VACATE the awards of damages and attorneys’ fees and REMAND this case to the district court for further proceedings.