Am. Consulting, Inc. v. Hannum Wagle & Cline Eng'g, Inc.

• Decision Date: 18 December 2019
• Docket Number: Supreme Court Case No. 18S-PL-00437
• Court: Indiana Supreme Court
• Parties: AMERICAN CONSULTING, INC. d/b/a American Structurepoint, Inc., Appellant-Plaintiff/Cross-Appellee, v. HANNUM WAGLE & CLINE ENGINEERING, INC., d/b/a HWC Engineering, Inc., Marlin A. Knowles, Jr., Jonathan A. Day, David Lancet, and Tom Mobley, Appellees-Defendants/Cross-Appellants.

136 N.E.3d 208

AMERICAN CONSULTING, INC. d/b/a American Structurepoint, Inc., Appellant-Plaintiff/Cross-Appellee,

v.HANNUM WAGLE & CLINE ENGINEERING, INC., d/b/a HWC Engineering, Inc., Marlin A. Knowles, Jr., Jonathan A. Day, David Lancet, and Tom Mobley, Appellees-Defendants/Cross-Appellants.

Supreme Court Case No. 18S-PL-00437

Supreme Court of Indiana.

Argued: October 4, 2018

FILED December 18, 2019

On Petition to Transfer from the Indiana Court of Appeals, No. 49A02-1611-PL-2606

David, Justice.

This is an action by an employer against several of its former employees and their new employer for alleged violations of the former employees' noncompetition and non-solicitation agreements. The employer brought various claims, including tortious interference with a contractual relationship and breach of contract claims, against its former employees. At issue, among other things, is whether the liquidated damages provisions in the employees' contracts are enforceable. We hold that they are not. With regard to American Structurepoint, Inc.'s tortious interference claims, we find that the trial court correctly held that summary judgment was not appropriate because there remains an issue of material fact. Accordingly, we affirm the trial court on all issues.

Facts and Procedural History

Defendants Marlin Knowles, Jonathan Day and David Lancet were all previously employed by Plaintiff, American Structurepoint, Inc. ("ASI").¹ Knowles served as ASI's Vice President of Sales, and as a condition of his employment, he executed a contract that contained covenants restricting him from both customer and employee solicitation should he leave his employment with ASI. That is, Knowles agreed that for two years after his employment, he would not sell, provide, try to sell or provide or assist any person or entity in the sale or provision of any competing products or services to ASI's customers with whom Knowles had any business contact with on behalf of ASI during the two years prior to separation. He agreed that if he breached this agreement and such a breach resulted in termination, withdrawal or reduction of a client's business with ASI, he would pay liquidated damages in an amount equal to 45% of all fees and other amounts that ASI billed to the customer during the twelve months prior to the breach. The contract further precluded Knowles from causing an employee to end their employment with ASI, and if he breached this provision, he agreed to pay liquidated damages equal to 50% of the employee's pay from ASI during the twelve months prior to the breach.

Day and Lancet, who were both resident project representatives at ASI, also executed agreements that precluded them from hiring or employing ASI employees. They agreed that if they breached their agreements, they would pay liquidated damages in an amount equal to 100% of that employee's pay from ASI during the twelve months prior to breach.

All of the contracts at issue provide that the liquidated damages provisions are a reasonable estimate of the damages ASI will suffer and do not constitute a penalty.

Knowles left ASI to work for a competitor, Hannum Wagle & Cline Engineering, Inc., d/b/a HWC Engineering, Inc. ("HWC"). Lancet and Day later joined him. Evidence favorable to ASI shows that Knowles, Day and Lancet engaged in activities in an effort to recruit ASI employees, and they successfully recruited seven ASI employees. Additionally, after joining ASI, Knowles networked with various ASI client contacts and signed various contracts with them.

ASI sued Knowles, Lancet and Day, as well as their employer HWC (collectively, "Defendants"), alleging various claims including breach of contract and tortious interference with ASI's contractual and business relationships. Defendants moved for summary judgment, and, in relevant part, the trial court granted summary judgment for Defendants on the issue of liquidated damages, finding that the liquidated damages clauses were unenforceable as a matter of law. As for the tortious interference with a contractual relationship claim, the trial court granted summary judgment with regard to ASI's contracts with Day. However, it found that there were issues of material fact regarding ASI's contracts with Knowles and Lancet.

On interlocutory appeal, our Court of Appeals affirmed the trial court on the tortious interference issue² but reversed the trial court on the liquidated damages issue finding these provisions were enforceable.

Am. Consulting, Inc. v. Hannum Wagle & Cline Eng'g, Inc. , 104 N.E.3d 573, 576 (Ind. Ct. App. 2018), transfer granted, opinion vacated , 110 N.E.3d 1146 (Ind. 2018). Judge Riley dissented in part, believing that the liquidated damages provisions were unenforceable penalties. Id. at 596 (Riley, J., dissenting). We granted transfer, thereby vacating the Court of Appeals opinion. Ind. Appellate Rule 58(A). For reasons discussed herein, we affirm the trial court on both issues and remand for further proceedings.

Standard of Review

When reviewing a summary judgment order, we stand in the shoes of the trial court. Matter of Supervised Estate of Kent , 99 N.E.3d 634, 637 (Ind. 2018) (citation omitted). Summary judgment is appropriate "if the designated evidentiary matter shows that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Ind. Trial Rule 56(C).

Discussion and Decision

I. The liquidated damages provisions are unenforceable penalties.

A. Defendants have shown that the provisions are facially unreasonable.

At issue is whether the liquidated damages provisions in the Knowles, Day and Lancet agreements constitute unenforceable penalties. Defendants argued, and the trial court determined, that they are. Specifically, Defendants argue the liquidated damages in this case are not fairly correlated to ASI's actual loss and therefore constitute a penalty. For its part, ASI agrees with the Court of Appeals majority: because the agreements at issue were freely negotiated and the amount of damages resulting from the contract breaches are difficult to ascertain, these liquidated damages clauses are enforceable. For reasons discussed herein, we agree with the Defendants and find that the liquidated damages provisions in this particular case are unenforceable penalties.

"Liquidated damages" refers to a specific sum of money that has been stipulated by parties to a contract as "the amount of damages to be recovered by one party for a breach by the other, whether it exceeds or falls short of actual damages." Time Warner Entm't Co., L.P. v. Whiteman, 802 N.E.2d 886, 893 (Ind. 2004). "A typical liquidated damages provision provides for the forfeiture of a stated sum of money upon breach without proof of damages." Gershin v. Demming, 685 N.E.2d 1125, 1127 (Ind. Ct. App. 1997). Reasonable liquidated damages provisions are permitted. Skendzel v. Marshall , 261 Ind. 226, 232, 301 N.E.2d 641, 645 (1973), reh'g denied . "While liquidated damages clauses are ordinarily enforceable, contractual provisions that constitute penalties are not." Weinreb v. Fannie Mae , 993 N.E.2d 223, 232-33 (Ind. Ct. App. 2013). Whether a contract provision providing for liquidated damages is an unenforceable penalty is a question of law for the court to decide. Corvee, Inc. v. French , 943 N.E.2d 844, 847 (Ind. Ct. App. 2011).

"We have refused to enforce contracts when their provisions are unconscionable or when they offend the laws of this State, but there must be a clear showing by the party urging it that the contract provision was nothing more than mere penalty." Court Rooms of America, Inc. v. Diefenbach , 425 N.E.2d 122, 124 (Ind. 1981). As the moving party, Defendants have the initial burden of demonstrating that the contract provisions at issue are unenforceable penalties. Here, the facts regarding the contents and financial consequences of the liquidated damages clauses are undisputed.

The facts show that the employee solicitation restriction in the Knowles agreement provides that he pay 50% of the annual salary of each employee that leaves ASI due to his actions. The trial court found that this would amount to approximately $272,165 in damages. The Day and Lancet agreements provide that they must each pay 100% of the salary for each employee that leaves ASI due to their actions. This would amount to approximately $238,374 for Day and $176,813 for Lancet. The client solicitation restriction in the Knowles agreement provides that he is responsible for 45% of ASI's prior 12 months of revenue generated by the client if Knowles violates the agreement and that client purchases services from HWC. The trial court found that these damages could be in the range of millions of dollars.

While ASI is correct that the damages in this case are difficult to ascertain and this Court has previously noted its unwillingness to interfere in the freely negotiated contracts of the parties (see Time Warner , 802 N.E.2d at 886 ), this alone is not enough to enforce a liquidated damages provision. The liquidated damages provisions related to employee recruitment in this case are facially problematic for several reasons.³

First, it is not clear how an employee's salary for the prior year correlates to the loss to the company as salary alone is not reflective of revenue to ASI. While the salary of an employee factors into revenue to some extent, it is not the only variable that determines revenue, and ASI could hire other employees. It is also not clear why Knowles, who held a higher rank and made more money than Day or Lancet, is responsible for 50% of a recruited employee's salary while Day and Lancet are responsible for 100% of it. Additionally, as Judge Riley aptly noted in her dissent in the Court of Appeals below, because several employees were recruited in violation of all three agreements at issue, ASI was seeking 250% of their respective salaries. Even if we were to assume that the lost employee's salary was an...