Arthur J. Gallagher & Co. v. Babcock

• Decision Date: 18 December 2012
• Docket Number: No. 11–30452.,11–30452.
• Citation: 703 F.3d 284
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: 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.

703 F.3d 284

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.

Philip Anthony Franco(argued), Leslie A. Lanusse, Elizabeth Anderson Roussel, Raymond Peter Ward, Adams & Reese, L.L.P., New Orleans, LA, for Plaintiffs–Appellees.

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.

Appeal from the United States District Court for the Eastern District of Louisiana.

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 former employees, followed him to GBSI.In January 2005, Babcock added Kristy Copeland to GBSI's staff.

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.¹Plaintiffs 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.²We 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 the issue of damages.⁴We must in turn vacate the award of attorneys' fees, leaving the ultimate award to be decided on remand.

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.⁵In 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.⁸The governing statute is La.R.S. 23:921, which provides in relevant part:

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.

* * *

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 reasonwhatsoever, 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

Defendants argue that the agreements only prohibit solicitation or, alternatively, that combining non-competition and non-solicitation language created a restriction not permitted by La....