Chicago Title Ins. Corp. v. Magnuson

Decision Date21 May 2007
Docket NumberNo. 05-4411.,05-4411.
Citation487 F.3d 985
PartiesCHICAGO TITLE INSURANCE CORPORATION, a Missouri Corporation, Plaintiff-Appellee, v. James A. MAGNUSON; First American Title Insurance Company, c/o Timothy P. Sullivan, Registered Agent, Defendants-Appellants.
CourtU.S. Court of Appeals — Sixth Circuit

Matthew A. Kairis, Jones Day, Columbus, Ohio, for Appellants. Andrew S. Pollis, Hahn Loeser & Parks LLP, Cleveland, Ohio, for Appellee.

ON BRIEF:

Matthew A. Kairis, Chad A. Readler, G. Roger King, Jones Day, Columbus, Ohio, Robert P. Ducatman, Jones Day, Cleveland, Ohio, for Appellants. Andrew S. Pollis, Steven A. Goldfarb, Hahn Loeser & Parks LLP, Cleveland, Ohio, for Appellee.

Before: DAUGHTREY, GIBBONS, Circuit Judges; EDMUNDS, District Judge.*

OPINION

EDMUNDS, District Judge.

The numerous questions presented in this appeal concern a covenant not to compete and the resulting jury verdict awarding compensatory and punitive damages to Plaintiff-Appellee Chicago Title Insurance Corporation ("Chicago Title") for Defendant-Appellant James Magnuson's breach of the agreement and Defendant-Appellant First American Title Insurance Company's ("First American's") tortious interference with this agreement. On January 25, 2005, a jury found Magnuson and First American liable for breaching the covenant and for tortious interference and awarded compensatory and punitive damages totaling over $43 million. The district court denied several post-trial motions and upheld the verdict in its entirety. For the reasons discussed below, we AFFIRM in part, REVERSE in part, and REMAND this case to the district court for a new trial on compensatory damages consistent with this opinion.

I.

Chicago Title and First American are competitors in the title insurance industry, and Magnuson is an individual with many years of experience in a variety of positions for companies in this industry. Magnuson formed a title insurance agency in central Ohio in 1978 along with a partner, James Steller. Magnuson and Steller built the business and brought on additional partners until 1991, when the partners sold the business to Chicago Title for $5.5 million.

In conjunction with the sale, and in an effort to protect the goodwill of the business that Chicago Title purchased, Magnuson entered into an employment contract (the "Contract") on July 1, 1991, that included a covenant not to compete (the "Covenant") as one of its provisions. Specifically, the Contract obligated Magnuson to work for Chicago Title for five years after the sale, and the Covenant prohibited him from acting in any capacity for a title insurance company in a seven-county area surrounding, and including, Columbus, Ohio "[f]or a period of five years after the term of this Agreement." Steller also took a position with Chicago Title following the sale, but he left the Ohio market in 1993.

At the time Steller left Chicago Title's employ, Magnuson and Chicago Title amended the Contract to state that the initial five-year term of employment would extend for ten-and-a-half years, until December 31, 2001. According to the modification, "[a]ny other reference to word (sic) `term' in the Contract and the Exhibits thereto shall be construed as being the said ten and one half year period." Therefore, the five-year non-compete period did not begin until the term of the agreement ended, and contractual expiration of the non-compete period was delayed until the end of 2006.

Throughout his employment with Chicago Title, Magnuson advanced through a variety of management positions, each with an increasing scope of geographic coverage. In 1996, Magnuson became Chicago Title's Ohio Manager, where he supervised offices in Cincinnati, Dayton, Cleveland and Akron. He turned over direct management of the Columbus office to other Chicago Title managers at that time. In 1998 or 1999, Magnuson assumed responsibility over Ohio, Indiana, Michigan and Pennsylvania as Chicago Title's Regional Manager. Finally, in 2001, Magnuson became Regional Manager for all title insurance brands of Chicago Title's parent, Fidelity. In this position, his territory covered Ohio, Pennsylvania, New Jersey, Delaware, Maryland, Virginia and West Virginia.

Once the Contract term expired on its own terms at the end of 2001, Magnuson and Chicago Title discussed a two-year employment agreement containing a one-year post-employment non-compete clause, but they never executed any documents related to an extension of the Contract. In August 2002, Magnuson was appointed Division Vice President of another one of Fidelity's title insurance brands and no longer worked for Chicago Title.

Also in 2002, The Talon Group ("Talon"), a division of First American, embarked on an expansion strategy that included recruiting experienced individuals from industry competitors. Attracting employees who possessed established relationships with customers and employees was critical to generating business growth, as the title insurance business is highly competitive with minimal product differentiation among competitors. As part of this effort, First American convinced Magnuson to leave Chicago Title and join Talon. During the negotiation process, Magnuson made Talon aware of the existence of his non-compete agreement with Chicago Title, and First American agreed to indemnify Magnuson for any liability he might incur as a result of making the move. Shortly thereafter, Steller also joined First American.

Once with First American, Magnuson was based out of an office located in Columbus and the company began recruiting other key Chicago Title customers and employees from central Ohio. Within the first three months, thirty Chicago Title employees switched to First American, and a significant number of Chicago Title's customers in the area also ended up moving over.

The district court below granted Chicago Title's motions for summary judgment as to liability on its breach of contract claim against Magnuson and its tortious interference claim against First American before submitting the case to the jury on the issue of damages. The jury returned a verdict of $10.8 million in compensatory damages and $32.4 million in punitive damages, and the district court denied various motions for a new trial by Magnuson and First American, leading to the instant appeal.

Magnuson and First American challenge the following rulings of the district court: (1) finding that the Covenant was reasonable and therefore enforceable, (2) granting summary judgment for Chicago Title on the issue that Magnuson breached the Covenant, (3) granting summary judgment for Chicago Title on the issue that First American's actions constituted tortious interference, (4) granting judgment as a matter of law on the issue that Chicago Title was a lost volume seller, (5) instructing the jury that the Covenant was reasonable for the full five-year period, (6) finding that punitive damages were appropriate for the jury to consider, (7) not remitting the jury's punitive damages award as unconstitutionally large in relation to the amount of compensatory damages awarded, (8) failing to order a new trial on punitive damages, and (9) giving improper jury instructions that tainted the jury's verdict.

Magnuson and First American filed a timely appeal. We have appellate jurisdiction under 28 U.S.C. § 1291.

II.
A. Reasonableness of the Covenant

An appellate court reviews "the district court's conclusions of law de novo and its findings of fact for clear error. Questions of contract interpretation are generally considered questions of law subject to de novo review." Golden v. Kelsey-Hayes Co., 73 F.3d 648, 653 (6th Cir.1996) (internal citations omitted). Here, the district court's decision involved a question of law, as it required a determination of whether the Covenant was reasonable under the circumstances and was therefore enforceable. Furthermore, under Ohio law, which the parties have chosen to govern the Contract, a non-compete clause's enforceability is a matter of law for the court. UZ Engineered Prods. Co. v. Midwest Motor Supply Co., 147 Ohio App.3d 382, 770 N.E.2d 1068, 1078 (2001). Thus, we review the district court's ruling on the Covenant's reasonableness de novo, but accept the district court's findings of fact unless they were clearly erroneous.

1. The Covenant period at issue

Although the Covenant is contained in a single document that was extended by amendment on one occasion, there are actually two separate covenant periods at issue here between the parties. At the time of the 1991 sale, Chicago Title and Magnuson agreed that Magnuson would be employed for five years, after which time the five-year non-compete period would begin. Since the Contract was entered into at the same time Magnuson sold the business and mentions the acquisition itself, the original covenant is properly viewed as incident to the sale and not as an employment-related covenant.

At the time of the 1993 amendment, the amendment's provisions explicitly provided that the post-employment covenant period remained in effect and would begin at the end of Magnuson's employment term, as extended by the amendment to December 31, 2001. The amendment's sole focus, however, was on extending the period of Magnuson's employment with Chicago Title, and not the sale that occurred two years prior. The Covenant was no longer tied to the original ten-year period of protection contemplated when Magnuson sold his business to Chicago Title, as nothing in the amendment mentions the sale. Thus, the two covenants are: (1) a sale-related covenant not to compete for five years, beginning on July 1, 1996, and ending June 30, 2001, and (2) an employment-related covenant not to compete for five years (the one referred to as the "Covenant"), beginning on January 1, 2002, and ending on December 31, 2006.1

2. The Covenant is reasonable for at least two years

Under Ohio law, "[i]n determining...

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