Group Association Plans, Inc. v. Colquhoun, 71-1226.

• Decision Date: 22 August 1972
• Docket Number: No. 71-1226.,71-1226.
• Parties: GROUP ASSOCIATION PLANS, INC. v. David B. COLQUHOUN and Raymond K. Tongue Co., Inc., Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

466 F.2d 469 (1972)

GROUP ASSOCIATION PLANS, INC. v. David B. COLQUHOUN and Raymond K. Tongue Co., Inc., Appellants.

No. 71-1226.

United States Court of Appeals, District of Columbia Circuit.

Argued June 9, 1972.

Decided August 22, 1972.

Rehearing Denied August 30, 1972.

Messrs. John J. Ghingher, Jr., Baltimore, Md., of the bar of the U. S. Court of Appeals of Maryland pro hac vice by special leave of Court and James J. Hanks, Jr. with whom Mr. Manuel J. Davis, Washington, D. C., was on the brief, for appellant.

Messrs. Jack L. Lahr, Washington, D. C., and Lawrence F. Henneberger, Wheaton, Md., with whom Messrs. Earl W. Kintner and Donald M. Barnes, Washington, D. C., were on the brief, for appellee.

Before Mr. Justice CLARK,^* of the Supreme Court of the United States, and TAMM and WILKEY, Circuit Judges.

WILKEY, Circuit Judge:

This is an action for breach of contractual and common law duties to a former employer.

I. Facts

In June 1963 David Colquhoun, one of the two appellants here, began work as a group insurance salesman for appellee Group Association Plans, Inc. (GAP), with responsibility for the sales, solicitation and servicing of group insurance for membership associations. From 1 June 1964 until 31 May 1966 Colquhoun was employed by GAP pursuant to a written employment contract containing a restrictive "non-competition" covenant, which provided

that Colquhoun will not, for ten (10) years after the expiration or other termination of the term of this agreement, directly or indirectly . . . seek, solicit or accept any business of or with any person, firm, corporation, association, organization or group of any kind, which at any time during Colquhoun\'s employment with the Company, is or was a customer or client of the Company, or any company, venture or corporation, owned or controlled by the Company or the stockholders of the Company.

By the spring of 1966 Colquhoun had become dissatisfied with the conditions of his employment at GAP and had begun discussions with Robert L. Larsen, Vice President of appellant R. K. Tongue, Inc., another group insurance broker-agent, regarding possible employment. On 23 May 1966, at a meeting with the top officers of R. K. Tongue, he was presented with an employment contract. On 31 May 1966, the last day of the term of his employment contract with GAP, he met again with R. K. Tongue officials, and reached agreement on salary. Colquhoun's employment with GAP ceased, under the terms of the employment contract, on 31 May 1966; he also submitted, on that day, a letter of resignation to GAP, and on the day following began work for R. K. Tongue.

Prior to the termination of his employment with GAP, Colquhoun had represented GAP in soliciting the group insurance business of three associations relevant here. At the time he left the employ of GAP the three associations had not agreed to employ GAP as their group insurance broker, and thus might be termed "prospective customers" of GAP. After Colquhoun began his employment with R. K. Tongue, he again solicited the insurance business of these three associations, this time on behalf of his new employer. With two of these three companies, the National Rehabilitation Association (NRA) and the Society of American Registered Architects (SARA), the solicitation was ultimately successful. The activity of Colquhoun in soliciting these three programs on behalf of R. K. Tongue, and R. K. Tongue's profits derived therefrom, create the issues in the case at bar.

II. Proceedings Below

GAP's Amended Complaint charges, inter alia, that Colquhoun breached the non-competition clause of his contract of employment with GAP; that R. K. Tongue wrongfully interfered with, and wrongfully induced Colquhoun to breach the contract; and that R. K. Tongue and Colquhoun wrongfully conspired to interfere with GAP's contractual and business relationships with the two prospective customers discussed supra.

After extensive discovery and a trial before the late United States District Judge Alexander Holtzoff, sitting without a jury, Judge Holtzoff filed his opinion holding that because of the breach of a common law duty Colquhoun and R. K. Tongue should be permanently enjoined "from continuing and accepting the fruits of the illegal course of action to which the Court has referred . . . ."¹ Further, Judge Holtzoff awarded money damages against R. K. Tongue as to the prospective customers "to whom the individual defendant succeeded in selling insurance plans in behalf of his new employer."² Judge Holtzoff referred the matter to a deputy auditor and provided that "the measure of damages is the income derived by the corporate defendant, the new employer, from the business done with these three concerns, less the expenses incurred in conducting it."³

After a hearing, the deputy auditor recommended damages of $68,295.00, subject to a six percent interest and discount rate factor. On 20 January 1971 District Judge Gasch ordered that the report of the deputy auditor be confirmed and that judgment be entered against R. K. Tongue in the amount of $68,295.00, subject to the computation of the interest and discount. From this order R. K. Tongue and Colquhoun have appealed.

Only three issues need be considered here: (1) whether District Judge Holtzoff complied with Federal Rule of Civil Procedure 52(a) in making his finding of R. K. Tongue's liability; (2) whether the District Judge was correct in his statement of Colquhoun's common law duty to his former employer; and (3) whether the monetary damages were properly computed. Having concluded that appellants prevail on two of these issues, we vacate the judgment and remand the case to the District Court for further proceedings.

III. The Rule 52(a) Issue

R. K. Tongue's liability in the case at bar is governed by the principle well stated in American Republic Insurance Co. v. Union Fidelity Life Insurance Co.: "A company which knowingly participates in, encourages, and accepts the benefits of, acts of unfair competition committed by a person against his former employer is liable for those acts."⁴ In American Republic the court explicitly found that the employee was hired by his new employers because they thought that "he could transfer his organization and business to them."⁵

In Judge Holtzoff's opinion in the case at bar, however, there is no such finding, and indeed there is no finding whatever that sheds any light on the motives of R. K. Tongue for hiring Colquhoun. Rule 52(a) requires that "the court shall find the facts specially and state separately its conclusions of law thereon," but there is nothing in Judge Holtzoff's opinion which indicates the facts on which he based his legal conclusion as to R. K. Tongue's liability. There appear to be indications in the record that R. K. Tongue might have been aware of Colquhoun's dealings with NRA and SARA on behalf of Group Association Plans, but the evidence is not clear-cut, and Rule 52(a) requires the court to state on which facts the decision of liability is based. Without such a statement, an intelligent review of the lower court's factual considerations and resulting legal conclusions is impossible. With regard to R. K. Tongue's liability, this omission is a fatal defect; we thus remand for such consideration and statement.

In the proceedings now to be held in the District Court, a new judge will examine the record and make the required factual and legal determinations regarding R. K. Tongue's liability. If the District Judge decides that he can make such determinations on the record as it now stands, he may do so; otherwise, a new trial will be necessary.

IV. Colquhoun's Common Law Duty

R. K. Tongue's liability is, of course, predicated on Colquhoun's liability to Group Association Plans, whether for breach of contract or breach of a common law duty to a former employer. Judge Holtzoff's opinion ruled out contract as a basis for recovery, and went on common law grounds. On the remand we do not bar reconsideration of contractual liability, see infra, but we think it helpful to set forth the common law liability.

One of the most elaborate discussions of an employee's common law duty to his employer is to be found in Trice v. Comstock.⁶ The views of Judge Sanborn in Trice are worth quoting at some length:

For reasons of public policy, founded in a profound knowledge of the human intellect and of the motives that inspire the actions of men, the law peremptorily forbids everyone who, in a fiduciary relation, has acquired information concerning or interest in the business or property of his correlate from using that knowledge or interest to prevent the latter from accomplishing the purpose of the relation. If one ignores or violates this prohibition, the law charges the interest or the property which he acquires in this way with a trust for the benefit of the other party to the relation, at the option of the latter, while it denies to the former all commission or compensation for his services.

* * * * * *

The only indispensable elements of a good cause of action to enforce such a trust are the fiduciary relation and the use by one of the parties to it of the knowledge or the interest he acquired through it to prevent the other from accomplishing the purpose of the relation.

* * * * * *

And, within the prohibition of this rule of law, every relation in which the duty of fidelity to each other is imposed upon the parties by the established rules of law is a relation of trust and confidence. The relation of trustee and cestui que trust, principal and agent, client and attorney, employer and employee, who through the employment gains either an interest in or a knowledge of the property or business of his master, are striking and familiar illustrations of the relation.⁷

Comstock, the agent, used the knowledge that he had acquired in working for his principals (Trice, et al.) for his own gain, to buy land in which they were interested. The business of...