Merritt Hawkins & Associates v. Larry Gresham, et

Citations: 861 F.3d 143; 42 I.E.R. Cas. (BNA) 4; 2017 U.S. App. LEXIS 10981; 2017 WL 2662840Docket: 16-10439

Court: Court of Appeals for the Fifth Circuit; June 21, 2017; Federal Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The legal dispute involves Merritt Hawkins and Associates, L.L.C. (MHA) suing Larry Scott Gresham, Billy Bowden, and Consilium Staffing, L.L.C. for breaches related to non-compete and non-solicitation agreements following the employees' departure from MHA to a competitor. MHA claims Gresham recruited Bowden to leave MHA and alleges that Gresham stole over 400 proprietary files from its computer network before his departure. The district court previously ruled that the non-compete and non-solicitation clauses were valid and determined that Gresham breached his agreement. 

At trial, the court excluded evidence from a prior breach of contract case involving Gresham and another staffing company, which Defendants sought to introduce. MHA's president was allowed to testify about damages, estimating the value of stolen files at $100 each and stating that training a new employee costs approximately $45,000. After appeals regarding exemplary damages, evidentiary rulings, and attorneys' fees, the court vacated the exemplary damages award but affirmed the remaining decisions.

Smith provided testimony regarding MHA’s lost profits calculation, which he assisted in preparing. After a five-day trial, the jury found Gresham not liable for violations of the federal Computer Fraud and Abuse Act, misappropriation of trade secrets, violations of the Texas Theft Liability Act, or breach of fiduciary duty. However, the jury determined that Gresham breached his non-compete agreement and failed to return MHA’s property, but awarded no damages for these claims. Gresham was found liable under Texas’s Harmful Access by Computer statute, resulting in a $50,000 award to MHA. Bowden was found to have conspired with Consilium to tortiously interfere with Gresham’s employment agreement, but no damages were awarded for this. Bowden breached his non-solicitation agreement, leading to an award of $2,000 in damages. Consilium was found to have conspired with Bowden to tortiously interfere with Gresham's contract, resulting in a $30,000 damage award, and the jury imposed $124,000 in exemplary damages for Consilium's malice. 

Post-verdict, Defendants filed a motion for judgment as a matter of law, while MHA sought to alter the judgment and requested attorneys’ fees. The district court ruled that a liquidated damages clause in Bowden’s contract was the sole measure for damages, leading to a take-nothing judgment in Bowden’s favor. MHA’s request for an injunction and other equitable remedies against Gresham was denied, as the court found MHA failed to timely request such relief and did not demonstrate the necessity for equitable remedies. The court granted MHA attorneys’ fees for the Harmful Access by Computer claim but denied fees for breach of contract claims due to a lack of damage recovery, resulting in an offset of attorneys’ fees awarded to both parties. Both Defendants and MHA appealed various aspects of the judgment.

In the discussion of exemplary damages, Consilium contested the $124,000 award, arguing that MHA’s evidence was insufficient. MHA presented four pieces of evidence to support the claim, including Consilium’s knowledge of Gresham’s non-compete, testimony regarding Consilium’s founding by a former MHA partner, circumstantial evidence of malice due to proximity of headquarters, and Bowden’s malicious behavior towards MHA, which could be imputed to Consilium through vicarious liability.

The district court's denial of a Rule 50 motion for judgment as a matter of law is reviewed de novo, with a strong deference to the jury's verdict. In evaluating the evidence, the court must favor the nonmoving party and avoid making credibility assessments. To obtain exemplary damages, MHA must demonstrate by clear and convincing evidence that the Defendants acted with malice, defined as a specific intent to cause substantial harm. Ordinary negligence or bad faith does not suffice for this standard, as malice requires a higher threshold. The Texas Supreme Court clarified that willful harm alone does not justify punitive damages; additional evidence of malicious intent is necessary. Previous cases upheld exemplary damages for tortious interference and trade secret misappropriation when defendants engaged in deliberate schemes to harm their competitors, such as stealing clients and confidential information. In contrast, MHA's sole argument for exemplary damages was that Consilium intentionally breached a non-compete agreement, which does not meet the standard for malice as defined by Texas law, since it merely reflects the underlying tort without additional evidence of malicious intent.

MHA's claims against Consilium for specific intent to cause substantial harm are unsupported, as the proximity of their businesses alone does not imply malice. The involvement of Consilium's founder with MHA was not intended to demonstrate a scheme to harm MHA but rather to indicate knowledge of non-compete agreements. MHA has not alleged that Consilium induced former employee Gresham to misappropriate proprietary information, and evidence regarding other MHA employees leaving for Consilium was excluded by the court. 

Regarding vicarious liability, Texas law requires specific conditions for an employer to be liable for punitive damages based on an agent's actions. MHA failed to present evidence or arguments supporting a vicarious liability claim, and any animosity from Bowden towards MHA does not establish liability since it was not shown that he acted beyond simply facilitating Gresham's departure. Consequently, the court concluded that the award for exemplary damages should be vacated.

Additionally, defendants contested the admissibility of lay testimony from MHA's president, Mark Smith, concerning damages, arguing that his testimony on lost profits and other matters lacked personal knowledge and relevance to his duties. The court assesses evidentiary rulings for abuse of discretion, and while Smith's testimony may have exceeded typical lay witness limits, business owners often can provide relevant testimony about their company's financial matters without needing expert qualification.

Defendants challenged Smith's testimony regarding lost profits calculations, but the court upheld it, citing precedent that allows company officers to testify if they have direct knowledge of underlying business accounts. Defendants had opportunities to cross-examine Smith on his methodology, and no clear abuse of discretion was found. Regarding the value of missing computer files, the court admitted Smith's testimony based on his personal knowledge of the costs to recreate files. Although he acknowledged difficulties in calculating damages, Defendants effectively cross-examined him, allowing the jury to weigh his testimony as they saw fit. Even if admitting his testimony was erroneous, it was deemed harmless, as a computer forensics expert and MHA's IT employee provided substantial evidence of damages that the jury ultimately awarded less than. The court also supported the admission of Smith's testimony on training expenses, viewing them as routine costs within his knowledge as MHA's president. Lastly, Consilium argued that the jury's findings regarding damages were inconsistent but the court affirmed that the jury's verdict was consistent. The district judge determined that the jury's decisions reflected appropriate findings and did not demonstrate confusion or uncertainty, especially since the jury was properly instructed.

The district court ruled that a liquidated damages provision in Bowden’s employment contract dictated damages, and since MHA could not demonstrate damages under this provision, it was not entitled to any damages from Bowden’s breach of contract. MHA contends that the court erred by issuing a take-nothing judgment regarding Bowden’s breach of the non-solicitation agreement, arguing that the provision should apply to breaches involving physicians and that even if not entitled to actual or liquidated damages, it should receive nominal damages. Legal interpretation of contracts is reviewed de novo, considering all provisions in harmony. Texas law requires a two-prong test for enforcing liquidated damages: (1) the harm from the breach is challenging to estimate, and (2) the liquidated amount is a reasonable forecast of just compensation. Nominal damages can be awarded for contract breaches, but not when the harm is purely economic and provable. The liquidated damages provision applies broadly and is linked to MHA's interest in protecting its client base, thus deemed a reasonable forecast of compensation. The court correctly declined to award nominal damages due to the economic nature of the harm and MHA's failure to provide evidence of physicians leaving due to Bowden’s breach. Consequently, the take-nothing judgment in favor of Bowden is upheld.

Regarding attorneys’ fees, MHA claims the court erred in three ways: not awarding fees related to its Harmful Access by Computer claim, failing to award fees for the breach of contract claim, and improperly awarding fees to Gresham. The review standard for attorneys’ fees is whether the trial court abused its discretion, with factual determinations reviewed for clear error. Texas law allows recovery of attorneys’ fees only when specified by statute or contract. Both Gresham’s and Bowden’s employment contracts contained provisions for the prevailing party to recover fees, and the prevailing party in a Harmful Access by Computer claim is entitled to fees as per Texas law.

Under the Texas Theft Liability Act, a prevailing party is entitled to mandatory attorneys' fees, as established in Bocquet v. Herring. A prevailing party is defined as one that receives affirmative judicial relief, and a zero damage award negates prevailing party status. In the context of the Texas Theft Liability Act, a successful defendant is also considered a prevailing party regardless of outcomes on other claims. 

MHA contended that the court erred by awarding attorneys' fees only for expenses directly tied to the Harmful Access by Computer claim. MHA argued that fees intertwined with this claim should not be segregated even if they were incurred for unsuccessful claims. The legal standard requires segregation of fees only when discrete services pertain to both recoverable and unrecoverable claims. The district court found MHA's fee documentation inadequate for meaningful segregation and thus reduced the fee award accordingly, concluding that MHA did not meet its burden to prove the recoverable fees.

Additionally, MHA claimed it was the prevailing party in breach of contract claims against Gresham and Bowden, asserting entitlement to attorneys' fees. However, since MHA was awarded no damages or equitable relief, it did not qualify as a prevailing party. The court noted that a verdict against a non-party, Consilium, does not affect MHA's entitlement to fees, as the claims against Consilium were tort-based, not contract-based. Therefore, the district court did not abuse its discretion in denying MHA attorneys' fees related to the breach of contract claims.

Gresham is entitled to attorneys' fees under the Theft Liability Act, as Texas courts recognize a party who successfully defends a claim under this Act as a prevailing party, even if they lose on other claims. The statute mandates that the prevailing party "shall" receive attorneys' fees, and since MHA did not challenge the reasonableness of the fee award, its argument for reduction is waived. The district court did not abuse its discretion in awarding these fees.

MHA's motion to amend the judgment for equitable remedies, including an injunction against Bowden and Gresham, specific performance for Gresham to return proprietary information, and contract extensions, was also denied. To obtain a permanent injunction, MHA needed to demonstrate irreparable injury and that legal remedies were inadequate, but it failed to do so while merely asserting a right to an injunction based on employment contracts without legal backing. Consequently, the court upheld the district court's decision not to grant injunctive relief.

MHA's request for specific performance, demanding Gresham return all computer files, was deemed waived because it was not included in the pre-trial motion, despite being part of the original complaint, following the precedent set in Valley Ranch Dev. Co. v. FDIC. Additionally, MHA sought a one-year extension of Gresham's contract and a two-year extension of Bowden's contract post-judgment. However, under Texas law, while a district court can extend injunctions beyond the duration of a non-compete agreement, the appeal is now moot since more than two years have elapsed since the final judgment on January 30, 2015. MHA failed to prove that an equitable extension was justified because Gresham no longer worked for Consilium, and there were no indications that Bowden violated his non-solicitation terms. Consequently, the court affirmed the denial of equitable remedies and vacated the award of exemplary damages due to insufficient evidence of malice, upholding the rest of the district court's judgment.