HARRISBURG, Pa. -- The Pennsylvania Superior Court has affirmed a lower court’s ruling that upheld the legality of non-solicitation agreements employees often sign when they begin a new job.
The decision was handed down in B.G. Balmer & Co. Inc. v. Frank Crystal & Company Inc., et al, where, in 2003, the individual defendants were working for Balmer Agency and began working with a recruiter who tipped them off to potential employment with Frank Crystal & Company. While working for Balmer Agency for six months, the defendants plotted their move to Crystal with the explicit goal of soliciting and carrying over their Balmer clients.
They shared Balmer’s trade secrets with the recruiter and compiled lists of contacts and other protected information about Balmer clients for their own future use at their new employer. The defendants then either resigned or were terminated, but immediately began working as a Crystal satellite office. They set to work contacting their previous clients with Balmer, going after the agency’s biggest client and holding several meetings during which the defendants criticized Balmer and verbally attacked its president.
Those actions caused Balmer to lose its client base and eventually be sold, said Chris Cognato, attorney with Ballard Spahr in Philadelphia.
Balmer filed a multi-count complaint against the former employees and Crystal, alleging violation of their non-solicitation agreements, breach of fiduciary duty, tortious interference with contractual relations, unfair competition and other claims. The court ruled in Balmer’s favor for a majority of the claims, assessing $2.4 million in compensatory damages and $4.5 million in punitive damages.
“The high punitive damages award was outside of the norm, but appears to set an example,” Cognato told the Pennsylvania Record. “That’s the purpose of punitive damages in part. It’s still particularly high for a non-compete case, although there were non-contract issues, as well.”
The defendants appealed the punitive damages award, claiming the court failed to identify clear and convincing evidence demonstrating that their conduct was outrageous or malicious, but the Superior Court disagreed.
The Superior Court identified several acts it considered to be outrageous and malicious, including disclosing Balmer trade secrets to the recruiter while still employed there, using Balmer resources to work out details of their future employment with Crystal and doing so on company time, taking personnel and client files with them to solicit Balmer clients, then actually trying to solicit those clients, which led to the agency’s largest client leaving the firm.
In fact, all of the defendants’ revenue generated in their first year at Crystal came from former Balmer clients, even though Crystal knew about the non-competition agreements.
“The court focused on the conduct of the defendants and found it to be particularly outrageous,” Cognato said. “That’s important to remember, that this is the appellate court reviewing the decision of the trial court, so those decisions where the facts came from made the determination of fact, but upon reviewing those determinations, the appellate court agreed that the former employees’ conduct was particularly significant and outrageous.”
Cognato said most states will not enforce every non-compete clause regardless of scope, but will instead carefully review the scope.
“Pennsylvania is one of those states where it will look at the reasonability of the non-compete,” he said. “There’s several factors it will look at and that’s not rare. But the surprising piece of this decision wasn’t even necessarily the non-compete, it was the tort claim that the court allowed the plaintiffs to pursue in addition to this claim for the non-compete agreement.”
Cognato said employers should carefully review their recruiting tactics to avoid similar -- and costly -- mistakes in the future.