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Merritt Hawkins & Associates, L.L.C. v. Gresham

United States Court of Appeals, Fifth Circuit

June 21, 2017

MERRITT HAWKINS & ASSOCIATES, L.L.C., Plaintiff-Appellee Cross-Appellant

         Appeals from the United States District Court for the Northern District of Texas

          Before STEWART, Chief Judge, and HIGGINBOTHAM and COSTA, Circuit Judges.

          CARL E. STEWART, Chief Judge.

         This dispute arises out of two employees' departure from a medical staffing company to work for a competitor. Plaintiff-Appellee brought claims against Defendants-Appellants based on the alleged breach of non-compete and non-solicitation provisions in its employment contracts, tortious interference, and theft of computer files. The parties now appeal and cross-appeal exemplary damages, evidentiary rulings, allegedly inconsistent verdicts, a take-nothing judgment, attorneys' fees, and the denial of equitable remedies. For the reasons that follow, we VACATE the district court's award of exemplary damages but otherwise AFFIRM.

         I. BACKGROUND

         Plaintiff-Appellee Merritt Hawkins and Associates, L.L.C. ("MHA") recruits physicians to fill permanent positions at hospitals and other healthcare organizations. Defendant-Appellant Consilium Staffing, L.L.C. ("Consilium") primarily places physicians in temporary positions, although it sometimes fills permanent positions. The companies are both headquartered near each other in Irving, Texas, and Consilium's founder was a former partner at MHA. As a condition of employment, MHA requires its employees to sign contracts that include non-competition, non-disclosure, and non-solicitation clauses. Billy Bowden worked at MHA until September 2010, triggering Bowden's non-compete clause for one year and his non-solicitation clause for three years. After the expiration of his non-compete clause, Bowden began working for Consilium. In 2012, MHA claims that Bowden violated the non-solicitation provision by recruiting Larry Gresham to leave MHA for Consilium. At the time, Gresham worked at MHA as a Search Consultant, and his responsibilities included recruiting medical specialists, selling services, and account management. Gresham left MHA and immediately took a similar position at Consilium. Before leaving MHA, Gresham allegedly accessed MHA's computer network and copied over 400 of MHA's proprietary files. MHA claims that Gresham also deleted hundreds of files off his work computer in an attempt to hide this alleged theft.

         Litigation ensued, with MHA bringing numerous claims against Consilium, Bowden, and Gresham (collectively "Defendants") for breach of contract, tort, and violations of state and federal statutes. The district court entered partial summary judgment, finding as a matter of law that the non- compete and non-solicitation provisions in the contracts were valid and that Gresham had breached his non-compete agreement.

         At trial, Consilium sought to introduce evidence concerning a previous breach of contract suit involving MHA, Gresham, and a third party. Another medical staffing company, Arthur Marshall, had sued MHA and Gresham for breach of Gresham's non-compete contract when he left Arthur Marshall to work for MHA. The district court excluded this evidence.

         Over the objection of Defendants, the district court allowed Mark Smith, MHA's president, to testify as a lay witness on damages. While noting the difficulty of calculating damages for the missing and stolen computer files, he explained that "I attached a value of . . . a hundred dollars for each item . . . . A hundred dollars is what I would need to pay someone on an hourly basis to have them go in and attempt to create [these files from scratch]." Next, Smith stated that the amount MHA would spend to train a new employee was $45, 000. He based this figure on the number of hours spent training each new employee and the continuing training that MHA provides its employees. Finally, Smith testified about MHA's calculation of lost profits, which he helped prepare.

         After a five-day trial, the jury returned its verdict. It found that Gresham was not liable for violating the federal Computer Fraud and Abuse Act, misappropriating MHA's trade secrets, violating the Texas Theft Liability Act, or breaching his fiduciary duty to MHA. The jury found that Gresham breached his non-compete agreement and failed to return MHA's property, but it awarded no damages for those claims. The jury found Gresham liable, however, under Texas's Harmful Access by Computer statute and awarded MHA $50, 000. The jury also concluded that Bowden conspired with Consilium to tortiously interfere with Gresham's employment agreement but again awarded no damages. It determined that Bowden breached his non-solicitation agreement and awarded $2, 000 in damages. Finally, the jury found that Consilium conspired with Bowden to tortiously interfere with-and did tortiously interfere with-Gresham's contract, for which it awarded $30, 000 in damages. Finding that Consilium acted with malice, the jury also imposed $124, 000 in exemplary damages.

         Following the jury's verdict, Defendants filed a motion for judgment as a matter of law, MHA filed a motion to alter or amend the judgment, and both parties moved for attorneys' fees. Concluding that a liquidated damages provision in Bowden's contract provided the only measure of damages for his breach of the non-solicitation provision and that MHA had not shown evidence of any damages under that clause's formula, the district court entered a take-nothing judgment in favor of Bowden. In MHA's motion to alter or amend the judgment, it requested an injunction against Gresham, an order for Gresham to return MHA's files, and equitable extension of Gresham's and Bowden's restrictive covenants. Even though the employees' contracts allowed for such remedies, the district court denied the motion because it concluded that MHA did not request such relief prior to filing for reconsideration, and it failed to demonstrate that equitable remedies were necessary. The district court further determined that MHA was entitled to attorneys' fees for its Harmful Access by Computer claim, while Gresham was entitled to attorneys' fees under the Texas Theft Liability Act. It denied MHA attorneys' fees on its breach of contract claims because it did not recover any damages for those claims. Ultimately, the court awarded each party an identical amount of attorneys' fees, canceling out the awards.

         Defendants appeal, and MHA cross-appeals.


         All appealed and cross-appealed claims in this case are brought under Texas law. The district court had supplemental jurisdiction over the state law claims because they arose out of the same case or controversy as MHA's federal law claims. See 28 U.S.C. § 1367; Heinsohn v. Carabin & Shaw, P.C., 832 F.3d 224, 233 (5th Cir. 2016). When reviewing the district court's evidentiary rulings, however, we apply the Federal Rules of Evidence. See Fed. R. Evid. 101; Washington v. Dep't of Transp., 8 F.3d 296, 300 (5th Cir. 1993).

         A. Exemplary Damages

         Consilium appeals the award of $124, 000 in exemplary damages. It argues that the evidence presented by MHA was insufficient to support the award of exemplary damages. We agree.

         MHA points to four pieces of evidence to justify the exemplary damages award. First, MHA argues that it demonstrated Consilium was aware that Gresham had a non-compete contract with MHA but hired him regardless. Second, the jury heard testimony that Consilium was founded by a former partner at MHA. Third, MHA claims that the close proximity between MHA's and Consilium's headquarters is circumstantial evidence of malice because it shows intent and opportunity to "raid MHA for employees." Fourth, MHA claims that Bowden, Consilium's employee, displayed malice towards MHA and that this malice can be imputed to Consilium through vicarious liability. Specifically, MHA introduced evidence that Bowden sent Gresham a text telling him to "slap [his MHA supervisor] on the back of the head" before leaving MHA. Bowden also testified that he had been fired from MHA and disliked the company.

         We review the district court's denial of a Rule 50 motion for judgment as a matter of law de novo. Navigant Consulting, Inc. v. Wilkinson, 508 F.3d 277, 282 (5th Cir. 2007) (quoting Flowers v. S. Reg'l Physicians Servs., Inc., 247 F.3d 229, 235 (5th Cir. 2001)). However, our review is highly deferential to the jury's verdict. See Bagby Elevator Co. v. Schindler Elevator Corp., 609 F.3d 768, 773 (5th Cir. 2010). We "must review all of the evidence in the record, draw all reasonable inferences in favor of the nonmoving party, and may not make credibility determinations or weigh the evidence." Casey v. Toyota Motor Eng'g & Mfg. N. Am., Inc., 770 F.3d 322, 326 (5th Cir. 2014).

         To recover exemplary damages, MHA had to prove by clear and convincing evidence that Defendants acted with malice. See Tex. Civ. Prac. & Rem. Code § 41.003(a)(2). Clear and convincing evidence is evidence sufficient to "produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established." Id. § 41.001(2). MHA bears the burden of proof, which it cannot meet by showing "ordinary negligence, bad faith, or a deceptive trade practice." Id. § 41.003(b). Rather, "'malice' means 'a specific intent by the defendant to cause substantial injury or harm to the claimant.'" Horizon Health Corp. v. Acadia Healthcare Co., No. 15-0819, ---S.W.3d ---, 2017 WL 2323106, at *9 (Tex. May 26, 2017) (quoting Tex. Civ. Prac. & Rem. Code § 41.001(7)). Importantly, "when a tort requires willful harm as a necessary element of liability, that willfulness alone cannot also justify a punitive damages award. . . . More is required." Safeshred, Inc. v. Martinez, 365 S.W.3d 655, 662 (Tex. 2012). Tortious interference with a contract requires "willful and intentional" interference. See Holloway v. Skinner, 898 S.W.2d 793, 795-96 (Tex. 1995) (listing elements).

         In Horizon, the Texas Supreme Court recently upheld a finding of malice where each of the defendants, former members of Horizon's upper-management, "specifically intended to cause substantial injury or harm to Horizon." Horizon, 2017 WL 2323106, at *10. These former employees (1) staggered departure in a way intended to deprive Horizon of leadership and funnel information to its competitor, (2) created a business plan predicated on stealing a large number of clients from their former company, and (3) stole documents and trade secrets from their former company and immediately used them to solicit clients. Horizon, 2017 WL 2323106, at *10-13. Similarly, this court has upheld exemplary damages for tortious interference and misappropriation of trade secrets under Texas law where one company (1) attempted to "'conquer and dominate' the market, " (2) strategically hired away key employees, such as top managers and technicians, (3) and compelled the hired parties to upload and use confidential client contact information. Nova Consulting Grp., Inc. v. Eng'g Consulting Servs., Ltd., 290 F.App'x 727, 730, 741 (5th Cir. 2008); see also Bagby, 509 F.3d at 773 (upholding exemplary damages for tortious interference where an employee was hired for the express purpose of undercutting a competitor's contract and where the defendant deliberately misled a client about its ability to cancel a contract and fabricated evidence).

         Unlike in those cases, the only argument and evidence that MHA presented to the jury on the issue of exemplary damages was that Consilium intentionally breached the non-compete contract. MHA claimed that "the circumstances of this case [were] quite egregious, that everything was intentional, [Consilium] knew [MHA] had these agreements . . . and they breached them anyway." However, this is the exact type of argument that the Texas Supreme Court explains is insufficient to show malice when an element of the underlying cause of action is willful harm. See Safeshred, 364 S.W.3d at 662; Horizon, 2017 WL 2323106, at *9 ("evidence of the tort itself, with little more" is an improper basis for awarding exemplary damages). Even drawing all inferences in favor of MHA, see Casey, 770 F.3d at 326, the additional evidence MHA points to is insufficient to show that Consilium acted with specific intent to cause substantial harm to MHA. The proximity of the two businesses, without more, does not lead to the conclusion that Consilium acted with malice towards MHA. And the fact that Consilium's founder was a partner at MHA was not raised for the purpose of showing that MHA engaged in a strategic plan of hiring away MHA employees to harm it, but rather to show that Consilium was aware that MHA's employees had non-compete agreements. Moreover, MHA has never claimed that Consilium induced Gresham to steal or use its proprietary information, and the district court granted a motion in limine-not appealed here-that excluded all evidence of other MHA employees leaving for Consilium.

         Turning to MHA's vicarious liability argument, Texas will hold an employer "liable for exemplary or punitive damages because of the acts of [its] agent, but only if: (a) the principal authorized the doing and the manner of the act, or (b) the agent was unfit and the principal was reckless in employing him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or (d) the employer or a manager of the employer ratified or approved the act." Fisher v. Carrousel Motor Hotel, Inc., 424 S.W.2d 627, 630 (Tex. 1967). MHA, however, neither adduced evidence in support of a vicarious liability theory of recovery nor made a vicarious liability argument to the jury. Even if the jury concluded that Bowden targeted Gresham because of a desire to harm MHA, his personal animus towards MHA cannot support vicarious liability because it has not been alleged that he did anything more than induce Gresham to leave MHA. Therefore, MHA has failed to articulate how Bowden putting Gresham in contact with Consilium's recruitment staff evidences specific intent to cause MHA "to suffer substantial injury that [is] 'independent[ly] and qualitatively different' from the compensable harms associated with the underlying causes of action." Horizon, 2017 WL 2323106, at *10 (quoting Safeshred, 365 S.W.3d at 662).

         For these reasons, we conclude that the award of exemplary damages must be vacated.[1]

         B. Evidentiary Rulings

         Defendants appeal the district court's decision to allow the lay testimony of Mark Smith, MHA's president of eight years and a twenty-six year employee, on the issue of damages. Consilium argues that Smith should not have been allowed to testify about (1) lost profits, (2) the value of computer files taken or deleted by Gresham, and (3) training expenses because "virtually none of [his testimony] was based . . . on his ...

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