Commercial litigation update: Fifth Circuit affirms verdict against competitor for luring away exclusive sales agent

Posted
by Jay Pate

The federal Fifth Circuit Court of Appeals has affirmed a judgment in favor of a check processing company against a former sales agent for $2.15 million and against a competitor for $700,000. The court of appeals held:

  1. sufficient evidence established that the competitor knew or should have known of an exclusivity provision in a contract between the sales agent and the plaintiff; and
  2. the jury’s award against the competitor was properly limited to damages proximately caused by the competitor’s tortious interference with the contract; but
  3. the competitor was not jointly and severally liable with the sales agent for damages caused by the sales agent’s breach of fiduciary duty.

Homoki v. Conversion Services, Inc., No. 11–20371 (5th Cir. May 28, 2013).

The plaintiff, Global Check Services, sells check and debit/credit processing services to merchants. Global Check developed a product it calls “Accounts Receivable Conversion” (ARC). Global Checks markets the product through agents. For a time, the largest agent selling the product for Global Check, by far, was Conversion Services, Inc. (“CSI”), run by Larry Stuart.

Global Checks argued that Mr. Stuart and CSI agreed in 2008 that they would refrain from selling competitors’ products. Whether CSI ever signed the 2008 contract and whether Mr. Stuart was aware of the exclusivity provision in the contract were contested issues at trial.

Defendant Electronic Payments Systems (“EPS”) developed a competing product to Global Check’s ARC product. Mr. Stuart testified that he had been in contact with EPS at least since 2006, when EPS informed him that they were interested in developing a program similar to ARC. EPS knew that CSI worked as a selling agent for Global Check and sought to profit from Mr. Stuart’s knowledge of how the ARC program was sold. Mr. Stuart testified that in October 2008, as EPS was preparing to bring the EPS90 service to market, he discussed with EPS employees how the service should function and how it should be marketed. Both parties anticipated that Mr. Stuart would work as an agent selling the EPS90 service. Mr. Stuart obtained his first EPS90 contract in November 2008.

Mr. Stuart’s CSI was not the only Global Check agent that EPS attempted to recruit. Another agent of GCS, Ms. Beranek, testified that EPS tried to persuade her to sell for EPS and to move merchants from Global Check Services to EPS. There was also testimony that someone using CSI’s password accessed confidential portions of Global Check’s computer system from computers owned by EPS and obtained confidential information related to Global Check’s merchants.

Global Check filed suit against both CSI and PES. Following trial, the jury returned the following verdict:

  1. CSI breached its contract with Global Check, causing Global Check to suffer $1.15 million in past lost profits and $1 million in future lost profits;
  2. CSI’s relationship with Global Check was an agent/principal relationship, and CSI breached its fiduciary duty to Global Check, resulting in $1.15 million in past lost profits and $1 million in future lost profits;
  3. EPS conspired with CSI to breach CSI’s fiduciary duty to Global Check, proximately causing damage to Global Check. The jury was not asked to find, and did not find, the amount of damages caused by the conspiracy;
  4. CSI committed fraud against Global Check, causing damages in the amount of $1.15 million in past lost profits and $1 million in future lost profits; and
  5. EPS intentionally interfered with Global Check’s existing contract with CSI, causing Global Check to suffer $200,000 in past lost profits and $500,000 in future lost profits.

The district court entered judgment in the amount of $2.15 million against CSI and $700,000 against EPS. Global Check and EPS lodged timely appeals. CSI did not appeal.

On appeal, EPS argued that the evidence presented at trial was insufficient to support the jury’s findings that EPS interfered with the Global Check/CSI contract or that this interference caused $700,000 in lost profits. The Fifth Circuit assumed that EPS could only be liable for tortiously interfering with the contract between Global Check and CSI if EPS either knew or reasonably should have known that the contract prevented CSI from selling for anyone else.

Global Check presented no direct evidence that EPS knew about the exclusivity provision. At trial, EPS’s corporate representative testified that he had no knowledge of any exclusivity clause.

However, Global Check presented testimony that at least one person at CSI saw the exclusivity clause: there was testimony that a CSI employee informed Global Check that Mr. Stuart would not agree to the exclusivity provision. There was also evidence that other Global Check agents knew their contracts contained an exclusivity clause and that EPS nevertheless tried to persuade them to stop selling for GCS and start selling for EPS. Ms. Beranek, an agent of Global Check, testified that she knew that her contract with Global Check included an exclusivity provision. She also testified that Mr. Maley, the CEO of EPS, tried to convince her to stop selling for Global Check and start selling for EPS. Global Check introduced a letter written by Beranek to an employee of Global Check in which she stated, “[p]lease inform David [Homoki] that EPS is doing all it can to try and persuade Global Check’s active agents to leave, even though Global Check is light years ahead of EPS in terms of dealing with agents and merchants.” There was also substantial evidence that EPS and Mr. Stuart worked together to develop the EPS90 program and that EPS ultimately succeeded in persuading Mr. Stuart to switch to EPS.

On this issue, the Fifth Circuit concluded:

While the evidence is not overwhelming, we think that reasonable jurors could find that these facts and circumstances should have led a reasonable company in EPS’s position to believe in the existence of the exclusivity clause. […] Given EPS’s aggressive push to recruit GCS’s agents, we do not find such an inference unreasonable. The intent-to-interfere element of the tortious interference with contract claim was thus proved with sufficient evidence.

Homoki v. Conversion Services, Inc., No. 11–20371.

The court of appeals then found that Global Check presented sufficient evidence to support the award of $700,000 in lost profits due to ESP’s tortuous interference:

There is sufficient evidence to support a finding that CSI contributed approximately half of GCS’s profits on any given year. In 2010, a year in which CSI did not contribute to any of GCS’s profits, GCS earned $210,000 in profits. Thus, one could conclude that had EPS not caused CSI to stop selling for GCS at the end of 2008, CSI would have brought in roughly $200,000 a year in profits. Mr. Homoki testified that CSI brought in no new merchants for 2009 and that merchants generally stayed on for two years. Thus, one year of past lost profits (2009) plus two years of future lost profits (2010 and 2011) would yield $600,000 in lost profits. To account for the steady upward trend in GCS’s profits and CSI’s contribution to those profits, the jury could have added an additional $100,000 to arrive at the $700,000 figure While GCS’s presentation of its damages evidence was far from ideal, we think that there is sufficient evidence to support $700,000 in past and future lost profits.

Id.

However, the court of appeals rejected Global Check’s argument that EPS should have also been found responsible for the $1.15 million in past lost profits and $1 million in future lost profits found by the jury as damages for the breaches of fiduciary duty by CSI. The court of appeals noted that there was considerable evidence that such damages were due in large part to conduct by CSI that was completely unrelated to the conduct of EPS. For example, there was evidence that CSI injured Global Check by making misrepresentations to merchants when selling the product and by failing to properly service merchant ARC contracts. Thus, the court of appeals concluded:

There was no evidence that EPS had knowledge of, or intended to participate in, CSI’s misrepresentations to merchants or its failure to service merchant ARC contracts. Rather, as is discussed in more detail above, the evidence showed that a significant portion of GCS’s lost profits were caused by actions of CSI in which EPS had no part. We cannot say with any degree of certainty that the amount of damages proximately caused by the civil conspiracy in which EPS participated is the same amount caused by CSI’s breach of its fiduciary duty. The jury’s verdict regarding the amount of damages caused by CSI’s breach of fiduciary duty does not, therefore, mandate entry of judgment in the same amount against EPS.

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