A recent $6.9 million verdict by a Pennsylvania state court judge serves as a stark warning to employers that hire a group of employees who resign together en masse. The case, B.G. Balmer & Co. Inc. v. Frank Crystal & Co., out of Chester County in Pennsylvania arose out of claims that a group of insurance brokers violated the non-solicitation clause in their employment agreements with their former employer, B.G. Balmer.
These mass exodus cases happen frequently in the financial services industry and can be particularly dangerous cases, especially where the employees improperly solicit colleagues or clients to join them before leaving. These cases are notoriously contentious and emotional -- think about your standard non-compete case, throw in a cup of betrayal, shake well, and then add a healthy jolt of steroids. I have not yet been able to locate the trial court's opinion yet (I understand it may be filed under seal) but Gregory D. Hanscom has a fine post about the case in Fisher & Phillips ' Non-Compete and Trade Secrets Blog.
According to Gregory, the group of departing employees first began to consider switching insurance brokers from B.G. Balmer to Frank Crystal & Co. when they individually met with a recruiter in May 2003. Less than three months later, those employees all resigned from B.G. Balmer on the same day (never a great idea) and promptly started working for Crystal. After they left, about 20 of B.G. Balmer's clients switched their accounts to Crystal.
After B.G. Balmer secured a preliminary injunction restraining the employees (affirmed on appeal by the Pennsylvania Superior Court), the dispute proceeded to a bench trial to determine the ultimate issues of liability and damages. According to Gregory's account of the case, B.G. Balmer effectively painted a sinister picture of the employees’ actions. B.G. Balmer argued that the former employees engaged in a calculated and concerted effort to disrupt its business by resigning on the same day and attempting to induce a number of clients to switch insurance brokers. The trial court rejected the employees' argument that the clients chose to switch insurance brokers on their own volition, and not because of any improper solicitation.
The trial court awarded $2.4 million in compensatory and $4.5 million in punitive damages, an unusual ruling since judges are generally perceived as being less willing to award punitive damages than juries.
Watch Out for Breach of Fiduciary Duty Claims. In addition to claims of the breach of a non-compete or non-solicitation agreement, one of the common claims that arise in these mass exodus cases is whether the former employees breached their fiduciary duties to their former employer when they planned to leave. Many states, including Ohio, impose a fiduciary duty of loyalty on an employee not to compete or harm his or her employer while he/she is on that employer's payroll.
Most states do recognize that an employee has the right to prepare to leave his or her job. Consequently, routine preparations to compete -- interviewing, leasing office space, hiring an accountant, forming a company, issuing business cards -- are frequently permitted. So long as the employee takes those actions after hours and not at the office, those actions will generally found to be proper.
However, things can get more interesting when the employee recruits others to leave while they still share the same employer. In my experience, courts will tolerate 2 or 3 employees having conversations about leaving their job together. However, courts grow more suspicious as that number grows, particularly when the departures then appear timed to put the former employer in the lurch or cause it substantial damage. My experience and research indicate that the facts of each case dictate whether the employees acted inappropriately.
However, there is one line in the sand that will trigger a finding of a breach of the duty of loyalty: if the employee solicits a customer before leaving. In my experience, courts will tolerate some mistakes but it is the solicitation of clients before resigning, misconduct that is compounded exponentially in mass exodus cases, that sets courts off the deep end. The punitive award in the B.G. Balmer case is an important reminder of that fact.
Takeaways: For the employees looking to avoid a mass exodus claim against them, take heed of the Trade Secret Litigator's Seven Deadly Sins of Departing Employees. These rules are particularly important to follow in mass resignation cases because as the B.G. Balmer case makes clear, every action may take on a more sinister note when it is coupled with the actions of other co-workers who are planning on leaving. The cumulative effect of this evidence can be devastating.
For employers taking on a group of employees, make sure that they follow their non-solicitation agreements, if they have any. If they do not have those agreements, make certain that they also do not solicit co-workers or clients until after they leave. Make sure they keep it clean.
Non-Solicitation Agreements | Pennsylvania | Restrictive Covenants
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