J M Neil & Associates, Inc. (“JMN”), a woman-owned business, entered into a teaming agreement in 2005 with Alexander Robert William, Inc. (“ARW”), a veteran-owned business, in hopes of being awarded a veteran set-aside General Services Administration contract. Under the teaming agreement, ARW would be the prime contractor under the GSA contract, and JMN would serve as a subcontractor to ARW. The teaming agreement contained a non-compete agreement that prohibited ARW from hiring the JMN employees who were to work on the GSA contract or attempting to influence them to remain with ARW after termination of the GSA agreement.
ARW was awarded the GSA contract, and the two companies performed under the contract for a few years, until ARW terminated the teaming agreement in 2009. Although ARW needed a JMN employee to continue working on the GSA contract, the non-compete clause in the teaming agreement prohibited ARW from hiring the employee. In an attempt to circumvent the non-compete, ARW’s owner (Smith) arranged for the employee to be hired by a staffing company owned by his mother.
JMN brought suit seeking to enjoin ARW from terminating the agreement and to recover damages for breach of contract, tortious interference, and conspiracy to breach and interfere with a contract. After a jury trial the jury found in favor of JMN on all counts and awarded compensatory and punitive damages. The defendants filed a motion for judgment notwithstanding the verdict and the trial court granted the motion with respect to the punitive damages award. JMN appealed.
Reckless or willful conduct can support punitive damages
The appeals court reversed the trial court’s judgment, holding that JMN had made a submissible case for punitive damages in that it provided clear and convincing evidence of the defendants’ evil motive and reckless disregard for JMN’s rights. The following facts supported the verdict:
- Smith’s mother was present at a meeting at the GSA’s office and encouraged Smith to terminate the teaming agreement at the conclusion of the meeting.
- Smith was warned by ARW’s former vice president and projects manager of potential litigation that could result if ARW kept JMN’s employee working on the GSA contract after termination of the teaming agreement.
- Smith told the JMN employee that he could continue working on the GSA contract if he worked for another staffing company.
- Smith gave the JMN employee a list of four staffing companies, one of which was the company owned by his mother.
- Smith’s mother hired the JMN employee when the employee called her. She was in the office on a Saturday in order to take the call.
- Smith’s mother knew about the non-compete agreement.
- The evidence permitted a reasonable inference that Smith and his mother conspired to hire the JMN employee away from JMN so that he could continue to work on ARW’s GSA contract in violation of the non-compete provisions of the teaming agreement.
- If ARW had not hired the JMN employee, it would have had to wait several months for a replacement employee to undergo the necessary background checks.
The appeals court thus reversed the trial court’s judgment and remanded the case with instructions to reinstate the jury’s award of punitive damages.
Be careful out there
Business people and their counsel should take this case as a reminder that they can be assessed punitive damages even for contract issues. Punitive damages generally aren’t available for breach of contract cases, but, with the right facts, punitive damages are available to plaintiffs. In this case, the punitive damages were almost four times the amount of compensatory damages, so the specter of punitive damages significantly raises a defendant’s exposure.