Indiana Supreme Court Holds Liquidated Damage Provisions are Unenforceable Penalties

The Indiana Supreme Court affirmed the trial court on both issues on appeal in the case of American Consulting, Inc. d/b/a American Structurepoint, Inc. (“American”) versus Hannum Wagle & Cline Engineering, Inc., d/b/a HWC Engineering, Inc. (“HWC”), Marlin A. Knowles, Jr., Jonathan A. Day, David Lancet, and Tom Mobley, originally filed in the Marion County Superior Court.

American-HWC-Engineering-logos-1-300x100Knowles, Day, Lancet, and Mobley were all previous employees of American. Mobley was granted summary judgment in his favor in the trial court so claims against him were not discussed on appeal. Each of the employees signed contracts precluding them from hiring or employing other American employees. These contracts each had clauses for liquidated damages upon breach set at 50% of the employee’s pay during the twelve months prior to the breach for Knowles and 100% of the employee’s pay during the twelve months prior to the breach for Day and Lancet.

HWC, a competitor of American hired Knowles after he left his employment with American. Lancet and Day later joined Knowles at HWC, successfully recruiting seven other American employees to work for HWC. American sued the employees and HWC for breach of contract and tortious interference with American’s contractual and business relationships. The trial court granted Defendants’ motion for summary judgment “on the issue of liquidated damages, finding that the liquidated damages clauses were unenforceable as a matter of law.” The trial court also granted summary judgment on the tortious interference claim in favor of Day, but found issues of material fact regarding the contracts with Knowles and Lancet. The Court of Appeals on interlocutory appeal “affirmed the trial court on the tortious interference issue but reversed the trial court on the liquidated damages issue finding these provisions were enforceable.”

The Supreme Court granted transfer, vacating the Court of Appeals opinion pursuant to Ind. Appellate Rule 58(A). The Court found multiple issues with the liquidated damages provisions. First, the Court could not find a clear correlation between an employee’s salary for the prior year and the loss to the company. Next, Knowles had a higher rank within the company and made more money, but he was only responsible for 50% of a recruited employee’s salary while Day and Lancet were responsible for 100%. Finally, “because several employees were recruited in violation of all three agreements at issue, [American] was seeking 250% of their respective salaries.” Finding that the liquidated damages provisions are unenforceable penalties and that they were not sufficiently correlated to American’s alleged loss, the Court affirmed the trial court on the liquidated damages issue.

The parties disagree about how the absence of justification element of tortious interference with a contractual relationship claim must be proven. Defendants argue “the defendant must act intentionally and without a legitimate business purpose and that ‘the breach is malicious and exclusively directed to the injury and damage of another.’” Morgan Asset Holding Corp. v. CoBank, ACB, 736 N.E.2d 1268, 1272 (Ind. Ct. App. 2000) (citation omitted). American argues the standard should be “whether the conduct at issue is fair and reasonable and believes application of the Restatement factors is appropriate.” The Court held that no matter which standard was applied, an issue of material fact remains so as to preclude summary judgment. Therefore, the Court affirmed the trial court on the tortious interference with a contractual relationship claim.

Justice Slaughter concurred in part, and dissented in part stating, “I respectfully dissent from the Court’s conclusion that [American] cannot enforce its contracts and collect the liquidated damages that the parties agreed would be warranted in case of breach.” Further, it was the Defendants’ “burden, substantively, as the parties challenging the legality of the bargains they struck, to prove the liquidated-damages provisions are unenforceable penalties” yet they did not. Justice Slaughter joined the rest of the Court’s opinion. Justice Massa joined Justice Slaughter’s opinion.

This case was assigned Supreme Court Case No. 18D-PL-00437. The Opinion dated December 18, 2019 was by Justice Steven H. David with Chief Justice Loretta H. Rush and Justice Christopher Goff concurring.


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