Cas Severn, Inc. v. Awalt

HOTTEN, J. This appeal arises out of a breach of contract claim brought by appellant, CAS Severn, Inc. (hereinafter referred to as either “CAS” or “the company”), against the appellee, Andrew ⁶⁸⁷ Await (“Await”), for failure to abide by a professional service agreement’s covenant not to compete. As discussed in more detail infra, CAS contends that Await breached his contractual obligation by violating Section 9 of the Professional Service Agreement (“PSA”), prohibiting Await from soliciting the services of any employee or contractor of CAS for a period of one year following the termination of Awalt’s business relationship with CAS. As a consequence, CAS filed a complaint against Await in the Circuit Court for Prince George’s County and sought, among other things, a judgment in the amount of $313,999.50, attorney’s fees, court costs, and a preliminary and permanent injunction prohibiting Await from further solicitation. After three months of discovery, the parties commenced trial on December 5, 2011.

On the last business day before trial, however, Await moved in limine and asked the court to find the liquidated damages clause of the contract void and unenforceable. Following argument of counsel, the court reserved its ruling on the matter, permitting trial to proceed. After a two-day jury trial and five hours of deliberations, the jury was unable to unanimously reach a verdict regarding whether Await had breached the terms of his agreement with CAS, and a mistrial was declared. Thereafter, the court entertained post-trial supplemental briefing on the validity of the liquidated damages clause.

On February 6, 2012, the circuit court granted Awalt’s motion by written order and declared the liquidated damages clause void and unenforceable because the provision was punitive and not compensatory in nature. Judgment was entered and the case was closed statistically. Following the circuit court’s denial of CAS’s motion to reopen its case or, in the alternative, alter or amend judgment, CAS noted a timely appeal to this Court and has presented two questions for our review: 1. Did the [cjircuit [cjourt err in voiding the PSA’s liquidated damages clause when its determination disregarded binding Maryland authority? ⁶⁸⁸ 2.

Did the [c]ircuit [c]ourt err in denying CAS a re-trial on the merits of its breach of contract claim? For the reasons outlined below, we shall answer, “yes” to CAS’s first question, reverse the judgment of the circuit court, and remand the ease for further proceedings. Because we conclude that the court’s judgment contravened settled precedent regarding the validity of liquidated damages provisions, we need not reach the other issue raised. I. FACTUAL AND PROCEDURAL BACKGROUND CAS first became acquainted with Await as a result of its business relationship with Landrover of North America (“Landrover”) in the late 1990’s.

At the time, Await was a computer engineer working for Landrover doing “everything an IT individual could do.” As CAS began building its engineering department, CAS offered Await an employment opportunity in October of 2002. Thereafter, Await worked for CAS as a systems engineer, spending the majority of his time working with the company’s customers to implement solutions to CAS’s computer-based technological services. After four years of employment with CAS, Await resigned as a full-time employee in October of 2006, but continued working as an independent contractor for the company. On November 1, 2006, Await entered into a four-page Professional Service Agreement (“PSA”) with CAS, which governed his retention with the company.

Pursuant to the PSA, Await agreed to provide technical services on a continuous basis until either of the parties terminated the PSA on fourteen days’ notice. In addition, Section 9 of the PSA contained a covenant not to compete, and provided in pertinent part: No solicitation. During the Term and for a period of one (1) year thereafter, Contractor [Await] agrees not to hire, solicit, nor attempt to solicit, the services of an employee or contractor of CAS nor shall the Contractor seek or accept employment from Client without the prior written consent ⁶⁸⁹ of CAS. Violation of this provision shall entitle CAS to assert liquidated damages against the Contractor equal to one hundred fifty (150) percent of the solicited person’s annual compensation.

In 2007, Await began his employment as a sales engineer with Qwest Communications (“Qwest”), 1 a telecommunications provider of data and voice communications. During this time, however, Await continued his independent contractor relationship with CAS under the terms of the PSA. Following his first three years of employment with Qwest, Await was promoted to sales engineer manager in the spring of 2010. As an engineering manager, Await became “part of a process for on-boarding individuals.” As a consequence, Await assumed the responsibility of hiring other sales engineers.

Await was required to fill two sales engineer positions with individuals that would work directly under him at Qwest. Shortly thereafter, two of CAS’s engineers, Jeff Jeglinski (“Jeglinski”) and Mohammed Naji (“Naji”), were hired to fill these two positions at Qwest. Await had forwarded a job posting to Jeglinski in 2008 and sent additional employment postings to both Jeglinski and Naji. Jeglinski had worked as a systems engineer for CAS since 2002.

According to John Blanchette (“Mr. Blanchette”), Vice President of CAS’s operations, Jeglinski was a “very bright engineer” able to handle almost any task assigned to him. Indeed, Jeglinski’s skill set was highly sophisticated and there were “very few people ... [who] were able to do some of the things he was doing.” When Jeglinski submitted his letter of resignation to CAS on June 23, 2010, he was a senior engineer with an annual salary of $104,333. Unlike Jeglinski, Naji had been working as a waiter attending Capitol College when CAS hired him as a technician in 1997. CAS sponsored Naji’s employment visa, provided him engineering opportunities, and trained him from “the ground up.” As one of the company’s ⁶⁹⁰ system engineers, Naji was rarely in the office, primarily spending his time addressing the concerns and needs of CAS’ clientele.

When Naji resigned from his employment with CAS in June 2010, he was earning an annual salary of $103,000. Believing that Await had violated Section 9 of the PSA, CAS instituted a breach of contract claim against him on September 14, 2010 in the Circuit Court for Prince George’s County, seeking, among other things, a judgment in the amount of $313,999.50, attorney’s fees and court costs, and injunctive relief designed to prohibit Await from further solicitation. CAS presented two witnesses at trial to explain the rationale behind Section 9’s liquidated damages provision: Mr. Blanchette and Douglas Gerstmyer (“Mr. Gerstmyer”), one of CAS’s founding members. During Mr. Blanchette’s direct examination, he described the substantial money and effort CAS expended in order to replace one of the company’s employees.

Specifically, Mr. Blanchette noted that ... to bring an engineer into our line of work, to train [him or her] in how we do things and how our clients like to see it, certifications that we work closely with IBM and other vendors that we have to be certified in their product to sell or to maintain. Some of those trainings cost anywhere from [sic] between $3,000 and $5,000. The fees to, to hire from recruiter is anywhere between 15, 20, 25 percent, depending on the level of the person that we’re trying to hire. To bring the skill set up, to get them into the client, get the, the client to trust them the way they do people who have been with us for a while.

You know that’s, there’s so many intangible pieces to it. The loss of productivity during the time the person is coming up. You know[,] it could be a little, it could be a lot[.] [I]t depends on the circumstance. (emphasis added).

In addition, Mr. Gerstmyer corroborated Mr. Blanchette’s testimony regarding the difficulty in calculating CAS’s incurred damages resulting from a breach of Section 9’s covenant not to compete provision. He further attested to the ⁶⁹¹ reasonableness of the one hundred fifty percent multiplier, indicating that he thought ... it [was] reflective of the significant cost [of] not only ... replacing the person, the recruiting fees, the initial training, getting some certifications, but it mainly is more reflective of the creation of the client relationships that happen over the course of years. And also, the significant loss of billings that the company suffers when a valuable person leaves the firm. Software and engineering companies like ours don’t have any assets.

The only thing we really have that is significant value is our, our employees. If we don’t have employees, we don’t have a company. Mr. Gerstmyer further attested that when CAS lacks the ability to replace the specific skill sets of employees the company has lost, it does not have the “privilege of, of the revenue that those people earned.” At the close of CAS’s case and at the close of evidence, Await moved for judgment on liability and renewed his motion in limine regarding the liquidated damages. Nonetheless, the circuit court denied those motions, stating, “... you know at this point, the inferences have to be in the favor of [CAS].” The circuit court subsequently reserved on Awalt’s motion in limine.

As a result, the case was submitted to the jury for deliberation. Unfortunately, the jury was unable to reach a unanimous verdict, resulting in the circuit court declaring a mistrial. On December 20, 2011, CAS filed “[a] line requesting rescheduling of trial which originally resulted in a mistrial.” However, on February 6, 2012, the circuit court granted Awalt’s motion in limine, declaring the liquidated damages clause void and unenforceable because CAS had failed to meet the burden of demonstrating actual damages. Curiously, the court additionally instructed the clerk to close the case statistically.

Thereafter, CAS filed a post-trial motion to reopen the case or, in the alternative, pursuant to Maryland Rule 2- ⁶⁹² 534, 2 to alter or amend judgment, which the circuit court subsequently denied. As a result, CAS noted a timely appeal to this Court. Additional facts shall be provided infra as they bear on the issues before this Court.

II

STANDARD OF REVIEW We observe that “ ‘[w]hen reviewing a trial court’s construction or interpretation of a written contract, we do so as a matter of law.’ ” Willard Packaging Company, Inc. v. Javier (“Willard”), 169 Md.App. 109, 120 , 899 A.2d 940 (2006) (quoting Nationwide Ins. Cos. v. Rhodes, 127 Md.App. 231, 235 , 732 A.2d 388 (1999).) “ ‘[T]he determination of whether a particular clause in a contract is to be construed as providing for liquidated damages, or as a penalty, depends on the facts and circumstances in each case and is ordinarily a question of law for the court.’ ” Id. at 120-21, 899 A.2d 940 (quoting Traylor v. Grafton, 273 Md. 649, 667 , 332 A.2d 651 (1975) (citing H.J. McGrath Co. v. Wisner, 189 Md. 260, 264 , 55 A.2d 793 (1947))). Thus, the issue of whether a contract’s liquidated damages provision is valid or a penalty is a question of law which we review de novo. Barrie School v. Patch, 401 Md. 497, 507 , 933 A.2d 382 (2007) (citing Bd. of Educ. v. Heister (“Heister”), 392 Md. 140, 155 , 896 A.2d 342 (2006), and ⁶⁹³ Hammaker v. Schleigh, 157 Md. 652, 667 , 147 A. 790 (1929)).

It is through this lens that we address the arguments presented before us.

III

DISCUSSION In support of CAS’s first assignment of error, it contends that “the liquidated damages clause of the PSA satisfies all three requisite elements of a valid clause.” CAS highlights Awalt’s concession to two of the three essential elements of a valid clause, see infra; and, to that end, presents two arguments demonstrating satisfaction of the remaining element to the liquidated damages inquiry. Specifically, CAS argues that the circuit court erroneously accepted Awalt’s “no-actual-harm” defense, “thereby essentially adding a fourth ‘element’ to a valid liquidated damages clause that the amount be supported by the non-breaching party’s actual damages.” In addition, CAS avers that the circuit court additionally erred “by shifting the burden of demonstrating actual damages when, under Maryland law, the challenger of a liquidated damages clause bears the burden of proving the unenforceability of the clause.” We agree with CAS. It is well-settled that “[u]nder the principles of freedom of contract, parties have broad right to construct the terms of the contracts they enter into as they wish, providing the contract is neither illegal nor contrary to public policy.” Willard, 169 Md.App. at 122 , 899 A.2d 940 . Generally, “courts will not inquire into any inherent disparity in the utility of a given exchange between the parties, but solely into its voluntariness.” Id.

(citations omitted). As a consequence, the law of compensatory damages applies to most actions brought in contract and “provid[es] a standard measure of compensation limited to the amount of injury incurred under a breach of contract.” Id. (citations omitted). In some instances, however, liquidated damages provisions “allow private parties to reform that fixed concept of injury providing relief in excess, or in lieu, of compensatory damages.” Id. ⁶⁹⁴ In that regard, “[liquidated damages have been defined as a specific sum stipulated to and agreed upon by the parties at the time they entered into a contract, to be paid to compensate for injuries in the event of a breach of contract.” Barrie School, 401 Md. at 507 , 933 A.2d 382 (citing Heister, 392 Md. at 155 , 896 A.2d 342 ).

The fundamental purpose of liquidated damages is “to provide a reasonable measure of compensation in the event of a breach where, at the time the provision is agreed to the damages are indeterminable or will be otherwise difficult to prove.” 24 Williston on Contracts § 65:3, p. 250 (4th ed. 2002). Therefore, when a reviewing court is called to determine the validity of a liquidated damages provision, the court conducts “a more searching inquiry into the propriety and reasonableness of the agreement itself, under the auspices of the so-called penalty doctrine, than would be conducted in any more typical contract case.” Willard, 169 Md.App. at 123 , 899 A.2d 940 (footnote and citations omitted). A court must examine the reasonableness of the amount fixed as liquidated damages “from the standpoint of the parties at the time the contract was made.” Traylor v. Grafton, 273 Md. 649, 663 , 332 A.2d 651 (1975). Additionally, the court is required to determine the enforceability of a liquidated damages clause through an evaluation of three essential elements that ensure the clause’s validity: ... “First, such a clause must provide ‘in clear and unambiguous terms’ for a ‘certain sum’[.]” Mass.

Indent. & Life Ins., [v. Dresser ], 269 Md. [364], 368, 306 A.2d [213] at 216 [ (1973) ] ([c]itation omitted). “Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach[.]” [Id.] at 369, 306 A.2d at 216 ( [citations omitted). “Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact[.]” Id. (citations omitted). While the language used by the parties is instructive in determining the validity of a liquidated damages clause “[t]he decisive element is the intention of the parties— whether they intended that the sum be a penalty or an ⁶⁹⁵ agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.” Traylor [v. Grafton ], 273 Md. [649], 661, 332 A.2d [651] at 660 [ (1975) ] ([citations omitted). Heister, 392 Md. at 156 , 896 A.2d 342 (emphasis added), quoted in Barrie School, 401 Md. at 509 , 933 A.2d 382 (internal citations and quotations omitted in Barrie).

In the instant case, neither party disputes that Section 9 of the PSA provides in “clear and unambiguous terms” a certain sum, nor do they aver that the clause may be altered to correspond with actual damages after the fact. Therefore, our analysis in the case at bar is limited to the second essential element of a valid liquidated damages clause: that “the liquidated damages must reasonably be compensation for the damages anticipated by the breach.” Barrie School, 401 Md. at 509 , 933 A.2d 382 (quoting Heister, 392 Md. at 156 , 896 A.2d 342 ) (internal citations and punctuation omitted in Barrie). Most recently, the Court of Appeals was called upon to consider the related issue of “whether a non-breaching party to a contract has a duty to mitigate damages where the contract between the parties contains a valid liquidated damages clausef,]” in Barrie School v. Patch, 401 Md. 497 , 933 A.2d 382 (2007) (additionally concluding that the liquidated damages clause was valid and enforceable). There, a private, non-profit Montessori school entered into a re-enrollment agreement with the parents of one of the school’s attendees (hereinafter collectively referred to as