Attorney’s Fees Alone Can Constitute Damages for Inducement to Breach a Non-compete.

By: Katelyn Barham [1]

A recent decision by the Tennessee Court of Appeals extended the “independent tort theory” to the non-compete context. As a result, employers who poach employees from competitors may expose themselves to liability for attorney’s fees as compensatory damages.

Background

In HCTec, LLC v. Crawford, No. M202001373COAR3CV, (Tenn. Ct. App. Feb. 24, 2022), a personnel recruiting company, The Rezult Group, Inc., hired away a top recruiter, Mr. Crawford, to build a recruiting division that would compete with Crawford’s previous employer, HCTec Partners, LLC.

HCTec had employed Mr. Crawford for seven years as a personnel recruiter for Healthcare Information Technology, or HIT. At the start of his employment, Mr. Crawford signed a “Confidentiality, Non-Competition, and Non-Solicitation Agreement,” requiring him not to disclose proprietary information or engage in direct competition for one year after the end of his employment. Mr. Crawford further consented to a prevailing parties attorney’s fee provision, meaning that in the event that one party sued for breach in court, the winning party would be entitled to costs of the action, including its attorney’s fees.

HIT recruitment is a highly competitive industry, and Mr. Crawford excelled at HCTec, becoming a top recruiter and eventually getting promoted to hire, manage, and train other recruiters. When personnel recruiting company Rezult began looking for a way to build its own HIT recruiting department, a headhunter contacted Mr. Crawford. He agreed to leave HCTec and work for Rezult. By all accounts, Mr. Crawford was open with HCTec about resigning and going to work for Rezult, thinking that if he did not take company files or clients with him, he would not run afoul of his non-compete agreement with HCTec. HCTec did not see it that way.

HCTec sent a cease and desist to Rezult, demanding that Mr. Crawford not participate in Rezult’s HIT recruiting department until the Agreement’s one-year term expired. Rezult refused, arguing Crawford was not in violation of the Agreement because his position at Rezult was not “outward-facing.”

HCTec then sued Mr. Crawford for breach and sought to recover its attorney’s fees under the Agreement. HCTec then also sued Rezult for inducement of breach and requested trebled (that is, tripled) damages per Tennessee Code Annotated § 47-50-109.[2]

Independent Tort Theory

The trial court found Crawford breached the Agreement and Rezult induced him to breach. In keeping with the Agreement’s language, the trial court awarded attorney’s fees to HCTec as the prevailing party. For the claim against Rezult, HCTec pointed to the costs of litigating the claim as its monetary damages. Rezult argued that attorney’s fees alone could not be used to prove damages, but the trial court disagreed. It used the independent tort theory and awarded HCTec attorney’s fees from Rezult as compensatory damages.

In Tennessee, the “independent tort theory” comes from a 1985 Tennessee Supreme Court decision, Pullman Standard, Inc. v. Abex Corp, 693 S.W.2d 336 (Tenn. 1985). The theory serves as a basis for recovery for fees and costs from a party whose tortious action caused litigation between two other parties. In Pullman, a train manufacturer sought attorney’s fees as compensation from a wheelmaker for the tort of deceit. The manufacturer had been involved in a lawsuit with a third party after the train derailed. The state Supreme Court saw no reason to bar the manufacturer from recovering attorney’s fees from the wheelmaker if it could prove the wheelmaker’s tort of deceit was the “natural and proximate cause” of the later litigation with the third party. Essentially, if Party A commits a tortious act that results in involving Party B and Party C in litigation against one another, Party B can recover reasonable compensation for attorney’s fees from Party A. Because the injured party was “required to act in the protection of his interests by bringing or defending an action against a third person,” he was entitled to recover the costs and fees associated with defending those interests. See id. at 340.

Thus, when HCTec alleged Rezult’s tortious act resulted in the suit for breach of contract against Crawford, the trial court applied the independent tort theory and allowed HCTec to recover attorney’s fees as standalone compensatory damages from Rezult.

The American Rule

On appeal, Rezult argued the trial court’s decision to award attorney’s fees as compensatory damages did not comport with the “American Rule” generally applied by Tennessee courts. The American Rule only permits recovery of attorney’s fees if: “(1) a contractual or statutory provision creates a right to recover attorney's fees; or (2) some other recognized exception to the American Rule applies, allowing for recovery of such fees in a particular case.”[3]

While Pullman recognized the independent tort theory as one such exception for the tort of deceit, Rezult argued the trial court should not have extended the independent tort theory to the inducement of breach context. Rezult argued doing so would create a windfall for HCTec and incentivize parties to prolong litigation. The Court of Appeals, like the trial court, disagreed.

Interpretation of T.C.A. § 47-50-109

The Court explained that recognizing the independent tort theory in this context did not “run afoul” of the American Rule and instead comported with the purpose of T.C.A. § 47-50-109. That statute prohibits a person from inducing or procuring a breach of a lawful contract and allows an injured third party to sue the wrongdoer for inducing the breach.

In Crawford, the Court reasoned that allowing attorney’s fees to be awarded as compensatory damages would not create a windfall but would allow an injured party to enforce its rights under the law. Indeed, leaving HCTec with no option for recovery would render T.C.A. § 47-50-109 without force. Additionally, the Court rebuffed Rezult’s argument that this decision would incentivize litigation, finding that it had been Rezult’s inducement of breach that incentivized the litigation. In short, the Court decided that Rezult could not commit a tortious act and then say it was unfair for HCTec to pursue its lawful interests in court. Thus, allowing HCTec to recover under the independent tort theory comported with the purpose of T.C.A. § 47-50-109, and Rezult was required to pay attorney’s fees as compensatory damages because of its inducement of breach.

Trebled Damages and Costs of Appeal

Rezult paid dearly for its inducement of breach. T.C.A. § 47-50-109 covers those who attempt to procure a breach and those who procure a breach. For the latter, the statute allows damages to be trebled (tripled). The Court of Appeals agreed with the trial court’s decision in this case that Rezult both attempted and procured a breach of the Agreement. Hence, the attorney’s fees HCTec sought as compensatory damages should be trebled. That meant the $200,000 awarded in attorney’s fees and expenses became $600,000 under the statute.[4] Further, the Court of Appeals saw no reason why the attorney’s fees for the appeal should not be included in the award and ordered Rezult to pay those as well.[5]

An Expensive Hire

In the end, Rezult got the experienced employee it wanted, but at considerable cost. While the Court of Appeals was careful to cabin its decision to “the circumstances of this case,” its affirmation that the independent tort theory can apply in the non-compete context to third parties who induce the breach will no doubt be relied upon by many employers in future litigation.

Although every case is different, companies who recruit employees from competitors should be aware that if a breach of contract claim arises between the previous employer and the employee, the employer may pursue a separate claim for inducement under T.C.A. § 47-50-109 and seek to recover its attorney’s fees, in treble, as compensatory damages even if it cannot show monetary damages.

[1] Ms. Barham, our guest blogger, is a rising third-year law student at Belmont University College of Law. She worked as a summer associate with Meridian Law in the summer of 2022.

[2] “It is unlawful for any person, by inducement, persuasion, misrepresentation, or other means, to induce or procure the breach or violation, refusal or failure to perform any lawful contract by any party thereto; and, in every case where a breach or violation of such contract is so procured, the person so procuring or inducing the same shall be liable in treble the amount of damages resulting from or incident to the breach of the contract. The party injured by such breach may bring suit for the breach and for such damages.”

[3] Cracker Barrel Old Country Store, Inc. v. Epperson, 284 S.W.3d 303, 308 (Tenn. 2009).

[4] See Judgment as to the Rezult Group, Inc., September 3, 2020, Chancery Court for Williamson County, Tennessee (awarding judgment against Rezult in the amount of $200,000, trebling that amount to $600,000, but noting any amount paid by Mr. Crawford would reduce the total amount collectible from Rezult).

[5] This case was appealed to the Tennessee Supreme Court on May 13, 2022. At the time of this post, the trial court has not issued a judgment on remand that includes the additional trebled fees from the appeal.