David, J.
This is an action by an employer against several of its former employees and their new employer for alleged violations of the former employees’ noncompetition and non-solicitation agreements. The employer brought various claims, including tortious interference with a contractual relationship and breach of contract claims, against its former employees. At issue, among other things, is whether the liquidated damages provisions in the employees’ contracts are enforceable. We hold that they are not. With regard to American Structurepoint, Inc.’s tortious interference claims, we find that the trial court correctly held that summary judgment was not appropriate because there remains an issue of material fact. Accordingly, we affirm the trial court on all issues.
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I. The liquidated damages provisions are unenforceable penalties.
A. Defendants have shown that the provisions are facially unreasonable.
At issue is whether the liquidated damages provisions in the Knowles, Day and Lancet agreements constitute unenforceable penalties. Defendants argued, and the trial court determined, that they are. Specifically, Defendants argue the liquidated damages in this case are not fairly correlated to ASI’s actual loss and therefore constitute a penalty. For its part, ASI agrees with the Court of Appeals majority: because the agreements at issue were freely negotiated and the amount of damages resulting from the contract breaches are difficult to ascertain, these liquidated damages clauses are enforceable. For reasons discussed herein, we agree with the Defendants and find that the liquidated damages provisions in this particular case are unenforceable penalties.
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The facts show that the employee solicitation restriction in the Knowles agreement provides that he pay 50% of the annual salary of each employee that leaves ASI due to his actions. The trial court found that this would amount to approximately $272,165 in damages. The Day and Lancet agreements provide that they must each pay 100% of the salary for each employee that leaves ASI due to their actions. This would amount to approximately $238,374 for Day and $176,813 for Lancet. The client solicitation restriction in the Knowles agreement provides that he is responsible for 45% of ASI’s prior 12 months of revenue generated by the client if Knowles violates the agreement and that client purchases services from HWC. The trial court found that these damages could be in the range of millions of dollars.
While ASI is correct that the damages in this case are difficult to ascertain and this Court has previously noted its unwillingness to interfere in the freely negotiated contracts of the parties (see Time Warner, 802 N.E.2d at 886), this alone is not enough to enforce a liquidated damages provision. The liquidated damages provisions related to employee recruitment in this case are facially problematic for several reasons. [Footnote omitted.]
First, it is not clear how an employee’s salary for the prior year correlates to the loss to the company as salary alone is not reflective of revenue to ASI. While the salary of an employee factors into revenue to some extent, it is not the only variable that determines revenue, and ASI could hire other employees. It is also not clear why Knowles, who held a higher rank and made more money than Day or Lancet, is responsible for 50% of a recruited employee’s salary while Day and Lancet are responsible for 100% of it. Additionally, as Judge Riley aptly noted in her dissent in the Court of Appeals below, because several employees were recruited in violation of all three agreements at issue, ASI was seeking 250% of their respective salaries. Even if we were to assume that the lost employee’s salary was an appropriate measure of damages, it is highly unlikely it would cost ASI 250% of a recruited employee’s salary to replace them.
Prior case law is also instructive. In cases where liquidated damages were enforceable in an employment context, the sum was certain and reasonably tied to the actual losses….
Further, in cases where the liquidated damages in an employment contract were not enforceable, the liquidated damages provision applied the same punishment for a broad range of conduct and served to punish the breaching employee…
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Accordingly, in light of the evidence in the record and our case law, we find that Defendants met their initial burden of showing that the liquidated damages in this case are facially unreasonable and as such, the burden is on ASI to show an issue of material fact. That is, it must show that the liquidated damages are somehow correlated with the actual damages and thus, an issue of fact remains as to whether the liquidated damages are unenforceable.
B. ASI has not shown the liquidated damages are correlated to their actual losses.
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For its part, ASI argues that the damages provisions are in fact reasonable forecasts of the loss they suffered. They argue that they lost seven valuable employees who generated revenue over a million dollars. However, they introduced no evidence that they could not replace these employees or their billing, in whole or in part. Also, as discussed above, it is not clear how a portion of the recruited employee’s salary is correlated with damages. ASI’s position assumes replacing an employee who made $40,000 costs $20,000 if recruited by Knowles and $40,000 if recruited by Lancet or Day, despite how much the replacement employee is actually paid or how much revenue they generate, and an employee who made $60,000 would cost $30,000 to $60,000 to replace. Certainly, the person who recruited an employee is in no way tied to the value of the employee or the loss suffered by ASI. ASI has not demonstrated otherwise.
Thus, even accepting ASI’s position that it was damaged by Defendants’ actions, that those damages are hard to calculate, that the employees who were recruited were valuable and that ASI incurred costs to replace these employees, the liquidated damages provisions as written are not correlated to the actual loss, and ASI offers no reasonable explanation or nexus between the two…
As for damages resulting from Knowles’ solicitation of ASI clients, ASI has put forth evidence that since Knowles arrived at HWC, it booked projects with ASI clients with revenues totaling over $14 million. This would make Knowles liable for millions of dollars in liquated damages based on a broad range of conduct… We agree that this provision is punitive in nature, and ASI has not shown the correlation between its actual damages and the liquidated damages sought. To be clear, ASI is asserting that if it had a contract with a client for $1 million immediately prior to Knowles’ departure from ASI, and after Knowles joined HWC it obtained a contract with that same client for $100, Knowles would be responsible for $450,000 in damages. This would be a windfall to ASI and a penalty to Knowles. The liquidated damages provision as written is too broad and captures too much conduct to be construed as a reasonable measure of damages resulting from a breach.
In sum, we find that all of the liquidated damages provisions at issue are unenforceable penalties. ASI may seek its actual damages for its breach of contract claims.
II. An issue of material fact remains as to ASI’s tortious interference with a contractual relationship claim.
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We find that no matter which of the two standards for what constitutes the absence of justification element for tortious interference with a contractual relationship is applied to the facts of this case, there remains an issue of material fact so as to preclude summary judgment. As our Court of Appeals majority aptly noted, there is both evidence that HWC has a legitimate business purpose in recruiting ASI employees and also evidence that HWC targeted ASI for an improper purpose. In light of this conflicting evidence and because of our summary judgment standard, we find the trial court properly denied summary judgment on ASI’s claims of tortious interference.
Conclusion
We hold that the liquidated damages provisions in this case are unenforceable penalties. We also hold that there remains an issue of material fact as to whether Defendants tortiously interfered with ASI’s contracts. We affirm the trial court and remand for proceedings consistent with this opinion.
Rush, C.J., and Goff, J., concur. Slaughter, J., concurs in part, dissents in part with separate opinion in which Massa, J., joins.
Slaughter, J., concurring in part, dissenting in part.
I respectfully dissent from the Court’s conclusion that ASI cannot enforce its contracts and collect the liquidated damages that the parties agreed would be warranted in case of breach. I would affirm the court of appeals on this issue and reverse summary judgment for the HWC Defendants. It was their burden, substantively, as the parties challenging the legality of the bargains they struck, to prove the liquidated-damages provisions are unenforceable penalties. And it was their burden, procedurally, as movants on summary judgment, to establish that ASI cannot prove at trial even a correlation between the liquidated damages called for in the parties’ agreements and ASI’s actual damages resulting from the HWC Defendants’ respective breaches. Yet the HWC Defendants failed to meet these burdens. The Court thus errs in reinstating summary judgment for them on this issue. The rest of the Court’s opinion I join.
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