Chicago Title Insurance v. Magnuson

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 07a0184p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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CHICAGO TITLE INSURANCE CORPORATION, a

Plaintiff-Appellee, -

Missouri Corporation,

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No. 05-4411

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v. >

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JAMES A. MAGNUSON; FIRST AMERICAN TITLE

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INSURANCE COMPANY, c/o Timothy P. Sullivan,

Defendants-Appellants. -

Registered Agent,

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Appeal from the United States District Court

for the Southern District of Ohio at Columbus.

No. 03-00368—Gregory L. Frost, District Judge.

Argued: November 28, 2006

Decided and Filed: May 21, 2007

Before: DAUGHTREY, GIBBONS, Circuit Judges; EDMUNDS, District Judge.*

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COUNSEL

ARGUED: Matthew A. Kairis, JONES DAY, Columbus, Ohio, for Appellants. Andrew S. Pollis,

HAHN LOESER & PARKS LLP, Cleveland, Ohio, for Appellee. ON BRIEF: Matthew A. Kairis,

Chad A. Readler, G. Roger King, JONES DAY, Columbus, Ohio, Robert P. Ducatman, JONES

DAY, Cleveland, Ohio, for Appellants. Andrew S. Pollis, Steven A. Goldfarb, HAHN LOESER &

PARKS LLP, Cleveland, Ohio, for Appellee.

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OPINION

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EDMUNDS, District Judge. The numerous questions presented in this appeal concern a

covenant not to compete and the resulting jury verdict awarding compensatory and punitive damages

to Plaintiff-Appellee Chicago Title Insurance Corporation (“Chicago Title”) for Defendant-

Appellant James Magnuson’s breach of the agreement and Defendant-Appellant First American

Title Insurance Company’s (“First American’s”) tortious interference with this agreement. On

*

The Honorable Nancy G. Edmunds, United States District Judge for the Eastern District of Michigan, sitting

by designation.

1

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 2

January 25, 2005, a jury found Magnuson and First American liable for breaching the covenant and

for tortious interference and awarded compensatory and punitive damages totaling over $43 million.

The district court denied several post-trial motions and upheld the verdict in its entirety. For the

reasons discussed below, we AFFIRM in part, REVERSE in part, and REMAND this case to the

district court for a new trial on compensatory damages consistent with this opinion.

I.

Chicago Title and First American are competitors in the title insurance industry, and

Magnuson is an individual with many years of experience in a variety of positions for companies

in this industry. Magnuson formed a title insurance agency in central Ohio in 1978 along with a

partner, James Steller. Magnuson and Steller built the business and brought on additional partners

until 1991, when the partners sold the business to Chicago Title for $5.5 million.

In conjunction with the sale, and in an effort to protect the goodwill of the business that

Chicago Title purchased, Magnuson entered into an employment contract (the “Contract”) on

July 1, 1991, that included a covenant not to compete (the “Covenant”) as one of its provisions.

Specifically, the Contract obligated Magnuson to work for Chicago Title for five years after the sale,

and the Covenant prohibited him from acting in any capacity for a title insurance company in a

seven-county area surrounding, and including, Columbus, Ohio “[f]or a period of five years after

the term of this Agreement.” Steller also took a position with Chicago Title following the sale, but

he left the Ohio market in 1993.

At the time Steller left Chicago Title’s employ, Magnuson and Chicago Title amended the

Contract to state that the initial five-year term of employment would extend for ten-and-a-half years,

until December 31, 2001. According to the modification, “[a]ny other reference to word (sic) ‘term’

in the Contract and the Exhibits thereto shall be construed as being the said ten and one half year

period.” Therefore, the five-year non-compete period did not begin until the term of the agreement

ended, and contractual expiration of the non-compete period was delayed until the end of 2006.

Throughout his employment with Chicago Title, Magnuson advanced through a variety of

management positions, each with an increasing scope of geographic coverage. In 1996, Magnuson

became Chicago Title’s Ohio Manager, where he supervised offices in Cincinnati, Dayton,

Cleveland and Akron. He turned over direct management of the Columbus office to other Chicago

Title managers at that time. In 1998 or 1999, Magnuson assumed responsibility over Ohio, Indiana,

Michigan and Pennsylvania as Chicago Title’s Regional Manager. Finally, in 2001, Magnuson

became Regional Manager for all title insurance brands of Chicago Title’s parent, Fidelity. In this

position, his territory covered Ohio, Pennsylvania, New Jersey, Delaware, Maryland, Virginia and

West Virginia.

Once the Contract term expired on its own terms at the end of 2001, Magnuson and Chicago

Title discussed a two-year employment agreement containing a one-year post-employment non-

compete clause, but they never executed any documents related to an extension of the Contract. In

August 2002, Magnuson was appointed Division Vice President of another one of Fidelity’s title

insurance brands and no longer worked for Chicago Title.

Also in 2002, The Talon Group (“Talon”), a division of First American, embarked on an

expansion strategy that included recruiting experienced individuals from industry competitors.

Attracting employees who possessed established relationships with customers and employees was

critical to generating business growth, as the title insurance business is highly competitive with

minimal product differentiation among competitors. As part of this effort, First American convinced

Magnuson to leave Chicago Title and join Talon. During the negotiation process, Magnuson made

Talon aware of the existence of his non-compete agreement with Chicago Title, and First American

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 3

agreed to indemnify Magnuson for any liability he might incur as a result of making the move.

Shortly thereafter, Steller also joined First American.

Once with First American, Magnuson was based out of an office located in Columbus, and

the company began recruiting other key Chicago Title customers and employees from central Ohio.

Within the first three months, thirty Chicago Title employees switched to First American, and a

significant number of Chicago Title’s customers in the area also ended up moving over.

The district court below granted Chicago Title’s motions for summary judgment as to

liability on its breach of contract claim against Magnuson and its tortious interference claim against

First American before submitting the case to the jury on the issue of damages. The jury returned a

verdict of $10.8 million in compensatory damages and $32.4 million in punitive damages, and the

district court denied various motions for a new trial by Magnuson and First American, leading to

the instant appeal.

Magnuson and First American challenge the following rulings of the district court: (1)

finding that the Covenant was reasonable and therefore enforceable, (2) granting summary judgment

for Chicago Title on the issue that Magnuson breached the Covenant, (3) granting summary

judgment for Chicago Title on the issue that First American’s actions constituted tortious

interference, (4) granting judgment as a matter of law on the issue that Chicago Title was a lost

volume seller, (5) instructing the jury that the Covenant was reasonable for the full five-year period,

(6) finding that punitive damages were appropriate for the jury to consider, (7) not remitting the

jury’s punitive damages award as unconstitutionally large in relation to the amount of compensatory

damages awarded, (8) failing to order a new trial on punitive damages, and (9) giving improper jury

instructions that tainted the jury’s verdict.

Magnuson and First American filed a timely appeal. We have appellate jurisdiction under

28 U.S.C. § 1291.

II.

A. Reasonableness of the Covenant

An appellate court reviews “the district court's conclusions of law de novo and its findings

of fact for clear error. Questions of contract interpretation are generally considered questions of law

subject to de novo review.” Golden v. Kelsey-Hayes Co., 73 F.3d 648, 653 (6th Cir. 1996) (internal

citations omitted). Here, the district court’s decision involved a question of law, as it required a

determination of whether the Covenant was reasonable under the circumstances and was therefore

enforceable. Furthermore, under Ohio law, which the parties have chosen to govern the Contract,

a non-compete clause’s enforceability is a matter of law for the court. UZ Engineered Prods. Co.

v. Midwest Motor Supply Co., 770 N.E.2d 1068, 1078 (Ohio Ct. App. 2001). Thus, we review the

district court’s ruling on the Covenant’s reasonableness de novo, but accept the district court’s

findings of fact unless they were clearly erroneous.

1. The Covenant period at issue

Although the Covenant is contained in a single document that was extended by amendment

on one occasion, there are actually two separate covenant periods at issue here between the parties.

At the time of the 1991 sale, Chicago Title and Magnuson agreed that Magnuson would be

employed for five years, after which time the five-year non-compete period would begin. Since the

Contract was entered into at the same time Magnuson sold the business and mentions the acquisition

itself, the original covenant is properly viewed as incident to the sale and not as an employment-

related covenant.

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 4

At the time of the 1993 amendment, the amendment’s provisions explicitly provided that the

post-employment covenant period remained in effect and would begin at the end of Magnuson’s

employment term, as extended by the amendment to December 31, 2001. The amendment’s sole

focus, however, was on extending the period of Magnuson’s employment with Chicago Title, and

not the sale that occurred two years prior. The Covenant was no longer tied to the original ten-year

period of protection contemplated when Magnuson sold his business to Chicago Title, as nothing

in the amendment mentions the sale. Thus, the two covenants are: (1) a sale-related covenant not

to compete for five years, beginning on July 1, 1996, and ending June 30, 2001, and (2) an

employment-related covenant not to compete for five years (the one1 referred to as the “Covenant”),

beginning on January 1, 2002, and ending on December 31, 2006.

2. The Covenant is reasonable for at least two years

Under Ohio law, “[i]n determining the validity of a covenant or agreement in restraint of

trade, each case must be decided on its own facts. . . . A covenant restraining an employee from

competing with his former employer upon termination of employment is reasonable if it is [1.] no

greater than is required for the protection of the employer, [2.] does not impose undue hardship on

the employee, and [3.] is not injurious to the public. Courts are2empowered to modify or amend

employment agreements to achieve such [reasonable] results.” Raimonde v. Van Vlerah, 325

N.E.2d 544, 547 (Ohio 1975). The party seeking to enforce the covenant “is required to adduce

clear and convincing evidence as to each of these factors” in order to prove that the covenant is

reasonable.3 Levine v. Beckman, 548 N.E.2d 267, 270 (Ohio Ct. App. 1988). “‘Clear and

convincing evidence is that measure or degree of proof which is more than a mere ‘preponderance

of the evidence,’ but not to the extent of such certainty as is required ‘beyond a reasonable doubt’

in criminal cases, and which will produce in the mind of the trier of facts a firm belief or conviction

as to the facts sought to be established.’” Estate of Schmidt v. Derenia, 822 N.E.2d 401, 405 (Ohio

Ct. App. 2004) (quoting Cross v. Ledford, 120 N.E.2d 118, 119 (Ohio 1954)).

Additional considerations that courts should assess in reviewing the reasonableness of a

covenant include:

whether the covenant imposes temporal and spatial limitations, whether the

employee had contact with customers, whether the employee possesses confidential

information or trade secrets, whether the covenant bars only unfair competition,

whether the covenant stifles the employee’s inherent skill and experience, whether

the benefit to the employer is disproportionate to the employee's detriment, whether

1

The first period is not in dispute, as Chicago Title contends that Magnuson’s breach occurred when he accepted

the new position with First American in December 2002, after the expiration of the initial covenant period tied to the

sale of his business. As a result, the cases that Chicago Title cites from other jurisdictions distinguishing between

covenants not to compete arising under a sale of business and those from standard employment contracts are inapplicable

here.

2

Magnuson limits his challenge to the first prong of this test, and does not address any hardship on himself or

public injury.

3

Chicago Title cites a number of cases for its assertion that the proper burden of proof on this issue is a

preponderance of the evidence. This position results from a failure to recognize that the clear and convincing standard

required for an injunction to issue and the preponderance of the evidence standard that must be met to obtain monetary

damages are the requisite burdens of proof to obtain either of these legal remedies. Each of these is distinct from a

plaintiff’s initial burden to show that a covenant not to compete is reasonable by clear and convincing evidence in order

for there to be a viable claim for breach of the covenant.

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 5

the covenant destroys the employee’s sole means of support, whether the employee’s

talent was developed during the employment, and whether the forbidden employment

is merely incidental to the main employment.

Basicomputer Corp. v. Scott, 973 F.2d 507, 512 (6th Cir. 1992) (quoting Raimonde, 325 N.E.2d at

547).

We need not determine whether the Covenant was valid for its full five-year term because

Magnuson’s actions that Chicago Title claims violated the Covenant occurred just over one year

after his defined term of employment ended. So, as long as the Covenant was reasonable for at least

two years, we must affirm the district court’s decision to award summary judgment to Chicago Title

on the issue of liability.

The district court below noted that Chicago Title’s vice president and manager of Ohio,

Michael Nolan, testified that the five-year duration was necessary in order to give Chicago Title

“time to secure the relationships.” While this is not particularly strong evidence on its own, the

district court made findings of fact regarding the competitive nature of the title insurance industry

and the “importance of relationships within the . . . industry.” See also Ticor Title Ins. Co. v. Cohen,

173 F.3d 63, 71 (2d Cir. 1999) (discussing the significance of strong customer relationships). Given

this backdrop, and how quickly Magnuson was able to bring employees and customers over to First

American after leaving Chicago Title, it appears reasonable for an employer to seek to restrict an

employee from moving to a competitor and taking customers and other employees with them for two

years following the employee’s departure. This is especially true with an employee such as

Magnuson, who was a “key figure in the central Ohio title insurance industry” and had “exposure

to Chicago Title’s inner workings in Ohio.”

Magnuson argues that Chicago Title’s failure to present evidence justifying the specific

length of five years (as opposed to a one-year or two-year non-compete period), means that the

Covenant is unreasonable. See Economou v. Physicians Weight Loss Centers of Am., 756 F. Supp.

1024, 1034 (N.D. Ohio 1991) (finding a three-year covenant unreasonable without support for that

particular length of time); Cole Nat’l Corp. v. Koos, No. 66760, 1994 WL 716522 at *3-4 (Ohio Ct.

App. Dec. 22, 1994) (reaching the same result for a one-year covenant). Both of these cases are

distinguishable, as the appellant-employers in Cole “wanted a longer period of time but [were] told

by counsel that twelve months would be reasonable.” Cole, 1994 WL 716522 at *3. The court

continued, reasoning that the employers chose “a time period not because of what was necessary but

because it was the longest they expected would be enforced.” Id. Similarly, in Economou, the

plaintiff produced “no relevant testimony” whatsoever on this point. 756 F. Supp. at 1034.

Magnuson asserts that a plaintiff must state specific reasons for a particular covenant length

in order for the covenant to be found reasonable, but he does not cite any cases in support of this

proposition. Even though the Economou court had no testimony before it as to whether the

particular time period sought was reasonable, it still assessed a number of the other factors outlined

in Raimonde before coming to its final conclusion that the covenant at bar in that case was not

reasonable. This mode of reasoning refutes Magnuson’s position that a failure to provide specific

justification for a covenant’s length automatically means that the covenant is unreasonable.

Based upon all of the facts found by the district court to justify the Covenant, we are satisfied

that the Covenant is reasonable for at least two years even though Chicago Title’s testimony did not

provide justification for a specific time period.

3. Magnuson’s remaining challenges are meritless

Magnuson also challenges several of the district court’s factual grounds for finding that the

Covenant was reasonable. First, he asserts that consideration of Chicago Title’s desire to protect

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 6

its employee relationships was inappropriate because Chicago Title could have protected its interests

through less restrictive means by entering into covenants with those employees directly. Busch v.

Premier Integrated Med. Assoc., Ltd., No. 19364, 2003 WL 22060392 at *6-7 (Ohio Ct. App. Sept.

5, 2003) (holding that a desire of “maintaining stability” was not sufficient to make a covenant not

to compete reasonable in a medical practice setting). Here, however, Chicago Title was concerned

with more than merely maintaining the stability of its workforce. The district court’s opinion states

that the relationships between a title company’s principals and its employees are important in

maintaining business and relationships with customers. As this item goes to the heart of a

company’s ability to compete in the marketplace, we do not find Busch applicable here, since a

desire to be able to effectively compete is a stronger justification than a desire to retain stability

among employees. Furthermore, we reject Magnuson’s argument for extension of Busch to all

cases, as nothing in Busch indicates that its holding was to be construed so broadly. Therefore, it

was appropriate for the district court to consider this justification in assessing the Covenant’s

reasonableness.

Next, Magnuson argues that protecting Chicago Title’s customer relationships was not a

valid reason because he was not the “sole customer contact and not actively engaged in the market

at issue.” (Appellants’ Br. at 29; citing Economou, 756 F. Supp. at 1034.) The district court found,

however, that Magnuson, in fact, was “the key figure in the central Ohio title insurance industry,

even if he was not the day-to-day point man with each customer.” Magnuson challenges this finding

by asserting his own view that he was not an important customer contact by this time. Such an

argument is unavailing at this stage, since assessing the credibility of various witnesses was the

district court’s responsibility, and the district court’s finding of fact on this point was not clearly

erroneous. Therefore, this was also a valid factor to consider in the reasonableness inquiry.

Finally, Magnuson posits that protecting Chicago Title’s trade secrets and confidential

information is an insufficient reason to justify the Covenant on these facts because Chicago Title

employees were not required to sign confidentiality agreements and the company’s information

systems were not password protected. Although this is Chicago Title’s weakest justification for the

Covenant’s necessity, Raimonde lists the protection of trade secrets as only one item to consider in

assessing reasonableness, so this potential deficiency is not dispositive of the issue.

Overall, because Chicago Title had critical customer and employee relationships to protect,

because these relationships directly affected Chicago Title’s ability to compete in the market,

because Magnuson could influence the continuity of these relationships, because the Covenant

contained appropriate geographic and temporal limits, because Magnuson had other means to

support himself (i.e. his law degree), and because at least some of Magnuson’s relationships were

established or strengthened during his employment with Chicago Title,4 we find that the district

court properly concluded that the Covenant was reasonable for at least two years following

Magnuson’s departure from Chicago Title.

B. Grant of Summary Judgment to Chicago Title on the Contract Claim Against

Magnuson

4

Magnuson is correct that courts have refused to enforce covenants not to compete in situations where an

employee possessed skills that were developed prior to the employment with the party seeking enforcement. See Patio

Enclosures, Inc. v. Herbst, 39 F. App’x 964, 968 (6th Cir. 2002); Raimonde, 325 N.E.2d at 547. Here, Magnuson had

a wealth of experience in the title insurance industry prior to joining Chicago Title, which weighs against enforcement,

but he also had ten years of employment with Chicago Title with which to strengthen his relationships with its customers,

and this factor supports enforcement.

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 7

Magnuson next argues that the district court erred in granting summary judgment to Chicago

Title on the issues of the Covenant’s enforceability and Magnuson’s breach. Specifically, he claims

that (1) he presented sufficient evidence of a novation to avoid Chicago Title’s motion for summary

judgment, (2) the evidence, in fact, supported a grant of summary judgment to Magnuson on the

issue of reasonableness, and (3) the court’s decision prejudiced him at trial. Only the first and third

arguments merit attention here, as we previously affirmed the district court’s finding regarding

reasonableness.

Appellate courts review a district court’s grant of summary judgment de novo. Leary v.

Daeschner, 349 F.3d 888, 896 (6th Cir. 2003). Summary judgment must be granted if “there is no

genuine issue as to any material fact, and . . . the moving party is entitled to a judgment as a matter

of law.” Fed. R. Civ. P. 56(c). “Initially, the moving party has the burden of proving that no

genuine issue as to any material fact exists and that it is entitled to a judgment as a matter of law.

To meet this burden, the moving party may rely on any of the evidentiary sources listed in Rule

56(c) or on the failure of the nonmoving party to produce ‘more than a mere scintilla of evidence’

which would create a genuine dispute for the jury. In reviewing the district court's decision to grant

summary judgment, we must view all evidence and draw all reasonable inferences in the light most

favorable to the nonmoving party.” Leary, 349 F.3d at 897 (internal citations omitted). The

standard prohibits a court from making credibility determinations. Arnett v. Myers, 281 F.3d 552,

559 (6th Cir. 2002).

1. No genuine issue of fact existed regarding novation

Under Ohio law, “[a] contract of novation is created where a previous valid obligation is

extinguished by a new valid contract, accomplished by substitution of parties or of the undertaking,

with the consent of all the parties, and based on valid consideration.” McGlothin v. Huffman, 640

N.E.2d 598, 601 (Ohio Ct. App. 1994). The party asserting a novation defense carries the burden

of showing “evidence of clear intent to form a new contract . . . .” Am. Vineyards Co., Inc. v. Wine

Group, 486 N.E.2d 854, 857 (Ohio Ct. App. 1984). The existence of a novation “will never be

presumed.” Fitness Experience, Inc. v. TFC Fitness Equip., 355 F. Supp. 2d 877, 891 (N.D. Ohio

2004) (citing Bolling v. Clevepak, 484 N.E.2d 1367, 1379 (Ohio Ct. App. 1984)).

Despite Magnuson’s citation of several items in the record that indicate the Contract may no

longer have been in effect, none of these showed that the parties agreed on a substitute contract to

replace the earlier one, so the district court did not err in finding that a novation did not occur here.

2. Evidence of Magnuson’s recruiting activities was properly admitted at trial

Next, Magnuson alleges that the district court granted summary judgment on liability without

specifically finding that Magnuson’s recruitment of Chicago Title employees violated the Covenant.

He cites no authority for his argument that the district court must have listed all possible ways that

the covenant was breached in order for the jury to properly calculate damages. With language as

broad as that in the Covenant prohibiting Magnuson from engaging in “any business . . . whether

as owner, director, officer, investor, employee, or otherwise, which is in competition with the

business of [Chicago Title] . . . in the [counties surrounding Columbus, Ohio],” a district court need

not list all possible ways that the defendant might violate the covenant in order to properly grant

summary judgment to the plaintiff on the issue of liability. In addition, such actions were properly

considered on the issue of proximate cause for the damages that Chicago Title suffered as a result

of Magnuson and First American’s breach of contract. As a result, the argument on this point is

without merit.

For the above reasons, we affirm the district court’s grant of summary judgment to Chicago

Title on the issue of Magnuson’s liability for breach of contract.

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 8

C. Grant of Summary Judgment to Chicago Title on the Tortious Interference

Claim Against First American

The same de novo standard of review that applies to Magnuson’s argument regarding the

district court’s grant of Chicago Title’s motion for summary judgment on breach of contract liability

governs the tortious interference issue. First American’s arguments regarding the district court’s

grant of summary judgment to Chicago Title on the issue of whether First American tortiously

interfered with Chicago Title’s employment contract and the associated covenant with Magnuson

are: (1) Chicago Title has not proven that a valid contract existed due to either (i) the Covenant

being unenforceable, or (ii) the alleged novation, and (2) First American presented sufficient

evidence on the issue of intent to defeat Chicago Title’s motion for summary judgment. As noted

above, the Covenant was enforceable for the relevant period and Magnuson failed to establish a

novation as a matter of law, so First American’s initial argument on this point is without merit.

Once the party moving for summary judgment has met its burden of raising sufficient facts

to entitle its motion to be granted as a matter of law under Rule 56(c), the opposing party “has an

affirmative duty to direct the court's attention to those specific portions of the record upon which it

seeks to rely to create a genuine issue of material fact.” In re Morris, 260 F.3d 654, 665 (6th Cir.

2001). A district court is not required to ”search the entire record to establish that it is bereft of a

genuine issue of material fact.” Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80 (6th Cir.

1989). Furthermore, the Sixth Circuit “will not entertain on appeal factual recitations not presented

to the district court” when reviewing a district court’s decision. Guarino v. Brookfield Twp.

Trustees, 980 F.2d 399, 404 (6th Cir. 1992). “In reviewing summary judgment, we look at [the]

record in the same fashion as the district court.” Id. (quoting Estate of Mills v. Trizec Prop., 965

F.2d 113, 115 (6th Cir. 1992)).

First American’s appellate brief cites to numerous items from the record in an attempt to

establish that disputed items of material fact existed regarding its intent to cause Magnuson to

breach his covenant not to compete with Chicago Title. Under Guarino, however, our proper focus

is on the factual evidence submitted below.

First American’s sole assertion of fact regarding this tortious interference claim before the

district court was that First American carved out and excluded the Columbus area from Magnuson’s

assigned territory. Chicago Title’s undisputed evidence, however, showed that First American

placed Magnuson in its Columbus office building, included him in a local title insurance industry

directory, listed his cell phone number as the regional office number, placed an incoming local

phone line on his desk, included his name on marketing materials, and had him participate in sales

calls to Columbus-area clients. In the face of such evidence, the district court did not err in granting

summary judgment to Chicago Title on the issue of liability for tortious interference because “no

reasonable mind could conclude that . . . Talon did not intentionally induce Magnuson into

breaching his contractual obligations” by placing him in the Columbus market despite the alleged

exception of this territory from his responsibilities.

For the above reasons, we affirm the district court’s grant of summary judgment to Chicago

Title on the issue of First American’s liability for tortious interference.

D. New Trial on Compensatory Damages

Magnuson and First American argue for a new trial on compensatory damages because the

district court erred by: (1) finding that Chicago Title was a lost volume seller as a matter of law, and

(2) instructing the jury that the Covenant was enforceable for the full five-year period.

1. Chicago Title’s duty to mitigate damages

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 9

We review the district court’s grant of a motion for judgment as a matter of law de novo.

“The motion may be granted only if in viewing the evidence in the light most favorable to the

non-moving party, there is no genuine issue of material fact for the jury, and reasonable minds could

come to but one conclusion, in favor of the moving party.” Gray v. Toshiba Am. Consumer Prods.,

Inc., 263 F.3d 595, 598 (6th Cir. 2001).

In general, an aggrieved party has a duty to mitigate its damages arising out of a breach of

contract under Ohio law. Young v. Frank’s Nursery & Crafts, Inc., 569 N.E.2d 1034, 1037 (Ohio

1991). One exception to this rule is a “lost volume seller” situation, where the aggrieved party could

have made both (i) the sale that was lost due to the breach, as well as (ii) a second, subsequent sale.

Under such a scenario, traditional contract damages would not fully compensate the damaged party

for its losses because the second sale would likely mitigate nearly all of the party’s lost profit

damages from the first sale, thus depriving the party of its profit on the second sale. To ameliorate

this unjust result, Ohio law allows a damaged lost volume seller to recover its lost profits from the

breached sale in addition to traditional breach of contract damages. Lake Erie Boat Sales, Inc. v.

Johnson, 463 N.E.2d 70, 73 (Ohio Ct. App. 1983) (citing Ohio Rev. Code § 1302.82(B) (2006),

Ohio’s version of § 2-708(2) of the Uniform Commercial Code prior to the 2003 amendments to

Article 2). Although this case involves services rather than a sale of goods, the lost volume seller

theory extends to service providers in a number of jurisdictions, and there is no indication that the

Ohio Supreme Court would hold otherwise.5 See Evergreen Int’l Airlines, Inc. v. Asiana Airlines,

136 F. App’x 95, 97 (9th Cir. 2005); Gianetti v. Norwalk Hosp., 833 A.2d 891, 897 (Conn. 2003).

In order to qualify as a lost volume seller, Chicago Title must prove that it had access to

sufficient supply to make both sales and that it would have completed the additional sale even if it

made the first sale. Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119, 1130 (3d Cir. 1992). Below,

First American attempted to present evidence that Chicago Title had to turn away business during

2002 because its existing employees were too busy and the company did not have physical capacity

to hire additional employees. If believed, this evidence suggests that Chicago Title might not have

been able to take on any additional business beyond that which it ended up losing to First American

and, thus, was not a lost volume seller. The district court excluded this evidence, however, because

it arose prior to the relevant damages period that began in March 2003 after Magnuson had

influenced other employees and customers to leave Chicago Title.

“We review a district court's decision to exclude evidence for abuse of discretion. ‘Under

this standard, we will leave rulings about admissibility of evidence undisturbed unless we are left

with the definite and firm conviction that the [district] court . . . improperly applie[d] the law or

use[d] an erroneous legal standard.” U.S. v. Lucas, 357 F.3d 599, 608 (6th Cir. 2004) (quoting U.S.

v. Bartholomew, 310 F.3d 912, 920 (6th Cir. 2002) (internal quotations omitted)). Although this is

a deferential standard, existing case law establishes that the district judge applied the law incorrectly

by excluding evidence of Chicago Title’s ability to take on new business prior to March 2003.

While Chicago Title provides no cases holding that such evidence is improper to consider, numerous

courts have recognized the propriety of allowing pre-breach evidence in making the determination

of whether a party is a lost volume seller. See R.E. Davis Chem. Corp. v. Diasonics, Inc., 924 F.2d

709, 711 (7th Cir. 1991) (citing to evidence that the seller was “beating the bushes for all possible

sales,” “pursued ‘every possible lead,’ and attempted to ‘identify every possible qualified customer’

in 1984" prior to the 1985 breach); Ullman-Briggs, Inc. v. Salton, Inc., 754 F. Supp. 1003, 1009

(S.D.N.Y. 1991) (considering evidence of the seller’s business with the defendant prior to the

breach). Where, as here, a party is seeking to dispute the other side’s claim that it is a lost volume

5

Furthermore, Magnuson and First American do not dispute that Chicago Title could be considered a lost

volume seller even though it provides only services and not goods.

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 10

seller, evidence of the seller’s business practices within a year of the breach is relevant and should

have been admitted.

In addition, Magnuson and First American should also be able to present evidence of

Chicago Title’s post-breach conduct relative to obtaining new business, as that would be relevant

to Chicago Title’s capacity and ability to take on additional work. This would not be an improper

indicator of whether Chicago Title did or did not mitigate its damages, so long as the evidence is

limited to the stated purpose of determining Chicago Title’s ability to service new customers.

Lastly, Chicago Title argues that it adequately proved mitigation, which would make the

district court’s decision regarding its status as a lost volume seller irrelevant. Because neither the

district court nor the jury considered this evidence below, it is premature for us to made a

determination on this issue.

This is not to say that the evidence conclusively shows that Chicago Title was or was not a

lost volume seller, but merely that the district court improperly excluded this evidence from

consideration. With this evidence, a genuine issue of material fact exists, and a reasonable person

could find that Chicago Title was not a lost volume seller. Therefore, we reverse the district court’s

grant of Chicago Title’s motion for judgment as a matter of law that it was a lost volume seller and

remand the case for a new trial on damages on this ground.

2. Enforceability of the Covenant for five years

Magnuson and First American also argue that this case should be remanded for a new trial

on compensatory damages because the district court erred in instructing the jury that the Covenant

was valid for the full five-year period. Although we have found that the Covenant was reasonable

for at least a two-year period, we express no decision one way or another as to the Covenant’s

validity for the full five-year period as written. This uncertainty does not affect our previous

discussion of the district court’s grant of summary judgment to Chicago Title on the question of

Magnuson’s liability for breach of the Covenant, because evidence of his conduct that breached the

Covenant and supported that decision occurred during the first two years previously determined to

have been a reasonable period to protect Chicago Title’s legitimate interests. As Magnuson and

First American argue, however, the district court subsequently instructed the jury that the Covenant

was enforceable through 2006, the full five-year period. Although the district court had both sides

brief the issue of the full period’s reasonableness prior to instructing the jury, the court failed to

incorporate its findings of fact on the issue in any written opinion. The only record is a brief

mention of this instruction in the district court’s opinion denying Magnuson and First American’s

post-trial motions. This indicates that the jury’s damage calculation may have improperly

considered actions taken by Magnuson beyond the time when the Covenant was enforceable.

Numerous Ohio state courts have upheld covenants that extended for three to five years,

finding that a covenant of five years is not per se unreasonable. See, e.g., Briggs v. Butler, 45

N.E.2d 757, 763 (Ohio 1942) (upholding a five-year non-compete provision); Procter & Gamble

Co. v. Stoneham, 747 N.E.2d 268, 276 (Ohio Ct. App. 2000) (three years); Matrix Corp. v. Faber,

146 N.E.2d 447, 451 (Ohio Ct. App. 1957) (five years). Without any further factual development

in the district court record as to the reasonableness of the Covenant for a period of five years,

however, we are unable to perform the requisite review under Raimonde for this longer period of

time. For the above reasons, we affirm the district court’s ruling that the Covenant was reasonable

and enforceable for at least two years, but reverse for a new trial on damages on this additional

ground.

E. Constitutionality of the Punitive Damages Award

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 11

In contrast to compensatory damages, which are designed to compensate victims for actual

harm suffered as a result of another’s wrongful conduct, the purpose of punitive damages is

grounded in retribution and deterrence. Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532

U.S. 424, 432 (2001). The Supreme Court has overturned jury verdicts awarding punitive damages

that are so large that they constitute “grossly excessive or arbitrary punishments.” State Farm Mut.

Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003). Such punishments do not put citizens on

sufficient notice of the possible legal repercussions they may face as a result of their actions, and

thus do not satisfy the Constitution’s guarantee of due process of law. Id. at 416-17. In State Farm,

the Court confirmed three guideposts for lower courts to use when considering the constitutionality

of a punitive damage award that were initially enunciated in BMW of North America, Inc. v. Gore,

517 U.S. 559 (1995). Under these guideposts, a court’s decision must be informed by: “(1) the

degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or

potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference

between the punitive damages awarded by the jury and the civil penalties authorized or imposed in

comparable cases.” State Farm, 538 U.S. at 418 (citing Gore, 517 U.S. at 575).

“[C]ourts of appeals should apply a de novo standard of review when passing on district

courts' determinations of the constitutionality of punitive damages awards.” Cooper Indus., 532

U.S. at 436.

1. Reprehensible nature of First American’s conduct

“[T]he most important indicium of the reasonableness of a punitive damages award is the

degree of reprehensibility of the defendant's conduct.” Gore, 517 U.S. at 575. In making this

assessment, the Court has instructed an inquiry into a number of factors, specifically, whether:

the harm caused was physical as opposed to economic; the tortious conduct evinced

an indifference to or a reckless disregard of the health or safety of others; the target

of the conduct had financial vulnerability; the conduct involved repeated actions or

was an isolated incident; and the harm was the result of intentional malice, trickery,

or deceit, or mere accident. The existence of any one of these factors weighing in

favor of a plaintiff may not be sufficient to sustain a punitive damages award; and

the absence of all of them renders any award suspect. It should be presumed a

plaintiff has been made whole for his injuries by compensatory damages, so punitive

damages should only be awarded if the defendant's culpability, after having paid

compensatory damages, is so reprehensible as to warrant the imposition of further

sanctions to achieve punishment or deterrence.

State Farm, 538 U.S. at 419. The harm here was economic, not physical, and the health or safety

of others were not in danger. Therefore, the primary considerations to be addressed are Chicago

Title’s financial vulnerability, whether First American’s conduct was repeated, and the culpability

of First American’s actions. We have already upheld the district court’s finding that First American

intentionally interfered with the Contract, so we are willing to assume, for sake of argument, that

First American acted maliciously rather than by accident. As a result, only two of the factors merit

discussion here.

a. Chicago Title was not financially vulnerable

First American presents Chicago Title as the antithesis of an entity that could be considered

to exhibit financial vulnerability, due to the company’s large size, as well as its self-professed status

as still having the number one position in Ohio a year after Magnuson’s departure. On the other

hand, there was evidence in the record that a realtor in the area believed that “Chicago Title would

be out of business in six months” as a result of First American’s actions, that employee morale

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 12

within Chicago Title “was at the very bottom,” and that rumors existed that Chicago Title was no

longer a viable company.

Regardless of the cases cited by the parties, the decisive fact on the instant record is Chicago

Title’s own testimony that it maintained the number one position in Ohio a year after Magnuson left.

Such evidence indicates a general lack of financial vulnerability on Chicago Title’s part, despite the

initial predictions that the company was placed in dire straits following First American’s actions.

If First American’s conduct was insufficient to unseat Chicago Title as the top player in this market

within a year, it would violate the plain meaning of the term to hold that Chicago Title was

financially vulnerable. On these facts, Chicago Title does not meet the criteria for being a

financially vulnerable victim, and the district court incorrectly found this factor to be present.

b. First American’s conduct was not repeated against other

companies besides Chicago Title

In Bach v. First Union Nat’l Bank, 149 F. App’x 354, 356 (6th Cir. 2005), and citing to

Gore, we interpreted the repeated conduct factor to “require that the similar reprehensible conduct

be committed against various different parties rather than repeated reprehensible acts within the

single transaction with the plaintiff.” Chicago Title argues that this interpretation disregards another

teaching of State Farm, illustrated in our recent decision in Clark v. Chrysler Corp., 436 F.3d 594,

609-10 (6th Cir. 2006), that the court is not to consider actions taken outside of the forum state when

awarding punitive damages.

Chicago Title’s argument overlooks a distinction between two different aspects of the

analysis. When assessing whether the defendant’s behavior was sufficiently reprehensible to support

an award of punitive damages, the Supreme Court has noted that consideration of the defendant’s

conduct against other parties across the country is instructive to the analysis. State Farm, 538 U.S.

at 419. When it comes to assessing the amount of damages awarded, however, such information is

not to be considered, as that would 6allow a court to punish behavior outside of its jurisdiction that

might be lawful in the second state. Id. at 420. Here, therefore, Chicago Title’s argument that we

should disregard Bach as inconsistent with the principles of State Farm is misplaced.

In this case, Chicago Title presented evidence that First American’s conduct of hiring

experienced individuals from other title insurance companies was part of its nationwide expansion

plan, but the district court did not find that First American engaged in the same type of tortious

behavior against other competitors that it displayed against Chicago Title.7 Without an indication

that First American employed tortious tactics against other competitors, its actions here were not

repeated, as we have interpreted this factor of the reprehensibility analysis.

c. First American’s conduct was not sufficiently reprehensible to

support a punitive damage award

By meeting a higher number of the reprehensibility factors, a plaintiff has a better chance

of supporting a jury’s award of punitive damages. In State Farm, however, the Supreme Court did

6

Similarly, the Court recently affirmed this distinction in reversing a punitive damages verdict that was possibly

based upon harm to other individuals who were not parties to the case at bar, although such evidence could be relevant

to the reprehensibility issue. Phillip Morris USA v. Williams, 549 U.S. ___, 127 S.Ct. 1057, 1064 (2007).

7

Chicago Title’s argument that the district court “precluded [it] from introducing evidence of similar misconduct

by [First American] in another market” does not have merit. A review of that portion of the trial transcript reveals that

Chicago Title was merely using a deposition from another case against First American for impeachment purposes, and

not attempting to demonstrate similar conduct in other markets.

No. 05-4411 Chicago Title Ins. v. Magnuson, et al. Page 13

not set a threshold number of the five factors that must be met in order for the defendant’s conduct

to be sufficiently reprehensible. In fact, the Court stated that the existence of one factor might not

be enough, but8 left open the possibility that an award could still be upheld even if none of the factors

were present.

Here, the only factor present is that First American acted with malice. Especially because

there were no physical injuries or threat to personal safety as a result of First American’s conduct,

and because Chicago Title was not a financially vulnerable victim, the fact that First American acted

maliciously is insufficient to support a finding that First American’s behavior was sufficiently

reprehensible for an award of punitive damages. As the Supreme Court instructed in State Farm:

“It should be presumed a plaintiff has been made whole for his injuries by compensatory damages,

so punitive damages should only be awarded if the defendant's culpability, after having paid

compensatory damages, is so reprehensible as to warrant the imposition of further sanctions to

achieve punishment or deterrence.” 538 U.S. at 419. Therefore, 9an award of punitive damages is

inappropriate here, and we reverse the district court on this issue.

III.

For the foregoing reasons, we AFFIRM the district court’s opinion in part, REVERSE in

part, and REMAND this case to the district court for a new trial on compensatory damages

consistent with this opinion.10

8

“The existence of any one of these factors weighing in favor of a plaintiff may not be sufficient to sustain a

punitive damages award; and the absence of all of them renders any award suspect.” State Farm, 538 U.S. at 419.

9

Since punitive damages are inappropriate in this case due to insufficient reprehensibility of First American’s

conduct, a number of its additional arguments are now irrelevant: (1) the two remaining guideposts from State Farm (that

the ratio between punitive and compensatory damages was too high, and a consideration of similar civil and criminal

penalties), (2) that Ohio law and the Ohio state constitution prohibit punitive damages in this case, (3) that Chicago

Title’s trial conduct prejudiced the jury, and (4) that the case should be remanded for remittitur of the punitive damages

award. Thus, we need not address these issues further.

10

Although we decline to reverse the district court on the issue that the jury instructions did not distinguish

between the damages arising from Magnuson’s breach of contract and First American’s tortious interference with the

contract, we note that it is usually proper trial practice to do so. Here, the unavailability of punitive damages and the

fact that First American indemnified Magnuson reduce the possible prejudicial effect from the omission. Still, the

differing legal characteristics of contract and tort claims suggest that it is typically prudent to request that the jury assign

an independent damage figure to each separate theory of recovery.