First American Corp. is chipping away at the damages awarded to rival Chicago Title in a lawsuit that claims First American lured a top manager away in violation of a noncompetition agreement.

In January 2005, a jury awarded Chicago Title compensatory and punitive damages totaling more than $43 million, after a district court ruled that the manager breached that agreement and that First American was liable for “tortious interference.”

Last week, the 6th Circuit Court of Appeals reversed the jury’s $32.4 million punitive damage award, and ordered a new trial on a $10.8 million compensatory damage award.

Although First American’s conduct may have been “malicious,” Chicago Title maintained its dominance in Ohio’s title insurance market, and was therefore not a “financially vulnerable victim,” entitled to punitive damages, said U.S. District Judge Nancy C. Edmunds in an opinion accompanying the decision.

In addition to throwing out the punitive damage award, Edmunds sent the case back to the U.S. District Court for the Southern District of Ohio for a new trial to determine compensatory damages. Edmunds said First American should have been allowed to argue that Chicago Title overstated its damages.

Manager ‘key figure’ in industry

At issue in the case is First American’s hiring of James A. Magnuson, a former regional manager for Chicago Title and its parent company, Fidelity. In 2001, Magnuson oversaw all of Fidelity’s title insurance brands in Ohio, Pennsylvania, New Jersey, Delaware, Maryland, Virginia and West Virginia.

Magnuson was recruited by The Talon Group, a division of First American that was engaged in an expansion strategy that allegedly included recruiting experienced employees 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,” Edmunds said in her opinion, citing the district court’s findings.

Although Magnuson had signed a noncompete agreement with Chicago Title through the end of 2006, First American had agreed to indemnify Magnuson for any liability he might incur as a result of making the move.

Once with First American, Magnuson was based in Columbus, Ohio, and the company began recruiting other key Chicago Title customers and employees from central Ohio. Within three months, 30 Chicago Title employees switched to First American, and “a significant number of Chicago Title’s customers in the area also ended up moving over,” Edmunds wrote.

The district court ruled that Magnuson’s actions breached his noncompetition contract, and that First American was liable for “tortious interference” before submitting the case to a jury to decide damages.

Magnuson and First American appealed, questioning whether the noncompetition agreement was reasonable and enforceable. First American also maintained it had not interfered in the agreement because Columbus was excluded from Magnuson’s assigned territory in his new position.

Breach of contract ruling stands

But Edmunds said the noncompetition contract was not unreasonable, and that the district court was justified in finding Magnuson violated it.

Given the importance of established relationships with employees and customers in the industry, Edmunds said, “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,’ ” Edmunds said, citing the district court’s findings.

Magnuson had two noncompetition agreements — one relating to the 1991 sale of his title insurance business to Chicago Title, and the other an “employment-related” agreement not to compete for five years ending on Dec. 31, 2006.

Magnuson and First America argued that Chicago Title presented no evidence that a five-year noncompetition agreement was necessary, and that the agreement was therefore unreasonable and unenforceable. But Edmunds said there was no need to determine whether the agreement was valid for its full five-year term because Magnuson allegedly violated the employment-related agreement after little more than a year.

Edmunds also rejected First American’s argument that Columbus was not part of Magnuson’s territory in his new job.

In the original trial, Chicago Title presented “undisputed evidence” 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,” Edmunds said.

Edmunds said the district court was correct in determining that First American was liable for “tortious interference” in Magnuson’s noncompetition agreement, agreeing with the court’s ruling that ” “no reasonable mind could conclude that … Talon did not intentionally induce Magnuson into breaching his contractual obligations” by establishing him in the Columbus market.

Punitive damages thrown out

Where the district court erred, Edmunds said, was in ruling that Chicago Title was entitled to punitive damages because it was a financially vulnerable victim.

That Chicago Title still retained the top position in Ohio’s title insurance market a year after Magnuson left, Edmunds said, “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.”

Edmunds cited a Supreme Court opinion instructing that punitive damages only be awarded on top of compensatory damages if the defendant’s “culpability … is so reprehensible as to warrant the further imposition of further sanctions to achieve punishment or deterrence.”

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.”

Punitive damages were also uncalled for because First American’s action was not repeated against other companies, Edmunds ruled.

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” — alleged interference with noncompetition agreements — that it displayed against Chicago Title, Edmunds said.

Edmunds also ordered a new trial to determine a damages award, saying the district court incorrectly refused to consider First American’s argument that Chicago Title might have had to turn away business during 2002 because its existing employees were too busy and the company did not have the capacity to hire additional staff.

That ruling allowed Chicago Title claim that it was a “lost-volume seller,” losing out on sales not only due to the alleged breach of the noncompetition agreement, but on second, subsequent sales.

Edmunds reversed the district court’s ruling that Chicago Title was a lost-volume seller, and returned the case to the district court for a new damages trial.

In filing its annual report with the Securities and Exchange Commission in February, First American said it believed it had “strong grounds” to overturn the judgment, and had recorded a $10 million reserve as “the company’s best estimate of its most likely loss base on its assessment of the likely outcome of the appeal.”

On Friday, the company said it was “evaluating the appropriateness of this reserve in light of the decision of the court.”

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