Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—8th Cir.: $500K judgment proper for breach of American Family agency agreement, (Jul 8, 2015)

By Greg Hammond, J.D.

An insurance agent that was terminated from American Family Mutual Insurance Co. was properly ordered to repay over $500,000 in extended earnings after violating the parties’ agency agreement. In affirming the lower court’ decision, the U.S. Court of Appeals in St. Louis determined that there was sufficient evidence to support the jury’s verdict, the agent was not entitled to a new trial, and the agent agreement contained a valid stipulated-damages clause (American Family Mutual Insurance Co. v. Graham, July 7, 2015, Kelly, J.).

Steven G. Graham sold insurance for American Family for over 20 years when a customer complaint led to an investigation finding that he: (1) increased coverage and added endorsements on customers’ insurance without customer permission, thereby increasing premiums; (2) improperly applied multi-vehicle discounts to accounts with only one car; and (3) changed vehicle-rating symbols used to assign risk and determine appropriate premiums for automobile insurance. American Family terminated the agency agreement in January 2011.

Graham later formed an independent insurance agency. He sent a letter to roughly 1,500 former American Family customers informing them that he no longer represented American Family and that he signed an agent agreement not to solicit or induce former customers for a one year period. Nevertheless, the letter stated that he was not prohibited from offering policies for insurance needs not covered by an existing American Family policy. Customers who responded to the letters were asked to sign a “non-inducement form.”

American Family sued Graham, alleging that he violated the agency agreement when he sent the letter to former customers. Graham counterclaimed for wrongful termination. A jury returned a verdict in favor of American Family on all claims and Graham moved for judgment as a matter of law (JMOL) and a new trial. The court denied the motions and entered judgment in favor of American Family, ordering Graham to repay the $523,153.70 in extended earnings, plus interest, that American Family already paid him. Graham appealed.

Sufficiency. Graham first argued that the lower court erred in denying JMOL in his favor on the breach of contract claim because the evidence was insufficient to support the jury verdict. Specifically, he asserted that the agreement did not prohibit him from contacting former customers or selling insurance policies to them so long as the customers understood he was not “inducing” them to cancel American Family policies.

The appellate court concluded, however, that Graham was properly denied his motion for JMOL, finding that a jury could reasonably have found that the letter amounted to a breach of the agency agreement because: (1) the letter stated that the agreement did not restrict him from offering a “broader range of insurance products” through “other companies that may be better suited for your needs”; (2) Graham sent out emails to customers who responded to the letter, encouraging them to return their non-inducement forms so he could send them favorable insurance quotes; (3) Graham admitted that over 100 customers bought insurance from him after receiving the letter and cancelled their policies with American Family; and (4) the jury was presented with evidence that Graham sold at least 591 policies that replaced cancelled American Family policies.

New trial. Graham next argued that the lower court abused its discretion by allowing an American Family employee to testify that Graham had breached the agency agreement, contending that the testimony was an inadmissible legal conclusion. The court rejected this argument, finding that even if the testimony was erroneously admitted, it was not so prejudicial that a new trial would likely produce a different result. The employee had previously testified, without objection, that American Family considered the letter a breach of the non-inducement clause; the letter itself was strong evidence of the breach of contract claim; and the jury heard testimony about the number of policyholders who switched companies after receiving Graham’s letter.

In addition, the lower court did not err in denying Graham’s motion for a new trial based on the trial court’s refusal to give his proposed jury instruction defining the word “dishonest.” The appellate court agreed that it would be error under Wisconsin law to give a contra proferentum instruction—which the lower court did when it found the word “dishonest” ambiguous—and then defined the same word in another instruction.

Damages. Finally, Graham argued that the lower court erred when it determined that Section 6 of the agreement was a valid stipulated damages clause rather than an unenforceable penalty, claiming: (1) the agency agreement’s use of the word “forfeiture” unambiguously showed the parties intended it to be a penalty; (2) American Family did not prove that its damages from the breach of the agreement were difficult to ascertain; and (3) the assessed stipulated damages were disproportionate to American Family’s actual damages.

The court found that the award of damages was proper. It first determined that the term “forfeit” was not determinative, that Graham offered no way to calculate American Family’s lost profit, and he overlooked the fact that American Family did present evidence of the estimated actual damages sustained as a result of his breach. Although Graham’s arguments concerning the difficulty of ascertaining damages were well-taken by the court, he failed to offer any evidence to support them. Lastly, the district court did not err in finding that the stipulated-damages clause of the agent agreement was reasonable, because it heard evidence that it was difficult to estimate damages at the time of the contract and that the amount of stipulated damages was proportional to the actual damages resulting from Graham’s breach.

The case is No. 14-2174.

Attorneys: Martin S. Chester (Faegre & Baker) for American Family Mutual Insurance Co., American Family Life Insurance Co., and American Standard Insurance Co. David Fulton Herr (Maslon LLP) for Steven G. Graham and Steven Graham Agency, Inc.

Companies: American Family Mutual Insurance Co.; American Life Insurance Co.; American Standard Insurance Co.; Steven Graham Agency, Inc.

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