Hefty Damages Award “in the Cards” for Hallmark: Eighth Circuit Upholds Victory Against Ex-Executive Who Released Confidential Information to Competitor

The Eighth Circuit Court of Appeals recently upheld a large jury verdict in Hallmark Inc.’s favor against a former employee who Hallmark alleged breached her separation agreement by working for and giving confidential information to a competitor. Hallmark Cards, Inc. v. Murley, No. 11-2855, 2013 WL 149817 (8th Cir. Jan. 15, 2013).

Background

Janet Murley served as Hallmark’s group vice-president of marketing from 1999 to 2002. In this capacity, she had access to confidential information including Hallmark’s business plans, market research, and financial information. In 2002, Hallmark eliminated Murley’s position as part of a corporate restructuring. Murley and Hallmark entered into a separation agreement whereby Murley agreed not to (i) work in the greeting card or gift industry for a period of eighteen months; (ii) solicit Hallmark employees; (iii) disclose or use any proprietary or confidential information; or (iv) retain any business records or documents relating to Hallmark. She also agreed to release Hallmark from any claims arising from her termination. In exchange, Hallmark offered Murley a $735,000 severance payment, eighteen months of paid COBRA benefits, executive outplacement services, and paid tax preparation for two years.

In 2006, after the expiration of her non-competition covenant, Murley accepted a consulting assignment with Recycled Paper Greetings (RPG) for $125,000. Murley admitted that in the course of that assignment, she disclosed to RPG confidential Hallmark information including slides from Hallmark’s business model redesign, information regarding Hallmark’s consumer buying process, and long-term industry analysis gathered from Hallmark’s market research.

Hallmark filed suit against Murley, alleging breach of contract, misappropriation of trade secrets, conversion of Hallmark’s confidential information, and unjust enrichment. During discovery, Hallmark learned that in 2007, RPG’s investor Monitor Clipper had arranged for a forensic computer company called LuciData to make a copy of Murley’s hard drive. At trial, Hallmark’s computer expert testified that in the two days leading up to LuciData’s review, sixty-seven documents had been deleted from Murley’s computer, eight of which plus one folder related to Hallmark. Consequently, Hallmark sought, and the court presented to the jury, an adverse inference instruction allowing the jury to infer that Murley had deliberately destroyed those documents to conceal their contents. The jury returned a verdict in Hallmark’s favor and awarded it exactly $860,000 in damages, which represented the $735,000 severance payment Hallmark made to Murley under the parties’ 2002 agreement and the $125,000 Murley received from RPG in exchange for her consulting services. Murley moved for a new trial, which was denied.

The Eight Circuit Decision

On appeal, Murley contended that the district court erred in granting Hallmark’s request for an adverse instruction and further that the district court erred by not laying out its findings of fact to this point explicitly on the record. The Eighth Circuit upheld the district court’s instruction, stating that the “decision is strongly supported by evidence that Murley deleted a number of Hallmark-related documents from her private computer just hours before it was scheduled for inspection — evidence to which Murley did not object at trial.” The Court concluded that in light of the overwhelming evidence of bad faith and prejudice before the district court, its failure to issue explicit findings before delivering the otherwise warranted adverse inference instruction was harmless error which did not prejudice Murley. Thus, the adverse inference instruction was affirmed.

Murley also contended that the jury’s verdict was excessive and, therefore, the district court abused its discretion in denying her motion for a new trial. For its breach of contract claims, Hallmark sought in damages an amount reflecting its $735,000 severance payment to Murley and the $125,000 Murley received as compensation from RPG. Hallmark based its entitlement to the amount Murley was paid by RPG on the fact that Murley’s value to RPG rested, in large part, on her disclosure of materials and information that belonged to Hallmark. The jury returned a verdict in favor of Hallmark, awarding it $860,000 in damages — the sum of both payments.

With respect to the $735,000 portion, Murley contended that Hallmark was not entitled to a return of its full payment under the parties’ separation agreement because Murley fulfilled several material terms of that agreement (e.g., the release of liability and non-compete provisions). The Court disagreed, holding that Hallmark’s terms under the separation agreement clearly indicated its priority in preserving confidentiality. According to the Court, at trial, Hallmark presented ample evidence that Murley not only retained but also disclosed Hallmark’s confidential materials to a competitor in violation of the terms and primary purpose of that agreement. Thus, the jury’s determination that Hallmark was entitled to a full refund of its $735,000 was not against the weight of the evidence and the district court did not err by refusing to grant a new trial.

With respect to the remaining $125,000 portion of the jury award, Murley argued that Hallmark was not entitled to her compensation by RPG for consulting services unrelated to Hallmark. The Court of Appeals agreed with this point. It held that Hallmark was only entitled to the damages that it could have considered at the time of the agreement. Moreover, the Court opined that “the law cannot elevate the non-breaching party to a better position than she would have enjoyed had the contract been completed on both sides.” By awarding Hallmark more than its $735,000 severance payment, the jury award placed Hallmark in a better position than it would find itself had Murley not breached the agreement. The jury’s award of the $125,000 payment by RPG was, therefore, held to be improper.

Conclusion

The Hallmark case demonstrates the value that separation agreements can provide to employers, and the importance of monitoring a former employee’s compliance with such agreements. Arent Fox’s Labor and Employment Group regularly drafts, negotiates and enforces separation, nondisclosure and noncompetition agreements for clients. If you have any questions about any of these topics, please contact the authors or any other members of the group.