Court Opinion

ID: 8992678
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:22:59.642292+00
Date Added: 2024-06-11T17:10:58.634593
License: Public Domain

BEAM, Circuit Judge,
dissenting in part.
I join the majority opinion except for its discussion of damages. The district court in this case awarded: (1) liquidated damages pursuant to paragraph nine of Travis’s contract for his breach of the restrictive covenant found in paragraph eight; (2) compensatory damages to compensate Ov-erholt for some unspecified breach of Travis’s contract; and (3) an injunction tailored to enforce the restrictive covenant for two years. Because I think that the district court’s award of liquidated damages includes all the relief to which Overholt is entitled, I respectfully dissent.
South Dakota law is clear that liquidated damages substitute for proof of contractual damages. In Dave Gustafson & Co. v. State, 83 S.D. 160, 156 N.W.2d 185 (1968), the South Dakota Supreme Court explained that liquidated damages are generally awarded in place of actual damages.
“If a provision is construed to be one for liquidated damages, the sum stipulated forms, in general, the measure of damages in case of a breach, and the recovery must be for that amount. No larger or smaller sum can be awarded even *1375though the actual loss may be greater or less.”
Id. at 187 (quoting 22 Am.Jur.2d Damages § 235 (current version at § 726 (1988))). Accord Walter Motor Truck Co. v. State, 292 N.W.2d 321, 323 (S.D.1980) (when liquidated damages awarded, “evidence of the actual loss or harm suffered is irrelevant.”). Cf. Chamberlain Livestock Auction v. Penner, 462 N.W.2d 479, 481, 485 (S.D.1990) (reversing trial court’s award of damages in excess of liquidated damages provision). As a general rule, then, the district court should not have allowed evidence of compensatory damages in this case. The majority justifies the award by arguing that while the liquidated damages clause is limited to violations of the restrictive covenant, compensatory damages, by contrast, compensate Overholt for Travis’s failure to devote his “full time and efforts exclusively to the performance of duties for” Overholt, as paragraph three of his contract requires. Ante at 1373. I respectfully suggest that this after-the-fact justification does not comport with either the nature of Travis’s wrongful acts or the proof of damages at trial.
The majority holds that Travis could breach the restrictive covenant without breaching paragraph three. This is conceptually impossible. In essence, the restrictive covenant restrains Travis from doing what he did — encouraging Overholt customers to cancel their policies and procure new ones from another insurer. Paragraph three indicates that Travis agreed “to devote [his] full time and efforts exclusively to the performance of duties for [Overholt] ... and agree[d] to diligently carry out” Overholt’s business. Appellants’ App. at 91 (emphasis added). When Travis breached the restrictive covenant by delivering Overholt customers to IGF, he necessarily breached paragraph three requiring that he devote his full efforts “exclusively” to Overholt. While Travis could violate paragraph three without violating the restrictive covenant (e.g., by simply not servicing his customers or soliciting new ones), the converse cannot be true. That is, even if Travis breached the restrictive covenant yet serviced some of his remaining Overholt customers, he still would not be devoting his full efforts “exclusively” to Overholt. To the extent that paragraph three contractually sets forth a quasi-fiduciary duty, it is, with respect to breach of the restrictive covenant, redundant.1 In effect, Overholt has been awarded both liquidated and compensatory damages for the same wrongful conduct. Liquidated damages provisions are provided for and upheld precisely to avoid conceptual problems of this sort.
Nevertheless, even if it were proper or possible to award compensatory damages for a separate and distinct breach of paragraph three, the proof at trial does not support such an award in this case. Neil Lapidus, Overholt’s accountant, testified that he calculated the present value of Ov-erholt’s losses resulting from Travis’s wrongful acts for the next thirty years to be $2,043,811. Trial Transcript at 590, 606; Exhibit 88. Lapidus similarly testified that the present value of Overholt’s loss due to Nielsen’s wrongful acts amounted to $439,-610. Trial Transcript at 623; Exhibit 150. The problem, however, is that the jury was given no idea what part of these damages was already included in the liquidated damages award, and what part was due to Travis’s supposed breach of paragraph three. Indeed, Lapidus did not even attempt to link his calculations to certain wrongful acts. As James Overholt testified about Lapidus’s calculations:
*1376Q: So the calculations [of total cancellations], the figures Mr. Lapidus used, were caused by farmers dropping [their coverage with Overholt], for one reason or another, including of course, what was sold to IGF?
A: Yes.
Trial Transcript at 1023-24.
The majority tries to establish a connection now, by suggesting that because not all the farmers from Travis’s territory who cancelled in 1989 then purchased coverage from IGF, some of the cancellations must have been due to Travis’s neglect of his duties to Overholt under paragraph three. Ante at 1373-74. As the majority suggests, the evidence does show a disparity between total cancellations in Travis’s territory and cancellations (coverage) that were in essence transferred to IGF. Lapi-dus’s calculations provided that total premium cancellations amounted to $692,445, while only $424,421 in cancellations were from Overholt customers who purchased new policies from IGF. See Trial Transcript at 1021-22; Exhibits 88, 189, 190; Yet nothing in the record, beyond conjecture, supports the majority’s conclusion that the remaining $268,024 in cancellations were due to Travis’s breach of paragraph three. Indeed, it is not at all clear that the jury even found a breach of paragraph three.2 When James Overholt was asked whether there could “be several reasons why a person might cancel [a policy], aside from the fact that it was cancelled or transferred by what [could be] characterized as wrongful acts,” he replied: “Well, sure. Policies can be cancelled for — for a number of reasons, and I guess the taint is something we're here about." Trial Transcript at 953. From my review of the record, this is as specific as the testimony ever got. Thus, James Overholt’s admission that particular damages could not easily be linked to particular acts rings true.
Q: ... When you have violations of Paragraph 3 and Paragraph 8, do you have a way of determining which are— which acts lead to which damages?
A: No. It’s — It’s all intertwined. It’s all difficult.
Trial Transcript at 577-78.3
Nor was the jury instructed that it should award compensatory damages for cancellations resulting from Travis’s breach of paragraph three. Rather, the jury was given almost no guidance in its award of compensatory damages. The spe*1377cial verdict form, after providing that the jury should calculate liquidated damages “due Overholt under Paragraph 9” simply allowed the jury to award further damages as it saw fit. In paragraph four, as indicated, the special verdict form provides, simply: “What additional amount of money would fairly and adequately compensate Overholt for its present and future damages resulting from Travis’ breach of his contract?” Appellants’ App. at 129. Nowhere was the jury told that it could award compensatory damages only for breach of contract other than that remedied by liquidated damages. Thus, the verdict form allowed the jury to award compensatory damages for the same conduct for which it awarded liquidated damages. This might not be a problem had the jury been instructed that it could award compensatory damages only for some breach of contract other than paragraph eight. But the court’s instructions provided that the jury could award compensatory damages to remedy some unspecified conduct. See Trial Transcript at 2246-47 (“ ‘Compensatory damages’ will consist of plaintiff’s direct economic losses and out-of-pocket expenses resulting from the effect of the defendants’ conduct on the plaintiff. In other words, the defendants are liable for all damages suffered by plaintiff that were proximately caused by defendants’ conduct. ... In determining compensatory damages, you may consider whether the plaintiff suffered any measurable loss of profits, as a proximate result of defendants’ conduct.”) (emphasis added). Given these uncertain instructions, the vague special verdict form, and no evidence connecting any of the cancellations to a breach of paragraph three, the proof of compensatory damages — even if properly submitted— cannot satisfy even the most liberal standard of certainty. Again, liquidated damages are provided for and upheld to avoid just this sort of problem.
Finally, I think that allowing an award of both liquidated and compensatory damages in this case makes the liquidated damages clause a penalty. The South Dakota Supreme Court has held that liquidated damages will be upheld
if it appears that at the time the contract was made the damages in the event of a breach will be incapable or very difficult of accurate estimation, that there was a reasonable endeavor by the parties ... to fix fair compensation, and that the amount stipulated bears a reasonable relation to probable damages and [is] not disproportionate to any damages reasonably to be anticipated.
Anderson v. Cactus Heights Country Club, 80 S.D. 417, 125 N.W.2d 491, 493 (1963). Accord Prentice v. Classen, 355 N.W.2d 352, 355 (S.D.1984). While the South Dakota Supreme Court does not look with disfavor upon liquidated damages, and while the validity of a clause is a question of law, liquidated damages will be construed as a penalty when they work an “unconscionable forfeiture.” Id. Accord Walter Motor Truck, 292 N.W.2d at 324 (liquidated damages are penalty when they are “so disproportionate to the amount of any damage reasonably to have been contemplated when the contract was executed as to be oppressive”). In this case, the combined award of liquidated and compensatory damages plus injunctive relief becomes disproportionate to any damages reasonably contemplated.
As earlier indicated, Lapidus testified that the total gross premium loss for 1989 was $692,445, with $424,421 of this amount representing policies transferred from Overholt to IGF. See Trial Transcript at 1021-22; Exhibits 88, 189, 190. Even if this entire figure had been connected with a breach of contract, which it was not, it did not represent lost profits. First, Over-holt was entitled to only 35.57% of this total amount, or $246,302. See Exhibit 88. Second, from Overholt’s share, the salesman was entitled to a commission of ten to thirteen percent of the gross premium, depending on the type of coverage, a minimum of $69,245. Thus, without any further deduction for overhead, Overholt would have received something less than $177,000 in 1989 had things proceeded without any problems. Whatever the amount of Overholt’s actual damages, if capable of calculation, the liquidated damages produc*1378ed an award of over five times Overholt’s lost agency commissions for 1989.
Further, the damages award affirmed by the majority gives Overholt the benefit of projected profits for thirty years on this sales territory without even replacing the salesman, Travis, or without exerting any future sales effort whatsoever. In addition, the majority also imposes a two-year injunction on Travis, Salzsiedler, Nielsen and IGF, delivering, so to speak, a triple whammy to the defendants. While the majority holds that the injunction protects Ov-erholt against the loss of additional customers during the two-year restrictive covenant period, the liquidated damages award already compensates Overholt for this potential loss. Any future sales effort by Overholt, without competition from IGF, one of the major players in this phase of the insurance business, will result in unearned profits for Overholt coupled with punitive sanctions against the defendants.
Accordingly, I would vacate the district court’s injunction and its award of compensatory damages. Overholt is entitled to $881,182 in liquidated damages as well as attorney’s fees, but no more.

. Overholt’s amended complaint further illustrates my point. In count one, the complaint alleges breach of Travis’s fiduciary duty "to act with the utmost good faith, integrity, and loyalty for the best interest of plaintiff." Appellants’ App. at 141. The complaint also alleges, in the same sentence, breach of "a duty not to compete with plaintiff concerning the subject matter of the employment." Id. The complaint thus mixes what Overholt now contends are separate contractual violations and seeks contractual damages for both. Similarly, in count two, the complaint alleges that Travis breached the substance of both paragraph three and paragraph eight of his contract, and then seeks damages “and/or” liquidated damages for both. Id. at 143. Were the contractual violations as distinct as the majority suggests — distinct enough to permit separate damage awards — the complaint would be more clear, as would the evidence at trial.

.In its first section, captioned "TRAVIS BREACH OF CONTRACT,” the special verdict form provides:
1. Did Travis breach his contract with Over-holt (Exhibit 20)?
IF YOU ANSWERED "YES" TO QUESTION NO. 1, THEN ANSWER QUESTION NOS. 2, 3, AND 4. IF YOU ANSWERED "NO” TO QUESTION NO. 1, PROCEED TO QUESTION NO. 5.
2. Did Travis breach Paragraph 8 of his contract with Overholt (Exhibit 20)?
3. If you answered “Yes” to Question No. 2, then answer this question: What is the amount of the liquidated damages due Over-holt under Paragraph 9 of the Travis contract with Overholt (Exhibit 20)?
4. What additional amount of money would fairly and adequately compensate Overholt for its present and future damages resulting from Travis’ breach of his contract?
Appellants’ App. at 128-29. Thus, the only specific reference to a part of Travis’s contract, generally mentioned in question one, is the reference to paragraph eight in question two. The majority must contend, then, that the jury found a breach of paragraph three in its answer to question one. This seems no more likely than that the jury thought it must affirmatively answer the general question of breach of contract before it could make its specific finding on paragraph eight required by question two.

.Overholt later seemed to contradict this testimony. When asked about his understanding of the liquidated damages clause at the time of his deposition, he replied that he understood that “all of the business which had been cancelled because it was tainted by the — by the acts of the defendants would be considered in our liquidated damages.” Trial Transcript at 780. After the deposition, he realized that the liquidated damages clause "was actually referring only to the business that had actually transferred or been cancelled and had been written with IGF or people with whom Mr. Travis is associated." Id. See abo id. at 828 (liquidated damages linked to “only those policies which have wound up with IGF"). The discrepancy proves nothing more than that James Overholt eventually read the contract correctly, for paragraph nine calculates damages based on customers who cancel with Overholt "and obtain[ ] insurance coverage through the former employee or through any firm or person with whom the former employee becomes associated.” Appellants’ App. at 92. Overholt’s testimony quoted in the text still illustrates that those cancellations that were not *1377transferred to IGF were not traced to a breach of paragraph three.