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Mountain West Series of Lockton Companies, LLC v. Alliant Insurance Services, Inc.

Court of Chancery of Delaware

June 20, 2019

MOUNTAIN WEST SERIES OF LOCKTON COMPANIES, LLC (formerly known as DENVER SERIES OF LOCKTON COMPANIES, LLC) and LOCKTON PARTNERS, LLC, Plaintiffs,
v.
ALLIANT INSURANCE SERVICES, INC. Defendant.

          Submitted: June 13, 2019

          Kenneth J. Nachbar, Ryan D. Stottmann, Thomas P. Will, Jarrett W. Horowitz, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Michael B. Carlinsky, Andrew M. Berdon, Isaac Nesser, Kimberly E. Carson, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Counsel for Plaintiffs.

          Jody C. Barillare, MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware; Timothy J. Stephens, MORGAN, LEWIS & BOCKIUS LLP, New York, New York; Counsel for Defendant.

          MEMORANDUM OPINION

          LASTER, V.C.

         The Lockton family of affiliated companies engages in the insurance brokerage business. Plaintiff Mountain West Series of Lockton Companies, LLC (the "Mountain Series") is a series of a Missouri limited liability company through which Lockton conducts business in the western United States. The members of the Mountain Series include Lockton business leaders who have developed and manage portfolios of Lockton customers and receive, through their equity interest, a share of the profits. Plaintiff Lockton Partners, LLC is an affiliated entity whose members include a subset of Lockton business leaders with particularly valuable portfolios of Lockton customers. Through their equity interest in Lockton Partners, they receive an even greater share of the profits.

         On March 12, 2019, twenty insurance professionals resigned en masse from Lockton's Denver office. Seven were members of the Mountain Series (the "Producer Members"). Two of the seven Producer Members were members of Lockton Partners (the "Producer Partners"). The other thirteen individuals worked closely with and supported the Producer Members. Within days, another six insurance professionals left Lockton, bringing the total number of former Lockton employees to twenty-six (collectively, the "Former Employees").

         All of the Former Employees were bound by contracts containing restrictive covenants that prohibited them from soliciting Lockton's customers for a period of two years (and for the two Producer Partners, four years). All of the Former Employees were also bound by contracts containing restrictive covenants that prohibited them from soliciting Lockton personnel for a period of two years (and for the two Producer Partners, four years). Before resigning, the Producer Members were required to give thirty-days advance notice to Lockton, in writing, and they remained bound to fulfill their professional obligations to Lockton during the notice period.

         Immediately after resigning, every one of the Former Employees joined defendant Alliant Insurance Services, Inc., a Delaware corporation that competes with Lockton. None of the Former Employees gave prior notice to Lockton before resigning. Once at Alliant, the Former Employees engaged in a full-court press to solicit the customers that they had supported and serviced while at Lockton. The Former Employees also helped Alliant solicit additional Lockton personnel.

         Alliant encouraged and facilitated the efforts of its new hires to solicit their Lockton customers. Indeed, having the Former Employees solicit their Lockton customers was the reason that Alliant engineered their mass resignations. Beginning in September 2018, Alliant spent months recruiting and then working closely with the Producer Members to plan and coordinate their departures. By December, Alliant had learned about and analyzed the restrictive covenants in the Producer Members' agreements. But rather than respecting those covenants, Alliant induced the Producer Members to leave Lockton and breach them. Alliant also expanded its recruiting efforts to the insurance professionals who supported the Producer Members. In some cases, there is evidence that the Producer Members assisted Alliant before leaving their employment with Lockton by soliciting Lockton customers and their fellow Lockton employees.

         In this action, Lockton has sued Alliant for its scheme to raid Lockton's Denver office. Lockton has asserted five counts against Alliant: (i) tortious interference with contract, (ii) tortious interference with business expectancy, (iii) misappropriation of trade secrets, (iv) aiding and abetting the misappropriation of trade secrets, and (v) aiding and abetting breaches of fiduciary duty.

         To preserve the status quo pending a final decision on the merits after trial, Lockton moved for a preliminary injunction that would bar Alliant from soliciting Lockton's customers, servicing the Lockton customers that Alliant had captured to date, soliciting Lockton's employees, and using Lockton's confidential information. This decision holds that Lockton is entitled to preliminary relief. Because Lockton's claim for tortious interference with contract is sufficient to support entry of a preliminary injunction that will protect Lockton's interests, this decision focuses on that claim and does not reach Lockton's other theories. As to the claim for tortious interference with contract, Lockton has shown a reasonable probability of success on the merits, a threat of irreparable harm, and a balancing of the equities that favors the issuance of an injunction.

         I. FACTUAL BACKGROUND

         The facts are drawn from the extensive record developed in connection with the application for a preliminary injunction. The parties have submitted transmittal affidavits attaching a total of 318 exhibits, including twenty-six deposition transcripts.[1]

         With its answering brief, Alliant submitted fifteen witness affidavits. For the most part, these lawyer-drafted submissions repeated the same language verbatim. In individualized portions of the affidavits, the witnesses sought to explain away aspects of their testimony or to address problematic documents. These witnesses had been deposed, and Alliant's counsel could have elicited their explanations during deposition, thereby giving plaintiffs' counsel the opportunity to test the witnesses' assertions through cross-examination. In several instances, the same affiants had submitted affidavits in related litigation that were inconsistent with their current explanations. Those earlier affidavits made expansive, absolutist representations about the absence of any solicitation efforts, which discovery revealed to be inaccurate. The current round of affidavits attempted to explain away what discovery had uncovered, but many of those explanations seemed forced. I have discounted Alliant's "non-adversarial proffers"[2] and relied primarily on the contemporaneous documents and depositions.

         What follows are the facts as they are likely to be found after trial. The description of the facts is necessarily constrained by the current evidentiary record.

         A. Alliant Targets Four Top Producer Members.

         Peter Arkley is a senior Alliant executive who heads up its specialty business unit. Arkley has significant experience recruiting groups of personnel from other insurers and has conducted a series of mass recruitments on Alliant's behalf.

         Before the events giving rise to this case, Alliant did not have an office in Denver. Arkley set out to change that. In September 2018, he contacted Charles McDaniel, a Producer Member and Producer Partner in Lockton's Denver office who focused on the real estate, construction, and risk management markets. McDaniel had worked for Lockton since 1995, and he had served as CEO of the Mountain Series from 2000 until earlier in 2018, when he was demoted for reasons that the parties dispute. Arkley thought that McDaniel would be receptive to leaving Lockton because of the demotion. Arkley also believed that hiring McDaniel would open the door to recruiting other Lockton employees.

         After a series of communications, McDaniel met with Arkley in person on October 29, 2018. Arkley subsequently arranged for McDaniel to meet with Alliant's senior management on November 12. To convince McDaniel to leave Lockton, Alliant offered him guaranteed compensation worth nearly $20 million plus the potential for earn-out compensation worth another $15 million. Alliant offered McDaniel this massive compensation package because Arkley and Alliant expected McDaniel to solicit his Lockton customers and bring them over to Alliant.

         Arkley and Alliant also expected that McDaniel would bring other Lockton personnel with him. To that end, McDaniel's earn-out compensation would be based not only on his own production, but on the production of the group of employees he supervised, which would include the Lockton employees that he brought with him. Evidencing their expectation about McDaniel bringing along other Lockton employees, Arkley and other senior Alliant executives discussed their expectation that McDaniel would allocate some of his outsized compensation package to induce other Lockton professionals to join Alliant.

         In its contract with McDaniel, Alliant took responsibility for the raid by committing to indemnify McDaniel against any claims that might arise from soliciting his Lockton customers. Alliant also agreed that it could not fire McDaniel for cause if it was shown that he had breached his contractual obligations to Lockton.

         Alliant did not only pursue McDaniel. During September 2018, Arkley also contacted Nicholas Hansen and Robert Kinder. Hansen was a Producer Member who focused on the construction, energy, and cannabis markets. He quickly committed to joining Alliant and indicated that he would bring with him at least three staff members. Kinder was both a Producer Member and a Producer Partner who had worked at Lockton for approximately twenty years. He focused on the construction and surety markets. After communicating with Arkley, Kinder received a detailed term sheet from Alliant in December and met with Alliant senior management on January 11, 2019.

         In December 2018, Arkley and Alliant expanded their efforts to include Derek Cady, a Producer Member who focused on the construction, real estate, and risk management sectors. Cady met with Arkley on December 4 and 12, then with Alliant senior management on January 11, 2019. On January 15, Cady told Alliant that he would join for a $1 million salary and $250, 000 bonus, plus indemnification against theft or misappropriation of Lockton's confidential information.

         B. The Contractual Obligations

         During the recruiting process, Alliant obtained copies of the agreements that McDaniel, Hansen, Kinder, and Cady had entered into with Lockton, and Alliant had its outside counsel review the contracts. Through this process, Alliant learned about restrictive covenants that bound McDaniel, Hansen, Kinder, and Cady, including restrictions on soliciting Lockton customers, soliciting Lockton employees, and using Lockton confidential information. Alliant also understood that the Producer Members had to give thirty-days prior written notice before terminating their employment.

         The primary contractual restrictions that bound McDaniel, Hansen, Kinder, and Cady flowed from two agreements: (i) the Third Amended and Restated Operating Agreement of Lockton Companies, LLC and Each of Its Series (the "Series LLC Agreement"), and (ii) an Amended and Restated Member Agreement with the Mountain Series (the "Member Agreement"). In addition, McDaniel and Kinder were bound by the First Amended and Restated Operating Agreement of Lockton Partners, LLC (the "Partners LLC Agreement").

         As Producer Members, McDaniel, Hansen, Kinder, and Cady each owned a "Producer Unit" in the Mountain Series, reflecting an equity interest in the Mountain Series that entitled them to profit distributions. In addition, each was a party to and bound by the Series LLC Agreement, which provided that a Producer Member could only resign as a member "on thirty (30) day's written notice to the Series." Ex. 28 § 5.10(a). The Series LLC Agreement also established a buy-out mechanism for the Producer Unit following a Producer Member's departure, which could result in the payment of substantial proceeds to the Producer Member.

         Each Producer Member also was a party to and bound by a Member Agreement. See Exs. 21-24. Section 5.4 of each Member Agreement restricted the Producer Member from soliciting Lockton's customers or from servicing or working on any customer account that the Producer Member could not solicit both during employment and for two years after the repurchase of their Producer Unit (the "Customer Non-Solicit"). It stated:

While Member is a Producer Member of the Series and for a period of two (2) years following the sale of Member's Producer Unit . . .
(a) Member shall not, directly or indirectly, for himself or on behalf of any other Person, solicit, induce, persuade or encourage, or attempt to solicit, induce, persuade or encourage, any of the Customer Accounts described below, if any such Customer Account qualified as a Customer Account within the six (6) month period immediately preceding the sale of Member's Producer Unit, to reduce, terminate or transfer to a competitor any products or services that are the same or substantially similar to, or directly competitive with, the products or services provided by the Series, the Other Series or any Affiliate.
Member shall not, directly or indirectly, for himself or on behalf of any other Person,
(i) accept, service, or work on, or attempt or threaten to accept, service or work on, any such competitive business from any of the Customer Accounts that Member may not solicit, or
(ii) in any way do business with any of the Customer Accounts that Member may not solicit to the extent such business is the same or substantially similar to that provided by the Series, the Other Series or any Affiliate.[3]

         Notably, the Customer Non-Solicit encompassed not only blatant solicitation, but also actions taken to "induce, persuade or encourage, or attempt to solicit, induce, persuade or encourage" any Lockton customer to leave Lockton. And it covered these activities whether engaged in "directly or indirectly."

         Section 5.3 of each Member Agreement restricted the Producer Member from soliciting Lockton employees, both during employment and for two years after the repurchase of their Producer Unit (the "Employee Non-Solicit"). It provided as follows:

While Member is a Producer Member of the Series, and for a period of two (2) years following the sale of Member's Producer Unit . . .
Member shall not, directly or indirectly, for himself or on behalf of any other Person, solicit, recruit, hire, induce, persuade, or encourage, or attempt to solicit, recruit, hire, induce, persuade or encourage, any employee, member or consultant of Series or any Other Series or Affiliate . . . to terminate his/its employment, membership or consultant relationship with, or to render services for any competitor of Series, or any Other Series or Affiliate, as applicable, and shall not otherwise take any action to interfere with, or attempt to interfere with, any employee's, member's or consultant's relationship with Series, or any Other Series or Affiliate, as applicable.

         Like the Customer Non-Solicit, the Employee Non-Solicit encompassed not only blatant solicitation, but also actions taken to "recruit . . ., induce, persuade or encourage" any Lockton personnel to leave Lockton, as well as any action "to interfere with, or attempt to interfere with" an employee's relationship with Lockton. And it covered these activities whether engaged in "directly or indirectly."

         Section 4.3 of each Member Agreement addressed the use of Lockton's "Confidential Information," which the Member Agreement elsewhere defined in impressively expansive terms (the "Confidentiality Restriction"). Section 4.3 stated:

While Member is a Producer Member of the Series and at all times thereafter, and except with the prior written consent of the applicable Lockton Entity or as is reasonably necessary for Member to perform Member's responsibilities as a Producer Member of the Series, Member shall not, directly or indirectly,
(a) disclose, or attempt to disclose, Confidential Information to anyone other than the members, officers or authorized employees, attorneys or other agents and fiduciaries of the applicable Lockton Entity,
(b) use, or attempt to use, Confidential Information for any unauthorized purpose, or
(c) acquire, access, duplicate, copy, remove, download, upload, save, email, transmit or otherwise take, or attempt to do any of the foregoing with respect to, Confidential Information for any unauthorized purpose.

         In Section 4.2(f), each Producer Member acknowledged and agreed that "the unauthorized disclosure, use, acquisition, access, duplication, removal, transmission or other appropriation of such Confidential Information at any time is prohibited and, whether actual or threatened, will cause irreparable injury to the Lockton Entity or Lockton Entities whose Confidential Information is at issue."

         In Section 7.1, the parties to each Member Agreement stipulated that (i) "a breach of this Agreement will result in irreparable harm" and that (ii) "in the event of a breach of this Agreement by Member, damages would be difficult or impossible to ascertain." The parties further stipulated in Section 7.1 that "in the event of Member's breach, attempted breach, or threatened breach of this Agreement, the Series . . . shall be entitled to obtain a temporary restraining order, a preliminary injunction, and an injunction permanently enjoining and prohibiting the breach of this agreement." Somewhat redundantly, Section 7.2 of the Member Agreement provided:

Member acknowledges, and agrees that strict compliance with this Agreement is necessary to protect the Confidential Information, goodwill and other legitimate protectable business interests of the Series . . . and that, as described above, a breach of this Agreement will result in irreparable harm and continuing damage to the Series . . . for which money damages may not provide adequate relief.

         Each Member Agreement thus contained multiple sections in which the Producer Members stipulated contractually to the existence of irreparable harm in the event of breach.

         McDaniel and Kinder were also Producer Partners, an elite status within Lockton reflecting their ability to generate at least $4 million in annual revenue. When they became Producer Partners, each received a "Partnership Unit" reflecting an equity interest in Lockton Partners. Each Producer Partner was a party to and bound by the Partners LLC Agreement. See Exs. 207, 242. As with the Series LLC Agreement, the Partners LLC Agreement provided for a repurchase of the Partnership Unit that could result in the Producer Partner receiving substantial compensation.

         In Section 5.1 of the Partners LLC Agreement, each Producer Partner reaffirmed the restrictive covenants that the Producer Partner had agreed to as Producer Members. In addition, each Producer Partner agreed to a comparable restriction that extended for a period of four years after the sale of the Partnership Unit. Through this provision, McDaniel and Kinder agreed to a separate, four-year Customer Non-Solicit and Employee Non-Solicit.

         The Partners LLC Agreement also contained provisions addressing the threat of irreparable harm to Lockton Partners and the consequent availability of injunctive relief. In Section 5.3, each Producer Partner agreed that "a breach of this Agreement will result in irreparable harm and continuing damages to the Company . . . and that, in the event of a breach of this Agreement by Producer Partner, damages would be difficult or impossible to ascertain." In that section, each Producer Partner further agreed that

in the event of Producer Partner's breach, attempted breach, or threatened breach of this Agreement, the Company and if applicable, any of the Series . . . shall be entitled to obtain a temporary restraining order, a preliminary injunction, and an injunction permanently enjoining and prohibiting the breach of this Agreement.

         In Section 5.4, another arguably redundant provision, each Producer Partner agreed that "a breach of this Agreement will result in irreparable harm and continuing damage to the Company and, if applicable, any of the Series . . . for which money damages may not provide adequate relief."

         C. Alliant Expands Its Recruiting Efforts.

         After starting with McDaniel, Kinder, Hansen, and Cady, Alliant expanded its efforts to encompass other Former Employees. They successfully recruited three other Producer Members, three senior managers, one operations recruiting executive, and fifteen technical, business development, or service support employees.

         The three other Producer Members were Gregory Winter, Raymond Paolini, and Richard Schwartzenberger. Winter focused on the cannabis and benefits markets, Paolini focused on the construction, real estate, energy, and benefits markets, and Schwartzenberger focused on the financial services, energy, and construction markets. As Producer Members, each was a party to and bound by the Series LLC Agreement and a Member Agreement. During the recruiting process, Winter, Paolini, and Schwartzenberger sent their agreements to Alliant.

         The three senior managers were AJ Jain (Surety Bond Department Manager), Jason D'Orvilliers (Real Estate Unit Manager), and Sarah Matthews (Real Estate SVP, Strategic Lead). The three senior managers were bound by employment agreements with Lockton that contained restrictive covenants prohibiting solicitation of Lockton personnel and customers during employment and for a period of two years afterwards. They had also entered into incentive compensation arrangements with Lockton that contained similar restrictions. During the recruiting process, Jain and Matthews sent their agreements to Alliant.

         The other sixteen professionals were employees who largely provided technical expertise, business development resources, or service support to the departing Producer Members. Like the Producer Members, most focused on the real estate, construction, surety, energy, or cannabis markets. Every employee was subject to at least one contract containing restrictive covenants that prohibited solicitation of Lockton personnel and customers during employment and for a period of two years afterwards.

         D. Preparations for the Coordinated Walkout

         Alliant coordinated the mass resignation of twenty Former Employees for March 12, 2019. Arkley instructed the Former Employees to resign without notice, even the Former Employees who had thirty-day contractual notice obligations. To conceal this instruction, Alliant's outside counsel told Arkley to pass it along verbally rather than putting it in writing.

         Alliant initially targeted Friday, March 8, 2019 for the walkout, then decided that the date should be moved to Monday, March 11, because "[i]f the resignations happen Friday, Lockton will have all weekend to prepare litigation strategy before the new hires are able to bring in business." Ex. 7 at '479 (emphasis in original). Alliant then moved the resignation date to Tuesday, March 12, because the Mountain Series leadership would be at a company retreat in Arizona that day, which would further interfere with Lockton's ability to respond.

         In the final days and hours before the mass walkout, McDaniel told several of his largest accounts he was preparing to leave Lockton. Several Former Employees printed confidential and proprietary Lockton documents, including customer and prospect lists, business plans, and personnel contact lists. There is powerful circumstantial evidence that the Former Employees used these materials to assist Alliant.

         E. March 12: Resignation Day

         On the morning of March 12, 2019, while the Mountain Series leadership was in Arizona, twenty Former Employees simultaneously submitted their resignations, effective immediately, and headed to Alliant's newly rented facility. Within hours, they had been hired and signed employment agreements. Uniformly, their agreements with Alliant contain restrictive covenants nearly identical to their agreements with Lockton, including (i) a two-year post-employment non-solicitation covenant covering customers and employees, (ii) protections for confidential information, (iii) an obligation to provide thirty-days prior notice before resigning, and (iv) an acknowledgment of irreparable harm and entitlement to a preliminary injunction in the event of breach.

         The Former Employees were also told that Lockton's outside counsel represented them. Several were asked to join a lawsuit that Lockton filed in Colorado seeking to invalidate the restrictive covenants in their agreements with Lockton.

         Later that day, Arkley called a meeting during which he identified Lockton personnel that he wanted to recruit. He told one Former Employee that Alliant had already hired twenty-one of Lockton's people and wanted five to eight more. The Former Employees helped identify additional Lockton employees for Alliant to target. Alliant has in fact continued to recruit Lockton employees since March 12, 2019. By March 19, another six professionals had joined Alliant, bringing the total number of Former Employees to twenty-six.

         Also on March 12, 2019, the Former Employees began soliciting as many Lockton customers as they could. All of this solicitation activity was undertaken with Alliant's support and encouragement. Within twenty-four hours, six Lockton customers had formally indicated their intent to transfer their business to Alliant by executing broker-of-record letters, and eleven others had indicated their intent to execute broker-of-record letters. On March 15, Arkley sent a group text message congratulating the Lockton recruits on having "established a business in 3 1/2 days." Ex. 15. He exhorted his new employees to "keep going!!!!!" Id. Another Alliant executive exhorted them to "Go go go. Call everyone." Ex. 16. The Former Employees did as they were asked.[4]

         F. The Effects on Lockton

         The Former Employees' solicitation efforts have had a massive effect on Lockton. By the date of the preliminary injunction hearing, Alliant had solicited at least 144 Lockton customers. Fifty customers had moved their business to Alliant. Two other customers had announced that instead of renewing their business with Lockton, they would issue requests for proposal that would permit any firm to bid.

         Every single one of the Lockton customers that moved their business was either a customer of a Producer Member or had their business serviced by Jain or other Former Employees. The Producer Members and other Former Employees have personally conducted the solicitation efforts. In this action, Arkley and the Former Employees testified that they are continuing to solicit Lockton customers.[5]

         G. Multi-Forum Litigation

         On March 12, 2019, the same day that they resigned from Lockton, ten of the Former Employees sued Lockton in Colorado. Their lawsuit sought a declaratory judgment that the restrictive covenants in their agreements were void under Colorado law. That lawsuit has been dismissed on the basis of forum-selection clauses in the agreements which choose courts in the State of Missouri.

         On March 13, 2019, Lockton sued the Producer Members in state court in Missouri. In that action, Lockton seeks to enforce the restrictive covenants against the Producer Members themselves. Lockton subsequently filed a lawsuit in federal court in Missouri against the three senior managers. Lockton is currently ...


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