Jarosch v. American Family Mutual Insurance (837 F. Supp. 2d 980, 2011)

DECISION AND ORDER FOLLOWING BENCH TRIAL

WILLIAM E. CALLAHAN, JR., United States Magistrate Judge.

I. INTRODUCTION

From August 23-27, 2010, a trial to the court was conducted in this action. Thirteen witnesses testified: Gerald Couri (“Couri”), Robert Jarosch (“Jarosch”), Gary Swanigan (“Swanigan”), Thomas Donnelly (“Donnelly”), Mark Boettner (“Boettner”), John Vanyo (“Vanyo”), Kenneth Harrison (“Harrison”), Craig Reinmuth (“Reinmuth”), Kenneth Martin (“Martin”), James Madden (“Madden”), Randy Vogler (“Vogler”), Thomas Clifford (“Clifford”), and Gaylene Stingl (“Stingl”). Following the completion of the receipt of evidence, the parties asked for and received an opportunity to obtain a trial transcript and thereafter file post-trial briefs.

Upon completion of the first round of briefing, the plaintiffs filed a motion seeking various forms of relief stemming from their post-trial discovery of some material evidence that had not been previously provided by the defendants. The court’s resolution of the motion required, inter alia, that the post-trial briefing be suspended, pending further analysis of the tardy discovery and a hearing to supplement the trial record. This supplementary hearing was conducted on March 7, 2011. The parties thereafter filed further post-trial briefs. The post-trial briefing has now been completed and the case is ready for resolution by the court.

The court has jurisdiction over this action pursuant to 28 U.S.C. § 1332, diversity of citizenship: the plaintiffs are citizens of Arizona; the third party defendant insurance agencies are citizens of Arizona; American Family Mutual Insurance Company, American Family Life Insurance Company, and American Standard Insurance Company (collectively referred to as “American Family”) are citizens of Wisconsin; and Couri Insurance Associates, LLC (“CIA”) and Couri Insurance Associates West, LLC (“Couri West”) are citizens of Wisconsin; and the matter in controversy exceeds $75,000. Venue is proper in the Eastern District of Wisconsin pursuant to 28 U.S.C. § 1391(a). The following shall constitute the court’s findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52.

II. FACTUAL BACKGROUND

In 2006, each of the plaintiffs ceased being captive insurance agents for American Family, opting, instead, to work as independent insurance agents with CIA, an American Family competitor. Several months before they terminated their relationships with American Family, each of the plaintiffs began meeting with CIA representatives. After numerous meetings with CIA personnel, and before terminating their American Family Agent Agreements (hereinafter “Agent Agreements”), the plaintiffs signed corporate documents with CIA establishing their intent to form new insurance agencies whereby CIA would be a 50% shareholder in each agency with the named agent as the other 50% shareholder.

After the plaintiffs decided to form new insurance agencies, but before they terminated their employment with American Family, they, among other things, bought computers for their new agencies, created and established a new electronic database (hereinafter “FSC Database”), and learned how to quote insurance for their new agencies. Before terminating employment with American Family (or as of the effective date of termination in Jarosch’s case), the plaintiffs sent out letters to their American Family policyholders notifying them of their career change. Then, after more than fifteen years of employment with American Family, the plaintiffs abruptly terminated their respective employment contracts with American Family. More specifically, the plaintiffs terminated their relationships with American Family as follows: (1) Swanigan on February 28, 2006; (2) Donnelly on June 5, 2006; (3) Jarosch on September 11, 2006; and (4) Vanyo on October 9, 2006.

Following their termination from American Family, the plaintiffs separately incorporated their new insurance agencies in Arizona. The newly formed insurance agencies (also referred to as “competitor corporations”) were incorporated respectively as Gary Swanigan Insurance Agency, Inc., Donnelly Insurance Group, Inc., Jarosch Insurance Agency, Inc., and Vanyo Insurance Group, Inc. — all of which are named as third party defendants in this action. The plaintiffs also served as officers in each of their newly-incorporated agencies.

In the last few months before leaving American Family, the plaintiffs began entering American Family policyholder information into their FSC Databases for the benefit of their new insurance agencies. The types of information entered with respect to each policyholder and from where the plaintiffs got the information to enter into their new databases is a source of debate in this action.

The plaintiffs, with the exception of Vanyo (who admitted taking certain information from American Family’s electronic database (hereinafter “ADS System”)), maintain that the information entered into the FSC Databases came solely from information stored in the file folders that they maintained for each of their policyholders. American Family contends that the plaintiffs took information directly from the ADS System. Each of the plaintiffs used the ADS System to store information about his American Family policyholders, including name, address, date of birth, telephone number, email address, VIN number, all policy types, premium information on all policies, effective and expiration dates on all polices, out-of-force dates, whether each policy is active or inactive, years since major and minor traffic violations, demerit point ranges for given policies, claim history for certain policies, prospect information, history of contacts with policyholders, and relationship information. The ADS System also contained information on prospective policyholders. In the months leading up to their termination, the plaintiffs ran numerous ADS queries, obtaining large amounts of policyholder information. In some cases, those lists were either downloaded, printed, or exported to Microsoft Excel.

Since the first day of operating their new insurance agencies, the plaintiffs began re-writing insurance for their former American Family policyholders. In fact, the plaintiffs have been quite successful as independent insurance agents, and have re-written insurance for many of their former American Family policyholders. Central to this litigation are the plaintiffs’ Agent Agreements.

III. DISCUSSION

Jarosch, Swanigan, Donnelly, and Vanyo allege a breach of contract by American Family in failing to pay them the termination commissions due to them under their contractual agreements. Jarosch, Swanigan, Donnelly, and Vanyo also claim that American Family owes them their life insurance commissions.

American Family asserts the following counterclaims against the plaintiffs: (1) breach of contract; (2) misappropriation of trade secrets; and (3) violation of the Computer Fraud and Abuse Act (“CFAA”). Additionally, American Family asserts the following claims against the third party defendants: (1) aiding and abetting breach of contract; (2) tortious interference with its contracts with the respective plaintiffs; (3) aiding and abetting the plaintiffs’ misappropriation of its trade secrets; and (4) aiding and abetting the plaintiffs’ breach of the CFAA. I will analyze each claim below.

A. Breach of Contract Claim and Counterclaim

The parties spend a good deal of space in their respective briefs arguing whether Section 6.u. of the Agent Agreement is enforceable. The plaintiffs and third party defendants argue that it is an unenforceable penalty provision. The defendants argue that it is an enforceable stipulated damages clause. But, before its enforceability is determined, it is necessary to decide whether the plaintiffs breached their Agent Agreement in the first instance. After all, the question of whether Section 6.u. sets the amount of damages for a breach or, alternatively, whether breach of contract damages need to be proven independently of such clause becomes necessary to resolve only if a breach of the contract has been proven.

American Family alleges that the plaintiffs violated the following provisions of their respective Agent Agreements: (1) Section 6.k.; (2) Endorsement 10 and Section 4.1.; and (3) Section 4.a. and 4.i.

1. Non-Compete Provision: Section 6.k.

Section 6.k. of the Agent Agreement that each of the plaintiffs signed states:

For a period of one year following termination of this agreement, you will not either personally or through any other person, agency, company or organization directly or indirectly induce, attempt to induce or assist anyone else in inducing or attempting to induce any policyholder of the Companies credited to your account at the time of termination to lapse, cancel, replace or surrender any insurance policy in force with the Companies. In the event the “period of one year” conflicts with any statutory provisions, such period shall be the period permitted by statute.

(Ex. 1083.)

The defendants argue that each of the plaintiffs breached the non-compete provision of the Agent Agreement (Section 6.k.) by, among other things, contacting persons to whom they had sold policies while the plaintiffs were American Family agents, inducing them to cancel their American Family policies, and buying new policies from other companies, thereby causing American Family to lose out on future premium payments.

In contrast, the plaintiffs argue that they did not violate the non-compete provision of the Agent Agreement because they did not “solicit” business from such policyholders; instead, at most, they merely notified them of their change of business and invited the policyholders to contact them.

The evidence demonstrates that at or about the time they had notified American Family that they were terminating their agency relationship with American Family, the plaintiffs sent letters to their former customers, i.e., the active policyholders that they had at the time they left American Family. Rather than paraphrase any of the letters sent out by the plaintiffs, the text of each letter will be set out in full below.

Swanigan first gave notice to American Family of termination of the Agent Agreement on February 28, 2006, with an effective date the following day of March 1, 2006. On February 27, 2006, Swanigan sent out a letter stating the following:

RE: GREAT NEWS

Dear Friends,

The Swanigan agency is changing for the better! Wanda, Tricia and I are pleased to announce that as of March 1, 2006, we have formed a new independent agency and have retired from American Family Insurance.

After careful research and planning, we have decided to affiliate ourselves with Couri Insurance Associates, a very large and successful independent insurance association that represents more than 100 individual agencies.

The Gary Swanigan Insurance Agency Inc will now be able to provide even better service than before at GREAT rates. We will represent only top quality insurance carriers with a proven record of quality and service. We will also be able to provide additional benefits and services that were unavailable to us previously.

Our office location, hours of operation and phone number will remain the same and we will be available to help new clients at 8:00 am, March 1, 2006.

We would like to thank you for your past business and loyalty.

Thank you,

Gary R. Swanigan

(Ex. 1091.)

Jarosch first gave notice to American Family of termination of his Agent Agreement on September 8, 2006, with termination effective September 11, 2006. On September 11, 2006, Jarosch sent out a letter that stated the following:

To My Valued Clients:

I am excited to announce that effective September 11, 2006 we will leave American Family Insurance to own and operate an Independent Insurance Agency. 30 years with American Family Insurance has gone by fast. The knowledge and experience is invaluable. Changing market conditions and careful consideration are the reasons I must establish myself as an independent insurance agent.

My new agency will allow me to provide a more diversified insurance policy selection. Customizing client’s needs, large or small, with the industries most competitive prices. The client service I have provided in the past will continue. Our office location along with our phone number will remain the same. Business hours are Monday through Friday 9:00 to 5:00, with evenings and Saturdays by appointment.

Lorelei and I would like to thank you again for your confidence and allowing us to serve you with your insurance needs.

Sincerely,

Bob and Lorelei Jarosch

Jarosch Insurance Agency, Inc.

(Ex. 1112.)

Vanyo first gave notice to American Family of termination of his Agent Agreement on October 9, 2006, with termination effective that same day. On October 7, 2006, Vanyo sent out a letter that stated the following:

Re: GREAT NEWS

Dear Friends and Valued Customers:

The Vanyo Insurance Agency is changing for the better! After careful research and planning Susan and I are pleased to announce that as of October 9, 2006 we have formed a new independent agency and have chosen to end our affiliation with American Family.

The Vanyo Insurance Group will continue to provide outstanding service to our clients. We represent several major insurance carriers, enabling us to provide competitive packages individually tailored to meet our client’s specific personal and commercial needs.

Our office location, hours of operation and phone number will remain the same and we will be available to help new clients at 8:00 am, October 9, 2006.

We thank you for your past business and loyalty, we appreciated you as a client.

Sincerely,

John Vanyo

(Ex. 1173.)

Donnelly and Corporate Donnelly first gave notice to American Family of termination of the Agent Agreement on Friday, June 2, 2006, with an effective date of Monday, June 5, 2006, at 12:01 a.m. On June 2, 2006, Donnelly sent out a letter that stated the following:

Re: Exciting News Release

Dear Friends,

For the past 16 years' that my agency has been with American Family Insurance, I’ve gained invaluable experience and long lasting friendships. However, after thoughtful consideration and due to changing market conditions, I have ended my relationship with American Family and have established Donnelly Insurance Group as an independent insurance agency.

Donnelly Insurance Group is affiliated with Couri Insurance Associates in an effort to offer a more diversified product line. Couri Insurance Associates represents more than 100 quality insurance companies, which will allow our agency to, without compromise to outstanding service, provide competitive packages individually tailored to meet our clients’ specific personal and commercial needs. We will also be able to access other product lines and services which were unavailable to us previously.

Donnelly Insurance Group will continue at our current location. Hours of operation and phone numbers are the same, and we will be welcoming new clients as of June 5, 2006.

Your business, friendship and loyalty over the years has been greatly appreciated.

Thank you,

Tom Donnelly

(Ex. 62.)

Thereafter, should any former American Family policyholders who received such letters contact them, the testimony demonstrates that each of the plaintiffs would be careful to not verbally ask for the customer’s business. Rather, the plaintiffs would provide an insurance quote only if the customer asked for one. By engaging in such practice, the plaintiffs believed they would not be violating the non-compete provision of the Agent Agreement.

Indeed, each of the plaintiffs identified written form statements that they would have such customers sign as evidence that the plaintiffs did not “solicit” such business. The actual text of such statements is set forth below.

1) Swanigan’s form statement reads as follows:

I was not solicited by Gary Swanigan Insurance Agency for my insurance.

I further authorize Gary Swanigan Insurance Agency Inc to retain and use confidential information regarding my personal records, such as Driver License numbers, Social Security numbers and other data relevant to my insurance records.

I initiated the contact for my insurance needs.

(Ex. 43.)

2) Jarosch’s form statement reads as follows:

We were not solicited by Jarosch Insurance Agency, Inc. for our insurance.

We further authorize them to retain and use confidential information regarding my personal records, such as driver license number, social security numbers and other data relevant to my insurance records.

We initiated the contact for our insurance needs.

(Ex. 44.)

3) Vanyo’s form statement reads as follows:

I was not solicited by the Vanyo Insurance Group for my insurance.

I further authorize the Vanyo Insurance Group to retain and use confidential information regarding my personal records, such as Drivers License numbers, Social Security numbers and other data relevant to my insurance records.

I initiated the contact for my insurance needs.

(Ex. 45.)

4) Donnelly’s form statement reads as follows:

I was not solicited by Donnelly Insurance Group, Inc for my insurance.

I further authorize Donnelly Insurance Group, Inc to retain and use confidential information regarding my personal records, such as Driver License numbers, Social Security numbers and other data relevant to my insurance records.

I initiated the contact for my insurance needs.

(Ex. 42.)

Aside from the noticeable textual similarity that each of the form statements bear to one another, and aside from the obvious self-serving (not to mention hearsay) nature of the statements, such statements display a fundamental misunderstanding of the obligation that the Agent Agreements placed upon each of the plaintiffs. Indeed, during their trial testimony the plaintiffs themselves reconfirmed that misunderstanding of such obligation (regardless of whether such misunderstanding was arrived at intentionally or unintentionally). More particularly, they each testified that they understood their obligation was to not “solicit” business. At least for some, this “misunderstanding” was based on remarks that they claim to have had heard other agents and employees of American Family make over the years concerning the non-compete provision.

Simply stated, however, the clear and unambiguous language of Section 6.k. did not merely prohibit the plaintiffs, for a period of one year, from “soliciting” insurance business from any policyholder “of the Companies credited to [the plaintiffs] account at the time of termination.” Rather, Section 6.k. prohibited the plaintiffs, for a period of one year following termination of the agreement, from “personally or through any other person, agency, company or organization directly or indirectly inducting], attempting] to induce or assisting] anyone else in inducing or attempting to induce any policyholder of the Companies credited to [the agent’s] account at the time of termination to lapse, cancel, replace or surrender any insurance policy in force with the Companies.” (Ex. 1083; emphasis added.)

In my opinion, the efforts made by each of the plaintiffs to contact their active policyholders and advise them, not only of their new professional endeavors, but more importantly of their ability to serve such policyholders better than they were able to do in their prior positions, constituted attempting to induce such policyholders to “lapse, cancel, replace or surrender” insurance policies then in force with American Family. Indeed, in their post-trial brief, the plaintiffs themselves state as follows:

The Plaintiffs contend that the restriction on post termination activities set forth in section 6.k. of the contract did not prohibit rewriting of the insurance business of former American Family policyholders provided that the American Family policyholder initiated the contact with the Plaintiff, and requested the Plaintiffs assistance in providing insurance coverage. That is, although the language of section 6.k. prohibits any action which would directly or indirectly induce, or attempt to induce, those former American Family policyholders to cancel, surrender or replace their insurance coverages, it does not prohibit the Plaintiff from rewriting that business provided that the policyholder initiates the contact with the former agent.

(Pis.’ Post Tr. Br. 10.)

The plaintiffs have well stated the issue. Regrettably for them, the facts reveal that it was the plaintiffs themselves who initiated contact with the former American Family policyholders by virtue of the letters announcing their departure from American Family and suggesting in such letters that they could provide better service than they were able to provide with American Family. (“We will be able to provide additional benefits and services that were unavailable to us previously.” (Swanigan letter); “My new agency will allow me to provide a more diversified insurance policy selection. Customizing client’s needs, large or small, with the industries most competitive prices.” (Jarosch letter); “The Vanyo Insurance Agency is changing for the better! ... We represent several major insurance carriers, enabling us to provide competitive packages individually tailored to meet our client’s specific personal and commercial needs.” (Vanyo letter); “Donnelly Insurance Group is affiliated with Couri Insurance Associates in an effort to offer a more diversified product line. Couri Insurance Associates represents more than 100 quality insurance companies, which will allow our agency to, without compromise to outstanding service, provide competitive packages individually tailored to meet our clients’ specific personal and commercial needs. We will also be able to access other product lines and services which were unavailable to us previously.” (Donnelly letter)).

To be sure, it may be difficult to define exactly when a particular act by one individual is transformed into an inducement of a second individual. After all, what is an inducement to one potential customer may turn out to not be an inducement to another potential customer. And given that no policyholders testified at trial concerning what ultimately motivated them to change carriers, it would be pure speculation to say that they were in fact “induced” by the plaintiffs to do so. But it is not difficult to conclude why the plaintiffs contacted their active policy holders — it was “to encourage” or “to tempt” (to use the words of plaintiff Swanigan in defining the word “induce,” (Tr. 276)) such policyholders to do business with the plaintiffs. Indeed, Webster’s International Dictionary defines “induce” as “to move and lead (as by persuasion or influence).” Webster’s Third New International Dictionary of the English Language 1154 (1993). At a minimum, applying such definition to the above-quoted letters and follow-up conversations makes clear that these steps taken by the plaintiffs amounted to attempts to induce the active policyholders to do business with the plaintiffs and to replace American Family policies with policies of another company.

Such being the ease, I am persuaded that the plaintiffs did, indeed, breach Section 6.k. of their respective Agent Agreements.

2. Endorsement 10 and Section 4..1.

Before addressing American Family’s argument that the plaintiffs breached Endorsement 10, it must first be determined whether Endorsement 10 is a part of the plaintiffs’ Agent Agreements. Endorsement 10 states, in pertinent part, as follows:

The agent agrees to maintain hard copy records as are determined to be kept by Staff Underwriting and set out in an exhibit form to be attached to and become a part of this agreement.

These records become the property of the Company and the agent shall become bailee thereof for its own use and benefit while operating under the terms of this agreement and shall preserve such records and shall deliver the records to the Company at the termination of this agreement. The agent shall make these records available for review from time to time by personnel designated by the Company.

The agent agrees that software and data base provided under this agreement contains confidential, proprietary and trade secret information and that the agent and its employees will not use nor disclose to third parties such information unless in the ordinary course of the agent’s business with the Company.

The original and any copies made in whole or in part of the system software shall become and remain the property of the Company and shall be returned to the Company at the termination of this agreement.

(Ex. 1126.) Jarosch signed Endorsement 10 on November 17, 1986. (Ex. 1126.) Swanigan signed Endorsement 10, but the signature page is not dated. (Ex. 1083.) Vanyo signed Endorsement 10 on January 6, 1992. (Ex. 1140.) Donnelly signed Endorsement 10 on February 18, 1991. (Ex. 1133.)

Each of the plaintiffs also signed an American Family Agent Agreement, effective January 1, 1993. Within each of their Agent Agreements is a provision that states that “[t]his agreement supersedes all prior agreements between you and the Company, whether written or oral, and constitutes the entire agreement. Except as provided in this agreement, no modification of its terms may be made unless that modification is agreed to in writing by you and the Company.” (Ex. 1126 at § 7.a.) Despite this language, American Family contends that an Amendment to the 1993 Agent Agreements indicated that certain endorsements under the plaintiffs’ prior agreement, including Endorsement 10, remained in force and effect following the 1993 agreement. That Amendment claims that “[a]ny Defacto Agreement or endorsement, any Document Retention Exhibit or endorsement, any endorsement concerning Long-Term Disability Insurance Benefits under your prior agreement shall remain in force and effect under this agreement.” (Ex. 1126.) The Amendment also states that “[y]ou and the Company further agree that this amendment becomes part of your American Family Agent Agreement, edition January 1993, and that Agreement replaces any prior Agent Agreement including amendments or endorsements except as specifically set forth in this amendment.” (Ex. 1126.) The plaintiffs deny ever having received this Amendment when they received and signed their respective 1993 Agent Agreements.

American Family no longer possesses the original contracts entered into by the plaintiffs and American Family. However, American Family contends that the Print Shop Request Form from November 5, 1992 evidences that the Amendment was part of the 1993 contracts. The November 5, 1992 Print Shop Request Form demonstrates that American Family ordered 2,500 copies of the Agent Agreement as well as 2,500 copies of the “Amendment to Am Family Agent” for the Midland region, which included agents in Arizona. (Ex. 1148.)

While American Family’s destruction of the original Agent Agreements dismays me, such destruction does not necessarily mean that the Amendment was not attached to the 1993 Agent Agreement when presented to the plaintiffs for signature. Rather, logic suggests that the Amendment was attached to each of the plaintiffs American Family Agent Agreements. The Amendment bears the same American Family imprimatur as the imprimatur on the Agent Agreement, and the Amendment also bears a date of January 1993. It would be odd for American Family to request 2,500 copies of the Agent Agreement as well as 2,500 copies of the Amendment and then not attach the Amendment to the Agent Agreement.

Conversely, the plaintiffs offered equivocal, and even contradictory testimony, with respect to whether they received the Amendment. For example, Jarosch testified as follows:

Q. Mr. Jarosch, it’s your understanding that this amendment is part of your 1993 agreement with American Family, correct, sir?

A. Yes.

(Tr. 187-88.) Swanigan testified that he could not say for certain whether the Amendment was part of the contract that was presented to him for signature. (Tr. 262-64.) Swanigan, when asked whether he agreed that the provision in the Amendment giving effect to prior endorsements was binding on him and American Family, replied “I would assume so, yes.” (Tr. 260-61.) Additionally, the plaintiffs’ faded memory of where or when they received copies of the Agent Agreements, who presented the Agreements to them, to where or whom they sent the signed contracts, and even their unfamiliarity with their contracts undermines, to some degree, their strong conviction that they never received copies of the Amendment. (Tr. 97, 260-62, 458, 363.)

Furthermore, it is telling that Jarosch, Swanigan, and Donnelly do not dismiss the Amendment in its entirety. As stated above, they rely on it not being part of the contract to support their defense to American Family’s breach of contract claim. However, in claiming entitlement to their extended earnings credit for their service as American Family agents before 1993, they rely on the Amendment being part of the Agent Agreement. (Tr. 184-88, 258-60.) Specifically, the Amendment states that “[y]ou will receive credit under Sec. 6.1.2[] for the period of time you have represented the Company under your pri- or American Family Agent Agreement if that period of time was continuous and uninterrupted. This credit is in lieu of any other payments or credits under that prior agreement.” (Ex. 1126.) Neither Jarosch, nor Swanigan, nor Donnelly disputed American Family’s calculation of their extended earnings, which accounted for their years of service under prior contracts, and they could not offer any other contractual provision aside from the provision in the Amendment that would give them credit for service under their prior contracts. (Tr. 184-87, 258-61, 388.) The plaintiffs cannot have it both ways. The plaintiffs’ reliance on the same Amendment that they distance themselves from reveals their awareness of the Amendment and further supports the finding that it was, indeed, attached to their 1993 American Family contracts.

Finally, the plaintiffs’ argument that the Amendment and Endorsement 10 are not a part of their American Family contracts because they were not agreed to in writing by both the agent and American Family is without merit. To be sure, Section 7.a. reads as follows: “Except as provided in this agreement, no modification of its terms may be made unless that modification is agreed to in writing by you and the Company.” (Ex. 1126.) However, the front page of the Agent Agreements specifically states that any amendments or endorsements attached to the agreement became a part of the agreement. Thus, the Amendment and therefore Endorsement 10 were incorporated by reference into the original agreement itself, thus obviating the need for either document to be “agreed to in writing by” the plaintiffs and American Family, pursuant to Section 7.a. of the Agent Agreement.

That the plaintiffs testified that copies of the Amendment were not attached to their copies of the Agent Agreement (which were received when American Family mailed back the signed agreement) is not dispositive. What matters is whether copies of the Amendment were attached to the Agent Agreement when the plaintiffs signed it. And, I am persuaded that the Amendment was attached to each of the plaintiffs’ 1993 respective Agent Agreements. Under the language of the Contract stating that “[a]ny amendments, endorsements or schedules attached to this agreement become a part of this agreement,” (Ex.’ 1126), the Amendment, and thus, Endorsement 10, are part of the plaintiffs’ contracts with American Family.

Pursuant to Endorsement 10, the plaintiffs’ hard copy records became the property of American Family, making the information contained in the files “confidential, proprietary and trade secret information.” Because the plaintiffs have admitted to taking information from their hard copy records and inputting such information into Fiserve, they used and/or disclosed that confidential information, in violation of Endorsement 10. Indeed, the plaintiffs concede that, if Endorsement 10 is found to be part of the Agent Agreement, “then the compilation of the FSC database would, in accord with the Roth decision, constitute a breach of that contractual provision because the right to use the information was ‘granted to’ American Family under the terms of Endorsement No. 10.” (Pis.’ Post Tr. Resp. Br. 30.)

In sum, I find that the plaintiffs breached Endorsement 10 of their respective Agent Agreements.

3. Section La. and Li and Duty of Loyalty

American Family also argues that the plaintiffs breached their respective duties of loyalty to American Family. The plaintiffs, as independent contractors of American Family, argue that the “common law duty of loyalty ... has no application to the contract at issue in this litigation because the Plaintiffs were not employees of American Family.” (Pis.’ Post Tr. Resp. Br. 13.) However, the plaintiffs provide no authority for this proposition. Alternatively, the plaintiffs argue that because the common law duty of loyalty owed by an employee is limited to “key employees” of the company, no duty was owed here because the plaintiffs were not key employees of American Family. I disagree with the plaintiffs, for two reasons.

First, an independent contractor may owe a common law duty of loyalty to his “employer.” According to the Restatement, “[a]n agent may be one for whose physical acts the employer is not responsible and who is called an independent contractor in order to distinguish him from a servant, also an agent, for whose physical acts the employer is responsible.” Restatement (Second) of Agency § 1, comment e (1958). Moreover, agency is defined as “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Restatement (Second) of Agency § 1(1). Therefore, independent contractors can be agents. See Restatement (Second) of Agency § 2(3) (an independent contractor “may or may not be an agent”); see also Barnes v. Lozoff, 20 Wis.2d 644, 649, 123 N.W.2d 543, 546 (1963) (stating that engineer, although an independent contractor, was in a relationship with his employer that was characterized as one of trust and confidence and thus “good faith and loyalty to his employer constitute^] a primary duty” of the engineer). Thus, the line between employees and independent contractors is not as bright as the plaintiffs portray it to be.

The plaintiffs’ argument that they owed no fiduciary duty to American Family because they were not “key employees” of the company also fails. “[A]t least key employees in Wisconsin owe to their employer common-law duties of loyalty.” Aon Risk Servs., Inc. v. Liebenstein, 2006 WI App 4, ¶ 26, 289 Wis.2d 127, 710 N.W.2d 175. Whether an employee is a “key employee” depends on the precise nature of his or her employment duties. See Burbank Grease Servs., LLC v. Sokolowski, 2006 WI 103, ¶ 42, 294 Wis.2d 274, 717 N.W.2d 781, aff'd in part, rev’d in part, 2006 WI 103, 294 Wis.2d 274, 717 N.W.2d 781. Moreover, in Greenberg v. Stewart Title Guaranty Co., 171 Wis.2d 485, 498, 492 N.W.2d 147, 153 (1992), the Wisconsin Supreme Court held that “[a]n agent of an insurance, company owes a duty only to the insurance company.” Implicit in this holding is that an insurance agent, because he owes a duty of loyalty to the insurance company, is a “key employee” of the insurance company. Accordingly, under Wisconsin law, the plaintiffs owe American Family a fiduciary duty.

Second, and more importantly, American Family relies, not on the plaintiffs’ common law duties of loyalty, but on the duties of loyalty imposed by the plaintiffs’ respective Agent Agreements. A claim for the breach of an agent’s duty of loyalty may sound both in tort and in contract. See Sokolowski, 2006 WI 103, ¶ 42 (citing Aon Risk Servs., 2006 WI App 4, ¶ 8; Harman v. La Crosse Tribune, 117 Wis.2d 448, 454-55, 344 N.W.2d 536 (Ct. App.1984)). Here, Section 4.a. obligated the plaintiffs to “exclusively represent only those companies which are parties to” their Agreement. (Ex. 1126 § 4.a.) Additionally, the plaintiffs each agreed to direct their “efforts toward advancing the interests and business of the Company to the best of [their] ability,” and “to refrain from any practices competitive with or prejudicial to the Company.” (Ex. 1126 § 4.i.)

The same conduct that led to the plaintiffs’ breach of their covenants not to compete as well as to the breach of Endorsement 10 leads me to find that they also engaged in “practices competitive with or prejudicial to” American Family and that they did not “exclusively represent” the companies that were party to their Agent Agreements. An employee that is an agent for his or her employer “owes the employer a duty to act solely for the benefit of the employer during the term of employment; an employee breaches that duty by secretly engaging in competition with the employer during the employment term.” Burbank Grease Servs., LLC v. Sokolowski, 2005 WI App 28, ¶ 39, 278 Wis.2d 698, 693 N.W.2d 89. This is precisely the kind of conduct that the plaintiffs engaged in here. In acting in their capacity as presidents of their new agency corporations, they sent letters to their soon-to-be former American Family insureds telling them that they could offer better rates, products, and services, and they transferred information on those same soon-to-be former American Family insureds into their FSC Databases. Thus, the plaintiffs breached their respective duties of loyalty to American Family.

A Section 6.u.: Liquidated Damages Clause or Penalty

A finding that the plaintiffs breached their American Family contracts leads to the next question to be answered: what is the damage remedy for such breach? That is to say, is Section 6.u. of the Agent Agreement enforceable as a reasonable stipulated damages provision or, in the alternative, is it an unenforceable penalty provision?

The overall single test of validity of a stipulated damages clause is “whether the clause is reasonable under the totality of circumstances.” Wassenaar v. Panos, 111 Wis.2d 518, 526, 331 N.W.2d 357, 361 (1983). Several factors that can be applied to help determine whether a particular clause is reasonable are

(1) Did the parties intend to provide for damages or for a penalty? (2) Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of the contract? (3) Are the stipulated damages a reasonable forecast of the harm caused by the breach?

Id. at 529-30, 331 N.W.2d 357.

With respect to the first factor, the Wisconsin Supreme Court stated that “[t]he label the parties apply to the clause, which might indicate their intent, has some evidentiary value, but it is not conclusive.” Id. at 530, 331 N.W.2d 357.

Turning to the second factor, the court stated the following:

The second factor, sometimes referred to as the “difficulty of ascertainment” test, is generally viewed as helpful in assessing the reasonableness of the clause. The greater the difficulty of estimating or proving damages, the more likely the stipulated damages will appear reasonable. If damages are readily ascertainable, a significant deviation between the stipulated amount and the ascertainable amount will appear unreasonable. The “difficulty of ascertainment” test has several facets, depending on whether the stipulated damages clause is viewed from the perspective of the time of contracting or the time of breach (or trial). These facets include the difficulty of producing proof of damages at trial; the difficulty of determining what damages the breach caused; the difficulty of ascertaining what damages the parties contemplated when they contracted; the absence of a standardized measure of damages for the breach; and the difficulty of forecasting, when the contract is made, all the possible damages which may be caused or occasioned by the various possible breaches.

Id. at 530-31, 331 N.W.2d 357 (citations omitted).

With respect to the third factor, the court stated as follows:

The third factor concerns whether the stipulated damages provision is a reasonable forecast of compensatory damages. Courts test the reasonableness of the parties’ forecast, as they test the “difficulty of ascertainment” by looking at the stipulated damages clause from the perspective of both the time of contracting and the time of the breach (or trial).

Id. at 531, 331 N.W.2d 357.

The court further stated that

[t]he second and third factors are intertwined, and both use a combined prospective-retrospective approach. Although courts have frequently said that the reasonableness of the stipulated damages clause must be judged as of the time contract formation (the prospective approach) and that the amount or existence of actual loss at the time of breach or trial is irrelevant, except as evidence helpful in determining what was reasonable at the time of contracting (the retrospective approach), the cases demonstrate that the facts available at trial significantly affect the courts’ determination of the reasonableness of the stipulated damages clause. If the damages provided for in the contract are grossly disproportionate to the actual harm sustained, the courts usually conclude that the parties’ original expectations were unreasonable. Our prior decisions indicate that this court has employed the prospective-retrospective approach in determining the reasonableness of the stipulated damages clauses and has looked at the harm anticipated at the time of contract formation and the actual harm at the time of the breach (or trial).

Id. at 531-32, 331 N.W.2d 357 (citation omitted).

Furthermore, the court stated that

[i]n ruling on the reasonableness of a stipulated damages clause, the trial judge should take into account not only these factors but also the policies that gave rise to the adoption of the reasonableness test as the test for distinguishing between enforceable liquidated damages provisions and unenforceable penalty provisions.

Id. at 533, 331 N.W.2d 357.

Finally, the court stated that the person who is challenging the bargained-for contractual provision has “the burden of proving facts which would justify the trial court’s concluding that the clause should not be enforced.” Id. at 526, 331 N.W.2d 357 (citing Northwestern Motor Car, Inc. v. Pope, 51 Wis.2d 292, 295, 187 N.W.2d 200 (1971)).

Bearing all this in mind, the court will now turn to addressing the question of whether Section 6.u. of the Agent Agreement is an enforceable stipulated damages contractual provision, or in the alternative and as the plaintiffs claim (and on which they have the burden of proof), it is an unenforceable penalty provision.

The first factor is the parties’ intent, i.e., did they intend to provide for damages or for penalty? For their part, the plaintiffs make much of the fact that the word used in the clause to describe the consequences that will befall a breaching agent is to “forfeit” his or her extended earnings. Indeed, citing Equity Enterprises, Inc. v. Milosch, 2001 WI App 186, 247 Wis.2d 172, 633 N.W.2d 662, the plaintiffs argue that American Family’s use of the word “forfeit” in the Agent Agreement means that Section 6.u. was intended to be a penalty clause.

In Milosch, the court held that the two particular non-compete clauses being examined in that case were not enforceable because they were unreasonable. In reaching that conclusion the court applied the factors set forth in Wassenaar.

One of the provisions of the non-compete clauses that were being examined in Milosch dealt with the consequences to be imposed on a breaching party who was owed commissions. The particular section read as follows:

Commissions After Other Termination. Upon termination of employment by either party for any reason other than those specified in Paragraph 4. 1, above, Employee shall be entitled only to commissions accrued to the date of the termination and shall not be entitled to any subsequently accruing commissions on policies. Upon termination of employment by reason of the Employee’s commission of a prohibited act (as defined in Paragraph 3. 1, above), or if subsequent to termination Employee violates any of the provisions hereof, Employee shall forfeit any and all right to further commissions otherwise payable hereunder.

2001 WI App 186, ¶ 7 (emphasis added).

Applying the first of the Wassenaar factors, i.e., the intent of the parties, the court said:

In determining whether a particular clause is reasonable, the first factor— whether the parties intend to provide for damages or for a penalty — is only slightly helpful because the subjective intent of the parties has little bearing on whether the clause is objectively reasonable. In short, the label the parties apply to the clause, which might indicate their intent, does have some evidentiary value, but it is not conclusive. We agree with Milosch that the plain language of the contract at issue here implies a penalty rather than a liquidated damage. The parties did not use either the term “damages” or “liquidated damages.” Rather, the parties used the term “forfeit” to describe the consequences of a postemployment breach of contract. Although not conclusive, we can infer that the intent of the parties was that the forfeiture would constitute a penalty and was intended to punish an employee who violated any provision of the contract subsequent to termination of the contract.

2001 WI App 186, ¶ 22 (citations omitted).

Latching on to such language, the plaintiffs in the case at bar argue that the “conclusion reached by the Milosch court must necessarily be found in this case: The intent of section 6.u. was to impose a penalty.” (Pis.’ Post-Tr. Br. 16.)

In my opinion, the plaintiffs make a bit too much of the Milosch decision on this issue. First of all, the court’s decision in Milosch was predicated, not just on this particular Wassenaar factor, but on the other factors as well. Even more importantly, in Milosch, “[n]o extrinsic evidence was introduced to show the intent of the parties to the contract.” 2001 WI App 186, ¶ 11. That was not so in the case at bar.

In the instant case, there was testimony concerning the purpose of the extended earnings (which were to be forfeited in the case of contractual breach). The extended earnings were to provide money to agents when they retired or left the company because American Family agents were not allowed to sell their agencies when they did so. Indeed, plaintiff Jarosch testified that American Family paid him for his agency when he moved from Minnesota to Arizona and had to start a new American Family agency. Jarosch testified that he understood extended earnings were a way to compensate him for selling his agency back to American Family when he left the company.

Furthermore, that something may be “forfeited” does not necessarily mean that the loss occasioned by such forfeiture is to be considered a “penalty” for the commission of a wrongful act. The definition of “forfeit” includes “something which is lost or the right to which is alienated by a crime, offense, neglect of duty, or breach of contract.” Webster’s Third New International Dictionary of the English Language 891 (1993). Thus, by way of example, a grocer could “forfeit” the right to a load of bananas by not paying the freight costs up-front if the contract called for such up-front payment. But, that does mean that the grocer is being penalized for his failure to pay. It just means that he no longer has the right to receive the bananas.

The point is that the word “forfeit” in the Agent Agreement is not determinative on the question of whether Section 6.u. is enforceable. It is only one factor in the analysis, and a relatively non-helpful one at that, given the testimony in this case.

The second Wassenaar factor is whether the injury caused by the breach is one that is difficult or incapable of accurate estimation at the time of the contract. “The greater the difficulty of estimating or proving damages, the more likely the stipulated damages will appear reasonable.” Wassenaar, 111 Wis.2d at 530-31, 331 N.W.2d 357 (citing Sheffield-King Milling Co. v. Jacobs, 170 Wis. 389, 402-03, 175 N.W. 796 (1920)). And to reiterate, the various facets that make up the “difficulty of ascertainment” test include the difficulty of producing proof of damages at trial; the difficulty of determining what damages the breach caused; the difficulty of ascertaining what damages the parties contemplated when they contracted; the absence of a standardized measure of damages for the breach; and the difficulty of forecasting, when the contract is made, all the possible damages which may be caused or occasioned by the various possible breaches. Id. at 363-64.

The third factor concerns whether the stipulated damages provision is a reasonable forecast of compensatory damages. But, and as previously noted, the second and third factors are intertwined. The factors at trial affect the court’s determination of the reasonableness of the stipulated damages clause. If the damages provided for in the contract are grossly disproportionate to the actual harm sustained, the courts usually conclude that the parties’ original expectations were unreasonable. In other words, how matters actually play out (as opposed to baseless conjecture or speculation) goes a long way to helping decide whether the stipulated damages clause as agreed to is reasonable and therefore enforceable.

To begin, there was no testimony about what damages the parties contemplated when they executed the Agent Agreement. Thus, this particular factor would seem to have little relevance. The same could be said of the last factor, i.e., the difficulty of forecasting all the possible damages that may be caused or occasioned by the various possible breaches. Once again, there was no testimony about what the parties considered or contemplated as being possible damages at the time of contracting so it follows that there was no effort by the parties to project what damages might in the future flow from particular breaches.

The other facets of the test seem to be more relevant to the analysis. First, with respect to the difficulty of proving damages at trial, both parties presented expert testimony at trial on the question of damages. To be sure, they did not agree on the appropriate analytical method to be used in coming up with the damage amount; nor, not surprisingly, did they agree on the amount of damages actually sustained by the defendants as a result of a breach of the Agent Agreement. They did, however, each express an opinion on how much financial loss the defendants sustained.

Indeed, the plaintiffs argue that the very fact the defendants themselves did present a damages expert leads to the inescapable conclusion that damages can be proven without much difficulty, thereby negating this particular facet of the test. I do not necessarily agree. In my opinion, the fact that both attempted to determine the amount of damages sustained as a result of a breach of the Agent Agreement is not determinative on this facet of the test. To the contrary, the more disparity there is between the two opinions, the more such might suggest a greater degree of difficulty in trying to prove actual damages caused by the breach.

Furthermore, and as discussed above, this court has not found that the plaintiffs breached their respective Agent Agreements by actually inducing “any policyholder of [American Family] credited to [their] account at the time of termination to lapse, cancel, replace or surrender any insurance policy in force with [American Family].” (Ex. 1126). There has been a failure of proof on that issue. Rather, the court has found that the plaintiffs each breached their respective Agent Agreements by, inter alia, attempting to induce such policyholders to “lapse, cancel, replace or surrender any insurance policy in force with [American Family].” (Ex. 1126.)

No expert presented any analysis on the damages caused by such a limited breach. Indeed, attempting to prove what damages would be caused by such a breach might prove nearly impossible. After all, how could one reasonably identify the amount of business American Family lost solely as a consequence of the plaintiffs’ attempts to induce the policyholders to cancel their policies with American Family and replace them with policies of another company? It would be pure speculation to attempt to do so. The same can be said of the plaintiffs’ breach of other provisions of their respective Agent Agreements — it would be pure speculation to identify the amount of business lost solely as a result of the plaintiffs’ breach of Endorsement 10 or of their breach of Section 4.a. and 4.i.

These facets of the “difficulty of ascertainment” factor appear to be readily applicable to the facts in this case. Once again, the second Wassenaar factor is the “difficulty of ascertainment” test: whether the injury caused by the breach is one that is difficult or incapable of accurate estimation at the time of the contract. “The greater the difficulty of estimating or proving damages, the more likely the stipulated damages will appear reasonable.” Ill Wis.2d at 530-31, 331 N.W.2d 357. Given the virtual impossibility of proving damages caused by any “attempt to induce” in violation of the Agent Agreement, it follows that application of the second Wassenaar factor, i.e., the “difficulty of ascertainment” factor, weighs in favor of finding Section 6.u. to be an enforceable stipulated damages clause.

This then takes me to the third factor: whether the stipulated damages provision is a reasonable forecast of compensatory damages. Application of this factor is nettlesome. To determine whether the damages provided for in the contract are grossly disproportionate to the actual harm sustained, I must first determine the amount of actual harm American Family, in fact, sustained. However, as previously discussed, the parties’ damage calculations differ drastically.

In this particular case, Clifford and Stingl render different damage calculations. As one might surmise, one calculation (Clifford’s) is greater than the termination commissions due to each agent, while the other calculation (Stingl’s) is well below the termination commissions due to each agent. In the case of American Family, it uses Clifford’s higher estimate to argue that because it is higher than the termination commissions due each plaintiff, Section 6.u. is a reasonable forecast of compensatory damages and is therefore a stipulated damages provision. Stingl’s damage calculation, which is well below what each agent claims as termination commissions, triggers the plaintiffs to argue that Section 6.u. is an unreasonable forecast of compensatory damages and is therefore an unenforceable penalty.

The numbers break down as follows. Termination commissions have been calculated at $216,926.03 for Jarosch; $263,138.26 for Swanigan; $256,901.12 for Vanyo; and $213,050.45 for Donnelly. (Exs. 18, 21, 25, 29.)

Clifford opined to a reasonable degree of certainty that the lost profits American Family incurred (before prejudgment interest) as a result of the agents’ conduct were as follows: $339,254.00 for Jarosch; $308,644.00 for Swanigan; $265,076.00 for Vanyo; and $286,795.00 for Donnelly. (Exs. 1387,1388,1390.)

Stingl provides three damage calculations for each agent. First, using the attrition rate and agency operating profit from each of the plaintiffs Agent Operating Report, Stingl opined to a reasonable degree of certainty that the lost profits American Family incurred as a result of the agents’ conduct were as follows: $60,841.38 for Jarosch; $46,550.28 for Swanigan; $54,918.07 for Vanyo; and $62,279.11 for Donnelly. (Ex. 50.) Second, using the State of Arizona’s average retention rate of 20% and average profit of 11%, Stingl opined to a reasonable degree of certainty that the lost profits American Family incurred as a result of the agents’ conduct were as follows: $36,523.76 for Jarosch; $43,055.09 for Swanigan; $79,718.88 for Vanyo; and $77,681.93 for Donnelly. (Ex. 50.) Third, using the company-wide attrition rate of 30% and average profit of 11%, Stingl opined to a reasonable degree of certainty that the lost profits American Family incurred as a result of the agents’ conduct were as follows: $31,958.29 for Jarosch; $38,106.33 for Swanigan; $69,754.02 for Vanyo; and $67,971.69 for Donnelly. (Ex. 63, Tabs 3-6.)

Although Clifford’s and Stingl’s damage calculations are disparate, there is some appeal to both estimates. On the one hand, Clifford includes damages beyond the one-year covenant not to compete period in his damage calculation. The assumption Clifford makes, i.e., that each policy American Family lost because of the agents’ conduct results in lost profits experienced over a period of time in excess of the one year time period after the agents’ termination date, may be a reasonable one to make. On the other hand, Stingl limits her damage calculation to only the first year following termination of the agents’ contracts. The assumption Stingl makes, i.e., that the agents would have induced their former American Family policyholders to terminate their policies upon the conclusion of their one year covenant not to compete, may also be a reasonable one to make.

However, Clifford and Stingl both take their assumptions to the extreme. American Family does not account for the likelihood that the plaintiffs, had they not breached their one-year covenant not to compete, would nevertheless have solicited their former American Family policyholders after the one year time limitation expired. Conversely, the plaintiffs do not account for the likelihood that, had they not breached their one-year covenant not to compete, not as many of their former American Family policyholders would have re-written insurance with the plaintiffs’ new agencies.

Were each factor of the reasonableness determination a separate test, it might be necessary to determine which damage calculation more accurately reflects the actual harm that American Family sustained. However, determining the validity of a stipulated damages clause is not a divide- and-conquer analysis. As the Wisconsin Supreme Court stated, “the various factors and approaches to determine reasonableness are not separate tests, each of which must be satisfied for a stipulated damages clause to stand. Reasonableness of the stipulated damages clause cannot be determined by a mechanical application of the three factors cited above.” Wassenaar, 111 Wis.2d at 533, 331 N.W.2d 357. Accordingly, the difficulty in determining actual damages American Family sustained after the breach of contract lends credence to the proposition that actual damages sustained would have been difficult to accurately estimate at the time of the contract.

Such conclusion hearkens back to my earlier finding that proving damages caused by the plaintiffs’ actual breach is nearly impossible. Stingl stated that the damages flowing from the breach of contract can be calculated with reasonableness and certainty, (8/27/10 Tr. 100), and that the differences between her estimate of lost profits and Clifford’s estimate of lost profits “really lie upon the underlying assumptions in developing the calculations in the methodology,” (8/27/10 Tr. 103). However, to say that the difference in the expert opinions lies not with the methodology, but with the assumptions that had to be made to employ the methodology, is a distinction without a difference. The various assumptions that had to be made to calculate lost profits in this case highlight the purely speculative nature of the task of estimating actual damages. Relying on different assumptions, Clifford and Stingl came up with widely disparate numbe