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Element Productions, Inc. v. Editbar, LLC

Superior Court of Massachusetts, Suffolk, Business Litigation Session

November 29, 2018

ELEMENT PRODUCTIONS, INC.
v.
EDITBAR, LLC et al.

          File Date: November 30, 2018

          DECISION AND ORDER REGARDING DEFENDANT MARK HANKEY’S MOTION IN LIMINE TO PRECLUDE EVIDENCE OF CONSEQUENTIAL DAMAGES (LOST PROFITS) EVIDENCE AGAINST HIM (DOCKET ENTRY NO. 88.0), AND DEFENDANT MARK HANKEY’S MOTION IN LIMINE TO PRECLUDE ELEMENT’S FORFEITURE CLAIM (DOCKET ENTRY NO 90.0)

         

          Brian A. Davis, Associate Justice Superior Court

         This is an action in which plaintiff Element Productions, Inc. ("Element") alleges that its former employee, defendant Mark Hankey ("Mr. Hankey"), clandestinely assisted defendant Editbar, LLC ("Editbar") in forming a competing video production business (i.e., defendant Stir Films, LLC d/b/a Sweet Rickey ("Stir Films")). A jury-waived trial of all outstanding claims is scheduled to commence on December 4, 2018.[1]

         In anticipation of trial, Mr. Hankey filed a series of motions in limine, which the Court heard on November 20, 2018. The Court already has ruled on all of Mr. Hankey’s motions in limine, save two. The unresolved motions in limine are Mr. Hankey’s Motion in Limine to Preclude Consequential Damages (Lost Profits) Evidence Against Him, and Motion in Limine to Preclude Element’s Forfeiture Claim (collectively the "Unresolved Motions"). The gist of Mr. Hankey’s Unresolved Motions is that Element is legally barred from recovering any consequential damages (including lost profits) or punitive damages (including a forfeiture of all of his salary for the years 2015 and 2016) from Mr. Hankey at trial on account of the damages limitation provision contained in Section 9 of Mr. Hankey’s 2012 written employment agreement with Element (the "Employment Agreement").[2] That limitation provision states, in relevant part,

Remedies. You [i.e., Mr. Hankey] hereby recognize and agree that the Company [i.e., Element] would suffer irreparable harm and would not have an adequate remedy at law or in equity for the breach or threatened breach by you of any one or more of the covenants set forth in Sections 6, 7, and 8 and agree that, in addition to such other remedies as may be available to the Company, in law or in equity, the Company may obtain an injunction or restraining order, without the posting of any bond or security and without the proof of special damages, to enjoin you from the breach or threatened breach of such covenants. Except otherwise expressly set forth herein, all remedies provided for in this Agreement shall be cumulative, nonexclusive and in addition to, but not in lieu of any other remedies available to either party at law, in equity, or otherwise, except that neither party shall be entitled to any special, incidental, punitive, multiple or consequential damages ...

Employment Agreement, § 9 (emphasis added).

         Mr. Hankey argues that the damages limitation set out in Section 9 of his Employment Agreement applies not only to Element’s claim for breach of contract (Count II), but also to Element’s claim for breach of his duty of loyalty (Count IV) because, under Massachusetts law, "[w]here a fiduciary relationship arises out of a contract, the [parties’] obligations are defined and limited by the terms of that contract, not by general fiduciary principles." Max-Planck-Gesellschaft zur Orderung Der Wissenschaflen E.V. v. Whitehead Institute for Biomedical Research, 2010 WL 2900340, *1 (D.Mass. July 26, 2010) (citing Fronk v. Fowler, 456 Mass. 317, 331 (2010), and Chokel v. Genzyme Corp., 449 Mass. 272, 278 (2007)). Element concedes that the damages limitation set out in Section 9 of Mr. Hankey’s Employment Agreement precludes Element from recovering consequential or punitive damages on its breach of contract claim, but it argues that it still may recover consequential or punitive damages on its breach of duty of loyalty claim because Massachusetts law prohibits a party from "shield[ing] itself by contract from [tort] liability for gross negligence or reckless or intentional conduct." Element’s Opposition to Defendant Mark Hankey’s Motion in Limine to Preclude Evidence of Consequential Damages at 2 (quoting HR Knowledge, Inc. v. Professional Ins. & Risk Brokerage, LLC, 71 Mass.App.Ct. 1127 (2008) (Rule 1:28 decision) ("HR Knowledge ").

         Following the motion hearing on November 20, 2018, the Court permitted the parties to make further written submissions regarding Mr. Hankey’s Unresolved Motions. Those additional submissions now have been received and reviewed by the Court. Upon consideration of the parties’ respective motion papers and the oral arguments of counsel, both Unresolved Motions are ALLOWED IN PART to the extent, and for the reasons summarized, briefly, below.

         The Court agrees with Mr. Hankey that the language of Section 9 of his Employment Agreement, on its face, establishes a broad limitation on the recovery of consequential and punitive damages by either Element or Mr. Hankey in any dispute that might arise between the parties. See Freelander v. G. & K. Realty Corp., 357 Mass. 512, 516 (1970) (Where "[t]here is no ambiguity in the contract ... [i]t must be enforced according to its terms") (internal quotation marks and citation omitted). The Court further agrees with Mr. Hankey that Element’s claimed "lost profits" constitute a form of consequential damages (see, e.g., Delano Growers’ Cooperative Winery v. Supreme Wine Co., Inc., 393 Mass. 666, 679-80 (1985) ("[C]onsequential damages include any loss of prospective profits ...")), and that requiring Mr. Hankey to forfeit his entire salary for the years 2015 and 2016 likely would constitute a form of punitive damages (see, e.g., Meehan v. Shaughnessy, 404 Mass. 419, 440 (1989) ("[A] fiduciary may be required to repay only that portion of his compensation, if any, that was in excess of the worth of his services to his employer") (internal quotation marks and citation omitted)).

         The Court parts ways with Mr. Hankey, however, in assessing the effect of Section 9 of his Employment Agreement on Element’s right to recover consequential and/or punitive damages based on Mr. Hankey’s alleged breach of his duty of loyalty to Element. While Mr. Hankey admits that Massachusetts law prohibits a party from "shield[ing] itself by contract from liability for gross negligence or reckless or intentional conduct" (see HR Knowledge, supra), he asserts that the language of Section 9 necessarily "precludes" Element from recovering any consequential or punitive damages from him based upon any allegedly tortious conduct because he still is liable to Element for any direct damages that it may have suffered on account of his alleged misconduct. See Mark Hankey’s Memorandum of Law Supporting Application of a Mutual Contractual Limitation of Liability at 2 n.3. Thus, according to Mr. Hankey, the applicability and effectiveness of the damage limitation provision in his Employment Agreement turns on whether the language of the provision purports to bar "all liability," as opposed to only certain types of damages. Id.

         Massachusetts law is, in fact, different from, and more nuanced than, what Mr. Hankey claims. More specifically, the Massachusetts Supreme Judicial Court ("SJC") held long ago in The New England Trust Company v. Paine, 317 Mass. 542, 550 (1945) ("New England Trust "), that "exculpatory provisions" in a trust instrument or other document which purport to limit the liability of the trustee or another fiduciary "are generally held effective except as to breaches of trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary and as to any profit which the trustee has derived from a breach of trust." Thus, the applicability and effectiveness of a contractual provision that purports to limit a fiduciary’s liability for violating his or her fiduciary obligations turns not on whether the limitation provision purports to cut off all liability, but rather on whether the fiduciary is "guilty of breaches of trust [committed] either in bad faith or intentionally or with reckless indifference to the interest of the beneficiaries."[3] Id. at 551. This holding is generally consistent with other subsequent Massachusetts decisions, which have ruled that a party’s liability for "reckless" or "intentional" torts may not be contractually limited or eliminated.[4] See, e.g., Standard Register Co. v. Bolton-Emerson, Inc., 38 Mass.App.Ct. 545, 547 (1995) ("[T]he limitation of liability provisions in the [parties’] contract are ineffective to bar [plaintiff] from recovering for a violation of G.L.c. 93A, Section 11, based on ... deceitful activity"). See also HR Knowledge, supra.

         Applying the holding of New England Trust to the facts of this case, the Court concludes that Element’s ability to recover consequential and/or punitive damages from Mr. Hankey at trial based upon any alleged breach of his duty of loyalty will depend, in part, on whether Element can prove that Mr. Hankey’s acted "in bad faith" or "intentionally or with reckless indifference" to Element’s interests. Id. This test places a high burden of proof on Element, but not necessarily an insurmountable one. The outcome will depend upon the evidence presented at trial. For this reason, the ...


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