Oral argument in Horizon Health v. Acadia Healthcare illustrates difficulties with proving lost profits damages when employment is at-will

Last week I wrote about a new Texas Supreme Court opinion that had to draw the line between sexual harassment and sexual assault. Just days later, the Texas Supreme Court confronted an even more difficult issue in oral argument in Horizon Health v. Acadia Healthcare: how to draw the line between reasonable assumption and speculation when an expert witness testifies about lost profits damages in a departing-employee case.

This is a difficult issue, because the typical departing-employee case involves at-will employment. Let’s assume a group of employees does all kinds of bad things before leaving to go to work for a competitor. And let’s assume the employer lost sales after the group left. Those facts are relatively easy for a jury to understand.

But this leaves out a critical issue that is harder for the average person to grasp: causation.  It’s not enough to prove the defendants did bad things and the plaintiffs were damaged. You have to prove that the bad things caused the damage. And you have to quantify the damage.

Let’s say the bad conduct is soliciting a key employee to join a competitor, and the damage is the loss of sales the key employee would have made for the company if she had not been solicited. The problem for the plaintiff is obvious: if the key employee is an at-will employee, she could have left the company at any time regardless of whether she was solicited. How do you quantify the amount of lost profits caused by the wrongful solicitation?

That, in simplified form, is the problem confronting the Texas Supreme Court in Horizon Health v. Acadia Healthcare. I call this the Causation Conundrum for departing-employee cases.

Facts of Horizon v. Acadia: the distilled version

Horizon was a somewhat complex case with multiple defendants, numerous causes of action, and a 55-page jury charge (see Court of Appeals opinion here). But the basic facts, in simplified form, follow a familiar pattern:

  • Horizon managed mental-health programs for hospitals.
  • Four of Horizon’s executives, the Saul group, began negotiating to join a Horizon competitor, Acadia, while they were still working for Horizon.
  • While still employed by Horizon, the Saul group solicited John Piechocki, a successful Horizon salesman, to work for the competitor.
  • The Saul group and Piechocki left Horizon to work for Acadia.
  • Before leaving Horizon, the Saul group said things in their emails that must have made their trial lawyers cringe later. Our departures will leave Horizon “dead,” they said, and our business strategy at Acadia will be “hurting Horizon early and often.”
  • The Saul group also did things that would not look good to the jury. Saul, for example, copied a massive amount of Horizon files from his work computer to an external hard drive before leaving Horizon.[1]

Given these facts, Horizon’s lawyers had a lot to work with on liability. But how could they prove the Saul group caused damage to Horizon by bringing Piechocki to the new company? And how could they quantify that damage?

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Emails about “hurting Horizon early and often” certainly didn’t help the defendants at trial

These challenges were compounded by a couple pesky facts. First, Horizon’s profits continued to go up after the employees departed, even exceeding Horizon’s own targets. Second, there was no evidence that any existing Horizon customer left and went to Acadia.

How could Horizon prove lost profits given all these difficulties? The answer is that Horizon tried to prove causation and damages the old-fashioned way: they hired an expert.

Horizon’s expert dares to pose hypotheticals and make assumptions

Horizon designated Jeff Balcombe, a qualified CPA, to testify on damages. Balcombe’s assignment was to quantify Horizon’s future lost profits resulting from the loss of Piechocki. In the words of the Court of Appeals:

Balcombe testified as to the “lost production” damages Horizon suffered as a result of the individual defendants’ wrongful actions. In doing so, he attempted to determine what would have happened but for the wrongful actions—as opposed to what actually happened—by considering (1) how long Piechocki would have remained an employee of Horizon but for the alleged wrongful conduct, (2) how many contracts Piechocki would have sold “but for being an employee of Horizon,” and (3) what the average profit for each of those contracts would have been had he remained with Horizon.[2]

The court’s interjection “as opposed to what actually happened” is dripping with skepticism. But in fairness to Horizon, let’s pause here to consider the nature of causation and damages in a lost profits case involving departing employees.

Proving lost profits damages necessarily requires entering a hypothetical world. To prove how the defendants caused your company to lose profits, you must ask the hypothetical question “what amount of profits would we have made but for the defendants’ wrongful conduct?” There is no other way to do it. So when Horizon’s expert tried to figure out what would have happened, he was doing his job.

The harder part for the damages expert is deciding what assumptions to make. Balcombe based his lost profits analysis on three assumptions:

  1. “Balcombe analyzed the average amount of time Horizon retained its higher-level employees and ‘conservatively elected to assume’ that Piechocki would have stayed at Horizon two or four more years but for the alleged wrongful conduct.”
  1. “Piechocki would have sold six contracts in each year he stayed, up to four years, but for the wrongful conduct because other Horizon salespeople sold four contracts per year.”
  1. “He concluded that $247,000 per year for each contract was ‘a conservative and reliable figure for a mature contract price.’”[3]

This is where the Court of Appeals thought the damages expert went wrong. “We conclude that Balcombe’s opinion was too speculative based on an analytical gap between the data and his opinion; thus, it was no evidence of lost profits suffered by Horizon.” For example, the assumption that Piechocki, an at-will employee, would have stayed employed by Horizon was “nothing more than speculation.” Experts are allowed to make assumptions, but the Court of Appeals found that Balcombe’s factual assumptions were “unsupported” and “not admitted into evidence.”[4]

Wait a minute. Does this mean lost profits damages are never recoverable in a case based on solicitation of an at-will employee? Is the Court of Appeals saying a damages expert is never allowed to make assumptions about how long an at-will employee would have stayed at a company? And does the plaintiff have to offer evidence during the trial to support every factual assumption made by the damages expert?

Surely the Court of Appeals did not mean to go that far. But where to draw the line? That is what the Texas Supreme Court will have to decide.

Fortunately I have the answers to these difficult questions

Does the fact that a wrongfully-solicited employee was also an at-will employee legally bar the company from obtaining lost profits damages? The answer has to be no. That the employee could have left at any time is certainly a relevant fact for the jury to consider, but it can’t mean that lost profits damages are never recoverable in such a case.

So, if lost profits damages are available in such cases, is it legally impermissible for a damages expert to make assumptions about how long a solicited employee would have stayed at the company?

Some might argue that making an assumption about how long an employee would have worked for the company is always speculative, and therefore impermissible. How can an expert know with absolute certainty how long an at-will employee would have stayed?

The answer, of course, is that he can’t. But absolute certainty is not required. The Texas Pattern Jury Charge asks the jury to decide the amount of lost profits “that, in reasonable probability, will be sustained in the future.” Reasonable probability is the standard.

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There is always some hypothetical element to the calculation of lost profits damages

So, even if the employment is at-will, a damages expert can make assumptions based on reasonable probability. That much is clear. But what assumptions?

Again, the question almost answers itself. The assumptions must be reasonable and must be supported by some evidence. No one would argue that an expert can base a damage calculation on unreasonable assumptions. And a damages expert should not be allowed to assume facts that have no evidence to support them.

A harder question is whether the facts assumed by the expert must be offered in evidence at trial. Texas Rule of Evidence 703, like the corresponding Federal Rule, allows an expert to reasonably rely on facts he has been made aware of, even if those facts are not admissible. But the Court of Appeals in Horizon was troubled by the fact Balcombe’s underlying information was not admitted into evidence.

The Texas Supreme Court also seemed troubled. In oral argument, one of the justices asked whether there was any evidence other than the expert testimony to support the amount of damages found by the jury. The Court of Appeals assumed the answer was no. But Horizon’s counsel argued to the Supreme Court that the answer was yes.

So perhaps the Texas Supreme Court will sidestep the entire expert testimony issue and find that there was other evidence sufficient to sustain the damages verdict.

It’s hard to predict what this Texas Supreme Court will do in a departing-employee lawsuit. This is a court that likes defendants and doesn’t like big speculative damage awards (see Southwestern Energy for example). But this is also a court that likes employers and non-competes.

If I had to predict, I would bet that the court’s aversion to speculative damage awards will outweigh its warm fuzzy feelings for employers, meaning a win for the defendants on the lost profits damages issue.

But it is a conundrum.

*UPDATE: The Texas Supreme Court issued its opinion on May 26, 2017, ruling that the evidence was legally insufficient to support any award of lost profits. See my analysis here.

____________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands. He can’t remember the last time he wrote a post with as many rhetorical questions as this one.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Acadia Healthcare Co. v. Horizon Health Corp., 472 S.W.3d 74, 79-82 (Tex. App.—Fort Worth 2015, pet. filed).

[2] Id. at 88.

[3] Id. at 88-89.

[4] Id. at 89-90 (emphasis added).

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