On August 3, 2016, the United States Court of Appeals for the First Circuit (“First Circuit”) affirmed the dismissal of a complaint brought by Cook and Company (“Cook”), a wholesale broker and third-party claim administrator (“TPA”) against the VFIS division (“ VFIS”) of the Glatfelter Insurance Group of York, Pennsylvania (“Glatfelter”).
The circumstances that led to Cook’s futile suit give an object lesson for agencies that have independent operations and particular niche businesses why they need careful contractual protections to protect their interests.
Specialized reinsurance product for municipalities requiring TPA claim services
Cook is a wholesale brokerage and service company that sells insurance products and services to various clients. Cook marketed and administered a high deductible injured on duty (“IOD”) reinsurance contract to municipalities in Massachusetts and Rhode Island for injured firefighters and police officers.
Municipalities purchasing high deductible IOD policies through Cook paid their own claims until they reach the deductible threshold, after which claims are paid under the IOD contract. Cook provided a division to administers claims for fire and police employees of various municipalities in Massachusetts and Rhode Island that needed such third party claims administration.
VFIS was set up by its parent, Glatfelter, in 1968, to develop and exploit the unserved insurance market for fire and, later, police departments. Since its founding VFIS has become a leading provider of insurance, education, training and consulting services for emergency service organizations. VFIS offered its emergency programs for firefighters and police in Massachusetts and Rhode Island VFIS through a regional director, Gowrie Barden & Brett, Inc. (“Gowrie”), an independent insurance agency.
Cook and Gowrie around 2002 negotiated a program where Cook would place VFIS IOD insurance through Gowrie. As part of the agreement, Cook would be the exclusive provider of third party claims administration services for municipalities who purchased the high deductible policy through VFIS since neither Gowrie nor Gowrie provided third party claims administrations services.
Cook plans move to new insurer and Gowrie makes plans to compete with Cook
In 2012, Gowrie learned through a Cook’ manager director of third party claims administration services that Cook intended not to renew some of its municipal IOD policies with VFIS but with other insurers.
In response to a VFIS inquiry for an update on Cook’s writing of insurance elsewhere, in July of 2012, Gowrie advised VFIS that Cook’s managing director was not happy at Cook but had a strong loyalty to VFIS. In response, a VFIS officer advised, “[m]aybe you guys should hire [him]?”
Initially, in response to potentially losing access to Cook’s claim services, Gowrie offered to buy the third party claims administration division from Cook.
When Cook declined the offer, Gowrie began meetings with Cook’s managing director about hiring him and two senior claims adjusters to start a claims administration entity at Gowrie to compete with Cook. Cook claimed Gowrie’s plan was to move the claims team to Gowrie at height of the renewal season, without notice to Cook. This timing would not allow Cook any time to recover and renew its third party claims administration business with its municipal customers for the policy year beginning July 1, 2013.
Managing director and adjusters join Gowrie just in time for renewal season
In mid-May 2013, at the height of Cook’s contract renewal season, Cook’s managing director and the two top claims adjusters precipitously left Cook for Gowrie. Gowrie immediately announced its new third party claims administration division was open for IOD business.
The managing director and the adjusters began following Gowrie’s instruction about contacting the “senior-most person you dealt with” at the municipalities they serviced while working at Cook, to let the person know that “the claims team they’re used to is now at Gowrie Group.” Gowrie also told the three former Cook & Company employees that, when asked by municipalities if, going forward, VFIS insureds would be required to use Gowrie for claims administration, that “it likely will be.”
Later in May 2013, Gowrie emailed an announcement to municipalities in the Commonwealth, including Cook’s third party administration customers, that Gowrie would now offer third party claims administration for municipalities relating to fire fighter and police injured on duty claims, and announced the hiring of the new Gowrie claims team including Cook’s former managing director and Cook’s former adjusters.
This announcement contained the VFIS trade name and logo. Cook alleged that the effect of the language in the announcement was to mislead the municipalities into believing that VFIS insureds must use Gowrie as their third party claims administrator for VFIS injured on duty insurance.
Cook’s complaint alleges “conspiracy” and “timing to maximize injury to Cook.”
Cook’s complaint alleged VFIS committed tortious interference with Cook’s contractual relations, civil conspiracy, and unfair and deceptive business practices in violation of Massachusetts General Law c. 93A. The alleged conspiracy involved Cook’s claim that VFIS had joined with Gowrie to damage Cook by improperly hiring away Cook’s claim department and cripple Cook from renewing its municipal contracts.
Cook further alleged that VFIS, acting through Gowrie, its Regional Director:
- intentionally and knowingly mislead Cook municipal IOD customers to believe that if they placed their coverage with VFIS, third party administration claim services could only be provided through the newly formed Gowrie Claims Group.
- VFIS conspired with Gowrie and Gowrie to damage Cook in its ability to renew existing IOD insurance by moving the third party administration claims team to Gowrie and convincing municipalities that Cook could no longer do the work.
- VFIS, Gowrie and Gowrie intended to put Cook & Company out of business by hiring away Cook’s managing director and two senior claims adjusters at the height of the renewal season, leading Cook’s clients to think Cook & Company was out of business.
- Based on the Gowrie notice, some of Cook’s municipal customers were lead to believe that Cook had, indeed, gone out of business.
Cook claimed that these actions of VFIS through its agent, and in conspiracy with its agent, Gowrie, were an intentional exercise of wrongful economic coercion over Cook and threatened its very existence.
Finally, Cook claimed damages based on its loss of significant claims administration and insurance business for renewals, effective July 1, 2013.
VFIS’ motion to dismiss Cook’s complaint allowed by United States District Court
VFIS for its part filed a motion to dismiss, accepting for purposes of that motion that all of Cook’s factual allegations were true. VFIS’ argument was that given what Cook claimed it had not stated a valid claim because:
- The total sum of the supposed “conspiratorial advice” was the email that read: “Maybe you guys should hire [Cook’s managing director]?
- Cook does not claim that there was any legal bar that prohibited Gowrie from hiring Cook’s managing director and the two adjusters.
- Gowrie acts as a retail broker for municipalities in providing VFIS insurance for injured-on-duty exposures and Gowrie and Cook compete in this retail brokerage market.
- Gowrie began a TPA operation in 2013, using three former Cook & Co. employees from Cook & Co.’s nine-person division. Cook. and Gowrie thus now compete in both the placement of insurance and in services to administer claims.
- VFIS does not compete with Cook in either line of business; rather, VFIS supplies one side of the business, the underwriting of injured-on-duty policies.
District court finds competitive marketplace led to Cook’s loss
The district focused on the fact that Cook claimed that the poaching of its at-will managing director and the other at-will employees constituted tortious interference because of the timing of their hiring by Gowrie. Cook argued that the timing was intended to “leave Cook without any staff competent to solicit renewals in competition with Gowrie.”
The district court found that Cook had failed to allege facts suggesting any improper motive that surpasses “the permissible bounds of rough-and-tumble business competition.”
The court ruled that the timing of the alleged poaching, even if carefully plotted as Cook alleged, was unfortunate for Cook (and consequently beneficial for Gowrie as one of Cook’s competitors) but that such planning does not make the conduct actionable or unfair competition.
The district court also reviewed that notices or letters that Cook claimed Gowrie had used to insinuate that VFIS would not allow Cook to act as a claim administrator for IOD policies and found:
While the letter recommends that the municipality switch from Cook to Gowrie for claims administration, it does not state or imply that Cook was incapable of providing those services. No objective recipient of the letter could possibly draw the conclusion argued by Cook, that “no customer [taking the letter and advertisement together] could have thought anything other than that Cook was out of the claims business.”
Finally, the district court ruled that “Because the defendant’s purpose was the legitimate advancement of its own economic interest, that motive is not “improper” for purposes of a tortious interference claim.”
The court noted that Cook may have suffered a loss as a consequence of the [VFIS] pursuit of its own interest is a by-product of a competitive marketplace; it does not render the defendant’s effort tortious.
First Circuit finds “bare-knuckle competition” but no facts establishing legal violations
Cook appealed the district court’s dismissal of its complaint to the First Circuit and got no better result.
The First Circuit affirmed the district court’s decision ruling: “Cook’s complaint is long on conclusory legal allegations” but that it was “conspicuously short of the type of factual allegations that are needed to state a plausible claim.”
The First Circuit did agree that from a factual standpoint, the complaint painted a picture of Gowrie “maneuvering to gain advantage over Cook in the marketplace” and “the use of bare-knuckle tactics to achieve that goal.”
The final conclusion of the First Circuit in dismissing the appeal was:
competitive infighting, though sometimes unattractive, is not per se unlawful; and here, the complaint is bereft of factual allegations adequate to show that either Gowrie or VFIS committed any tortious or wrongful acts.
Takeaways from the Cook case
Agencies or brokerages that have specialized departments or specialized personnel are allowed in Massachusetts to demand or request covenants not to compete that are reasonable in space and time. In the present case it appears that the claim department personnel, although critical to the operations of Cook, were at-will employees without any protective agreements for the benefit of Cook. Even something as simple as a confidentiality agreement that specifically prohibited the disclosure of business plans to a competitor by Cook’s employees might have made a difference in this case.
Such agreements do not necessarily avoid litigation but they put the holder of the agreement in a much better position to enforce the holder’s rights, especially if the agreement has a provision for reasonable attorney’s fees for the prevailing party.