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October 26, 2005.

DONALD L. SMALL and SMALL & SMALL, INC., Plaintiffs,

The opinion of the court was delivered by: CHRISTOPHER CONNER, District Judge


Presently before the court for judgment are the breach of contract and detrimental reliance claims of plaintiffs, Donald L. Small and Small & Small, Inc. (collectively "Small"). Small, a Pennsylvania-licensed insurance agent, contends that defendants, Core Employer Services, Inc. ("Core"), and CNA Unisource ("CNA"), breached a contract to provide services to Small's clients, and that Small detrimentally relied on defendants' promises to provide these services. Small seeks to recover over $450,000 in damages purportedly attributable to defendants' actions.

During a one-day bench trial, the parties presented documentation and testimony relating to their business dealings, to the alleged contract, and to the appropriate method of calculating damages. The action is now ripe for judgment under Federal Rule of Civil Procedure 52. Based on the findings that follow, the court concludes that Core is liable to Small for breach of contract and detrimental reliance, but that CNA is not liable to Small on either of the claims. I. Findings of Facts

  1. Donald L. Small is a licensed insurance agent and the principal owner of Small & Small, Inc., a property and casualty insurance agency located in Stroudsburg, Pennsylvania. (Doc. 84 at 6, 39-40).

  2. In 1998, Small, as an authorized agent for CNA, began offering to his customers, through CNA, professional employer organization ("PEO") services, including workers' compensation, human resource administration, health insurance products, 401-K plans, and payroll services. (Doc. 84 at 7, 42-43, 48; Trial Ex. 4).

  3. Between 1998 and 2002 Small placed approximately twelve business clients representing over 400 employees with CNA's PEO services, and received as compensation a percentage of the administrative fee charged by CNA to these clients. (Doc. 84 at 8, 43-44).

  4. Small received passive income for placing his PEO clients with CNA in the amount of approximately $50,000 per year. (Doc. 84 at 8, 37-38).

  5. Small also received peripheral business from his PEO clients via the sale of additional insurance policies to his clients' employees. (Doc. 84 at 84-85).

  6. In January 2002, Small received a telephone call from a CNA employee who stated that CNA would be discontinuing its PEO services. (Doc. 84 at 10).

  7. Shortly thereafter Small received a letter from CNA dated January 31, 2002, stating that CNA would be exiting the PEO business effective March 31, 2002. (Doc. 84 at 10-11; Trial Ex. 1). 8. The letter from CNA also provided, in relevant part, that:
We are also exploring alternative arrangements in an attempt to minimize any inconvenience to current PEO clients, and will be providing further information on our progress in the coming days. In the meantime you will need to work with your clients to secure replacement employee benefits and workers' compensation insurance coverage by March 31, 2002.
(Trial Ex. 1).

  9. Small's clients also received a letter from CNA, dated February 1, 2002, notifying them of CNA's exit from the PEO business and advising them that they should secure replacement employee benefit and workers' compensation insurance coverage by March 31, 2002. (Doc. 84 at 11-12; Trial Ex. 2).

  10. Shortly after receiving the CNA letter, Small contacted Ed Costello ("Costello") of H.R. Logic regarding the possible placement of Small's PEO clients with H.R. Logic. (Doc. 84 at 13-14, 15).

  11. H.R. Logic was a national PEO service company similar to CNA; it had fifteen years of PEO experience and was backed by several large investors. (Doc. 84 at 198).

  12. Costello was familiar with Small's PEO clients because he had worked for CNA and he had helped Small place those clients with CNA. (Doc. 84 at 13-14, 197, 200).

  13. Small provided to Costello all information necessary for a review of the PEO accounts, and received from Costello price estimates for H.R. Logic replacement PEO services, including underwriter-approved workers' compensation services. (Doc. 84 at 14-15, 84, 200-06).

  14. Under the proposed agreement with H.R. Logic, Small's compensation was similar to that which he received from CNA. (Doc. 84 at 207).

  15. Small provided to his clients several alternatives to CNA's PEO services, including buying individual policies and services, buying non-PEO services from CNA and supplementing them with services from elsewhere, or transferring the accounts to H.R. Logic. (Doc. 84 at 15).

  16. All of Small's clients opted to transfer to H.R. Logic services, and Small and Costello prepared paperwork to transition Small's PEO accounts to H.R. Logic. (Doc. 84 at 49, 50, 56, 84).

  17. On February 14, 2002, the presidents of CNA and Core established a conference call with Small and other CNA agents around the country to discuss the possible transfer of PEO services from CNA to Core. (Doc. 84 at 16-18, 63, 78, 170).

  18. During the conference call, Core presented itself as a "simplified solution" to the problem of CNA exiting the PEO business; the transition to Core was represented as "seamless" due to an understanding between CNA and Core that protected the pricing established under preexisting CNA-PEO contracts, and allowed Core to service the clients with a full panoply of PEO services, with the exception of payroll services which CNA would continue to provide. (Doc. 84 at 18, 171-72). 19. During the conference call, Ed Rawles ("Rawles"), President of Core, stated that he would meet with any CNA agents and their clients who wanted to learn more about the Core option. (Doc. 84 at 22, 93-94, 169, 172-173).

  20. Small and a few other agents expressed to CNA's Vice President of Sales, Bill Leahy ("Leahy"), a desire to meet with Rawles regarding the Core option. (Doc. 84 at 22, 93-94, 169, 172-73).

  21. The "seamless transition" offered by Core presented the best alternative service to Small because: (i) enrollment in a new PEO plan normally causes disruptions for the client, including on-site visits to the client's place of business and discussions with each of the client's employee's; (ii) the agreement between CNA and Core would allow Small's clients to receive the same pricing and coverage; and (iii) the paperwork necessary for a transition would be minimal and the files were already set-up at Core for the transfer. (Doc. 84 at 18, 68, 201).

  22. There was no substantive difference between CNA's PEO services and those being offered by Core. (Doc. 84 at 18-19).

  23. Around the time of the conference call, Small received a letter from Core dated February 14, 2002, indicating that Core and CNA had entered into an agreement for Core to serve as the "alternative" to CNA's PEO services. (Doc. 84 at 16, 47; Trial Ex. 3).

  24. The letter states that Core is "able to offer a relatively seamless transition from CNA[] and [to] protect [Small's] revenue stream." (Trial Ex. 3). 25. The letter states that Core will continue to provide the same CNA payroll processing and billing services utilizing the same CNA technicians and at the same CNA rates, and that "basically, all current terms and conditions" that Small and his clients had with CNA would "remain as is." (Trial Ex. 3).

  26. The letter states that Core's workers' compensation carrier was "A" rated, and that it had "agreed to accept the vast majority of accounts `as is'." (Trial Ex. 3; Doc. 84 at 29).

  27. The letter states that Core is negotiating with an insurance company to provide health coverage, and assures that, even if those negotiations fail, "[t]here will be no break in coverage and client employees will have a variety ...

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