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.
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
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
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,
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,
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
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 ...