A note on this post: this blog post is part of our series “Non-Compete Agreements: When are they valid, and when can the new employer be sued for an employee breach?” In this post we discuss what damages and remedies can be granted to an employer when their former employee breaches a non-compete agreement by working for a competitor. To learn what employers can do to create a valid non-compete agreement, check back in the next few weeks for the next and last post in our series, What Should Employers Do to Make Non-Competes Enforceable?
For a quick review, in our previous posts in the series we discussed
- When a non-compete agreement is enforceable, which we explained is more likely the narrower the agreement
- Whether the new employer can be liable for an employee breaching the non-compete agreement with a former employer, which they can, although it is very rare; and
- What new employers can do to reduce the risk of lawsuits and liability.
Now we will talk about the worst-case scenario: what happens if the former employer wins the lawsuit for breach of the non-compete agreement.
The most commonly sought (and most commonly granted) type of relief for breach of a non-compete agreement is an injunction. This means that in many cases, the former employer cannot or does not try to prove that there are damages. Instead, they ask the court to uphold the non-compete agreement and make the employee leave the new employer.
- Northwest Podiatry Ctr., Ltd. v. Ochwat
- Millard Maintenance Service Co. v. Bernero
- Capsonic Group v. Swick
- Dam, Snell & Taveirne, Ltd. v. Verchota
- Abel v. Fox
- Petter Packaging, LLC v. Hutchcraft
However, former employers do also seek damages (most often, but not always, against the former employee). One popular form is compensatory damages, or compensation for profits lost due to the breach. This, of course, requires showing that there was an actual loss. This can range from minimal sums to incredibly large amounts, depending on what the employer can prove the damages were in court.
Another popular type of damages is punitive damages for malicious conduct. This requires that there was strong evidence showing malicious conduct. Theoretically, malicious conduct is required to prove either claim, so if the claim is satisfied, punitive damages are on the table.
A third alternative is liquidated damages. Liquidated damages are provided in a contract as an amount, or formula for calculating an amount, that a party will pay for breaching the contract. In this context, employers may include an amount that the employee must pay if they breach the non-compete agreement with their employer. Because liquidated damages are part of the contract, the new employer will not have to pay liquidated damages unless they signed a contract directly with the former employer. Courts must decide whether a liquidated damages clause is reasonable before requiring a party to pay it. This amount can vary as well.
Finally, the unsuccessful party may be liable for court costs and attorney fees. This depends on whether the successful party asked for these damages, and whether the court feels that the unsuccessful party’s actions warrant them paying for these costs (for example, if they brought the case or made several arguments frivolously).
Outcomes Seen in Court
In general, it is very difficult to prove that a non-compete is enforceable. A majority of cases conclude that the non-compete was unenforceable. Generally, overly broad non-competes will be unenforceable, while the narrower, upheld non-competes will only prevent the employee from soliciting or working with the former employer’s clients. Almost all of the successful cases included direct competition for clients and malicious action in behalf of the employee or new employer.
- Lawrence & Allen, Inc. v. Cambridge Human Res. Group, Inc (no legitimate business objective, unreasonable restrictions)
- Northwest Podiatry Ctr., Ltd. v. Ochwat (ambiguous and overly broad covenant)
- Capsonic Group v. Swick (no legitimate business objective)
- Brown & Brown, Inc. v. Mudron (lack of adequate consideration)
- Diederich Ins. Agency, LLC v. Smith (lack of adequate consideration)
- Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc. (restraint unreasonable because overbroad)
When the former employer managed to win, the amounts have been $7,313.72 (Hagerty, Lockenvitz, Ginzkey & Associates v. Ginzkey); $49,322.50 against former employees that started up their own company using trade secrets and client lists from former employer (Cherne Indus., Inc. v. Grounds & Associates); $138,000 pursuant to a liquidated damages clause in a professional services firm (BDO Seidman v. Hirshberg); and $15,000-25,000 pursuant to a liquidated damages clause in a clinic (Raymundo v. Hammond Clinic Ass’n). The amounts can be much higher or lower depending on what loss the former employer can prove.
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