An award of damages for breach of a noncompete agreement, like any other damages award, requires evidentiary support. In a judgment issued yesterday after a bench trial, the Business Court awarded the plaintiffs nominal damages absent such evidence.
In HILB Rogal & Hobbs Co. v. Sellars, the Court faced a common factual scenario: a former vice president of the plaintiffs resigned and went to work for a direct competitor. The businesses in question were insurance companies targeting building materials suppliers. The plaintiff and defendant executed an employment agreement that contained standard restrictions on post-employment competition and on the use of confidential business information.
Two days after interviewing for the competitor's job, the defendant
copied the entire hard drive of his work computer, which contained, among other things, confidential and proprietary information about [plaintiffs'] Lumber Program accounts and business strategies, including account files and lists, policy expiration dates, policy terms, conditions and rates, internal and external pricing and profit margins, information relating to accounts’ risk characteristics, and carrier information.
He resigned two weeks later and went to work for the competitor, taking the confidential information with him. (The Court ordered him to return the confidential information in 2008).
Plaintiffs asserted claims for breach of fiduciary duty, breach of contract, and unfair & deceptive trade practices, and defendant counterclaimed for breach of contract for unpaid salary. Judge Diaz applied New York law to the claims.
During the lawsuit, the defendant took two Rule 30(b)(6) depositions of the plaintiffs concerning their claimed damages. At those depositions, the witness, another vice president of plaintiffs, disclaimed lost profits, as did counsel for the plaintiffs. The witness did not know of the origin or calculation of two summary exhibits that plaintiffs attempted to use at the bench trial -- those exhibits were prepared by other employees, none of whom testified at trial. Judge Diaz noted at least eleven unexplained discrepancies between the two exhibits. Moreover, the Rule 30(b)(6) witness "could not rule out the possibility that the damages exhibits contained amounts for lost revenues for business that Plaintiffs could not underwrite, irrespective of [defendant's] alleged breach of the Employment Agreement."
The damages witness suddenly became unavailable for trial due to the pre-trial but post-discovery termination of his employment -- he declined to appear voluntarily, and he was outside the Court's subpoena power. The plaintiffs attempted to notice a de bene esse deposition less than one month before trial. The Court quashed the notice of deposition based on a month-long delay between plaintiffs' awareness of the witness's unavailability and the issuance of the notice, as well as the fact that the Court already had continued the trial once to allow de bene esse depositions to occur. Thus, plaintiffs had to rely upon his deposition testimony.
Although the plaintiffs proved that the defendant breached his fiduciary duty and breached the employment agreement by copying the contents of his hard drive before resigning, the Court held that there was insufficient evidence of damages. Under New York law, breach of fiduciary duty damages "are limited to profits lost from the actual diversion of customers," a damages theory that the plaintiffs waived. The Court awarded $1 in damages for the breach of contract claim.
Although the plaintiffs attempted to rely on a liquidated damages formula in the employment agreement, the Court similarly held that they had not provided sufficient evidence of the components of that formula. Specifically, the Court rejected the argument that the summary exhibits were admissible business records under Rule 803(6) because the Rule 30(b)(6) witness did not lay any foundation for admissibility or for the reliability of the figures contained in the exhibits. The Court awarded $1 in damages for the breach of contract claim.
The Court rejected the unfair and deceptive trade practices claim, holding that North Carolina's Chapter 75 was inapplicable under the "most significant relationship test" and that, even if it applied, the lack of actual damages was fatal to a UDTP claim. Likewise, the Court found no basis to award punitive damages or attorneys' fees.
As for the counterclaim, the employee asserted that he was entitled to over $94,000 in unpaid salary. The plaintiffs responded that an interim $50,000 payment constituted an accord and satisfaction. The Court rejected plaintiffs' defense on the grounds that they failed to prove that the $50,000 was intended to settle all compensation claims or that the defendant was informed of that intention before he accepted the check. Instead, the Court offset the $50,000 payment from the employee's salary claim and awarded him the balance.
Although the claims on both sides arose under New York law, there is no apparent reason why the result would be different under North Carolina law. In either event, enforcement of a noncompete provision can prove to be an expensive proposition (here, two and a half years of litigation), particularly where the former employee has counterclaims.
[UPDATE: In an Order dated July 6, 2010, Judge Diaz denied the company's motion to reconsider the ruling on the employee's counterclaim].