Violation of Non-Competition Agreements

The business purpose of a non-competition agreement is to prevent a former employee from taking customers or other employees. By signing a non-competition agreement, an employee agrees not to start a competing business or work for a competing business for a period of time after employment ends. Like any contract, a non-competition agreement must give consideration to be binding. When an employee begins employment, that consideration is a job. If an employee is asked to sign a non-compete after a job commences, “new and valuable” consideration must be provided. This can include a salary increase, a promotion, ownership, or a change from part-time to full-time employment. What qualifies as consideration after a person is employed varies by state.

Except for the sale of a business, courts are more likely to enforce non-competition agreements when the duration is under two years and the geographical coverage is limited to an area that would affect the employer’s business. The employee should have also moved to a true competitor or become a direct competitor by starting a new business in the same field.

When litigating a non-competition agreement, courts generally focus on two potential risks from a former employee:

• Interference with relationships with customers, employees and vendors
• Use of trade secrets and other confidential business information

Employers can seek injunctive relief. If injunctive relief fails, employers can also seek compensatory damages. Money damages for lost profits are sometimes difficult to prove in non-competition cases. An economist, forensic accountant or experienced business valuator is needed to quantify damages and show causation. Causation can be shown by a before-and-after analysis and by documenting sales history, avoidable costs and expenses. A damage claim for missed business opportunities must show that a customer would have done business with the employer absent the former employee’s misconduct.

Non-competition agreements often include liquidated damages provisions. These provisions avoid the need for the employer to prove the extent of actual damages. The employer must prove only a breach of the agreement. To be enforceable, liquidated damages must represent a “reasonable forecast of damages” and not be an excessive amount relative to the damages anticipated when the contract was signed.

RPC has economists, accountants, statisticians and business valuators to assist plaintiffs and defendants in these cases. We have the IT resources to analyze large data files of sales and accounting records.  Contact us for a preliminary review of documents and discussion of your non-competition case at no obligation.