Damages and Liquidated Damages in Restrictive Covenants

When seeking to enforce a restrictive covenant, whether a noncompete or a nonsolicit, the standard play-book calls for an aggrieved party to file suit and seek a temporary restraining order and preliminary injunction to preclude the defendant from continuing to compete or solicit during the restrictive period. In order to obtain such relief, however, a plaintiff must show not only that it is likely to succeed on the merits, but also that (i) absent such relief it has a substantial risk of suffering irreparable harm, and (ii) the risk of such harm outweighs the risk of irreparable harm to the defendant if injunctive relief were to issue. Thus, it is possible that even if a plaintiff convinces the court that the defendant is violating a restrictive covenant, the court may not grant any injunctive relief. (One common scenario where this happens is when the defendant can show that enforcing the restrictive covenant, essentially, will prevent him/her from being able to be gainfully employed.)

Assuming your case is strong, even if no injunctive relief enters, you still may want to pursue a claim for damages against your former employee. While that is all well and good, proving damages for a violation of a restrictive covenant is problematic, to say the least. For instance, you are not going to be awarded damages simply by showing that your revenues decreased during the time period in which your former employee was violating the restrictive covenant. Likewise, it is not sufficient proof of damages to show that certain customers terminated their business relationship with you and now buy the same products or services from the company where your former employee now works. Rather, you only are going to be awarded damages if you can prove that but for the violation of the restrictive covenant, your company would have made $X more in profits. Further, proving this usually is at least difficult and often is impossible.

Enter, liquidated damages …. If you have a valid and enforceable liquidate damages provision, you can bypass having to provide actual damages. Further, under Massachusetts law, and the law of many other jurisdictions, as long as you indicate that liquidated damages is not intended to be your sole remedy, having such a clause should not prevent you from also seeking injunctive relief.

So next time you are about to enter into a restrictive covenant, consider whether including a liquidated damages provision might make sense.






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