Utah rules that damages for breach of a non-compete limited to lost profits

Posted on January 25, 2009 by Dan Warden

In a November 2008 decision, TruGreen Companies v. Mower Brothers, the Utah Supreme Court ruled that lost profits is the appropriate measure of damages for breach of a contractual non-compete provision. 

In TrueGreen, TruGreen Companies had argued that an unjust enrichment or restitution measure of damages should be used. TruGreen sought to recover the economic benefit realized by its employees' breach of their non-compete agreements. The Utah Supreme Court rejected this argument  as it expressly held that restitution or unjust enrichment was not an appropriate measure in non-compete actions. The court reasoned that restitution and unjust enrichment  should only be used when no express contract is present. The use of these equitable remedies would "punish" the breaching party, according to the TruGreen court, and would be inconsistent with the basic rule of contract damages that the non-breaching party should be placed in the position that it would have enjoyed if the contract had been performed. 

In reaching its decision, the court in TruGreen relied heavily on the 2007 decision by the Idaho Supreme Court in Trilogy Network Systems v. Johnson. The TruGreen court approved of the ruling in Trilogy that a plaintiff could "examine" the defendant's profits in an attempt to assess it own economic loss. A plaintiff can not rely solely on the defendant's gains to prove its lost profits, however, and must submit proof of its own costs and profits. Because the plaintiff in Trilogy had failed to introduce evidence about its own costs and profits, the Idaho Supreme Court declined to award damages because the plaintiff had failed to "to take the measure of its damages out of the realm of speculation". 

In rejecting the use of restitution as a measure of damages for breach of non-compete provisions, Utah joins not only Idaho, but also a number of other states, including Wyoming, Alaska and Connecticut. 

For those with non-competes governed by Colorado law, it is worth noting that Utah has not adopted a statute governing non-competes comparable to Colorado's. In that sense, Utah is generally more favorably inclined to enforce non-competes. It is also worth noting that the Utah Supreme Court's decision was limited to the question of the appropriate measure of damages for breach of a non-compete. Any employer seeking to recover damages in a non-compete case may face additional hurdles. 

Tags: , , ,

Unilateral contractual fee shifting provisions

Posted on January 20, 2009 by Dan Warden

Many non-compete agreements include provisions that state that the employer is entitled to recover any attorneys fees and costs incurred in connection with an action to enforce the non-compete. These provisions are unilateral or one-sided; they allow the employer to recover its attorneys fees but not the employee.

By including these provisions in the agreement, employers seek to discourage employees from challenging the enforceability of the non-compete. An employees must be concerned that, if their former employer prevails, the employee will be liable for not only his own attorneys fees, but also the fees incurred by the employer. Those fees can be substantial. 

Some states have adopted legislation that amends any unilateral fee shifting provision to make it bilateral. (That is, to allow either party to recover fees). Utah has adopted a statute, for example, that states that a court may award costs and attorneys fees to either party that prevails in an action when the provisions of a promissory note, written contract or other writing allow one party to recover its attorneys fees. Washington and California have adopted similar statutes. 

In a December 2008 decision that didn't involve a non-compete,  Morris v. Belfor USA Group, the Colorado Court of Appeals ruled, however, that unilateral fee shifting provisions are enforceable in Colorado under the proper circumstances. In Morris, the plaintiff argued that the attorneys fee provision should be interpreted to mutually benefit both parties. The Court of Appeals rejected this argument as it held that a fee-shifting provision did not need to be mutual to be enforceable. 

The Court of Appeals left open the possibility that a unilateral fee shifting provision could be stricken or reformed under the proper circumstances. The court noted that the trial court had not made any findings about whether the fee shifting provision was unconscionable or void as against public policy. The plaintiff apparently never argued at the trial court that the fee-shifting provision was unconscionable or void. 

It may be significant that the fee shifting provision in Morris did not arise from a non-compete agreement. Colorado has long had a public policy that disfavors the enforcement of non-competes. Trial courts may perceive unilateral fee shifting provisions in non-compete agreements as an attempt to undermine this public policy.

In any case, both employees and employers need to be careful in addressing attorneys fees in any non-compete agreement. If the employee has the ability to negotiate changes in a proposed non-compete, the employee should insist that any attorneys fee provision should be bilateral or mutual (that is, that the prevailing party, employer or employee, recovers fees). Employers, on the other hand, need to be careful not to impose a unilateral fee-shifting provision on employees under circumstances that could cause a trial court to decline to enforce the provision because it is unconscionable. Or because such a provision is inconsistent with Colorado's public policy governing non-competes. 

Tags: , , , , ,