Damages For Lost Profits Awarded
Profits lost on specific orders are recoverable for breach of a non-compete agreement, according to the recent Tenth Circuit decision in Southwest Stainless v. Sappington.
Oklahoma law was applied to determine that the non-compete was enforceable. As a result, the trial court's reasoning about why the non-compete was enforceable has limited value for a case governed by Colorado law. Oklahoma's non-compete statute differs from Colorado's. Nonetheless, the Tenth Circuit's damages analysis may provide guidance in Colorado cases.
In Sappington, the trial court rejected the plaintiff's claim for "general lost profits"; that is, plaintiff's claim for lost profits on all the business done by its former employees' new employer. Other jurisdictions have similarly concluded that damages should not be measured by the benefit to the party in breach. The trial court awarded damages, however, on two contracts where there was evidence that the former employees' breach of their non-compete had caused damages.
On appeal, the defendants challenged the ruling that lost profit damages were recoverable on the two contracts at issue. The former employees argued that any breach of their non-competes had not caused damages to their former employer because the plaintiff had not shown exactly what the defendants had done or how the damages had resulted. The Tenth Circuit rejected this evidentiary argument with little difficulty, as it noted that Oklahoma law provided that a causal connection could be proved by circumstantial evidence.
While the decision is not surprising, it does include lessons for both employees and employers. Employees subject to non-competes should recognize that there are times when damages have been awarded for the breach of a non-compete. Employers should recognize, on the other hand, that their case for damages may depend on showing how the employee's conduct caused it to incur damages. It is often not enough for a former employer to show that the new employer of its former employee has been successful.
