Tuesday, December 16, 2008
Supreme Court of Utah Answers Certified Questions on Non-Compete Damages (TruGreen Companies v. Mower Brothers)
In TruGreen Companies, LLC v. Mower Brothers, Inc., the Supreme Court of Utah answered a certified question regarding the appropriate measure of damages arising out of a breach of an employment non-competition agreement.
The question, as certified by the United States District Court for the District of Utah, was as follows:
"Whether under Utah law a former employer is entitled to an award of lost profits damages, or instead an award of restitution or unjust enrichment damages, where a former employee has breached contractual non-competition, non-disclosure, and employee non-solicitation provisions?"
The case arose when Mower Brothers hired Ryan Mantz away from TruGreen, a competitor in the lawn care industry. Several other ex-TruGreen employees followed Mantz. TruGreen alleged that it suffered a significant loss of key personnel, and that it had to replace them with workers from other branch locations and inexperienced staffers. TruGreen further alleged Mower Brotherws experienced steady revenue growth.
After losing a preliminary injunction battle, TruGreen positioned the case for trial on its remaining claims - which included those arising out of various non-compete agreements signed by the ex-TruGreen employees. TruGreen sought unjust enrichment damages - basically contending it was entitled to Mower Brothers' appreciably higher business income since the employees were hired. Mower Brothers argued that lost profits - presumably more difficult for TruGreen to prove - were the appropriate damages measure. The district court certified the damages issue for the Supreme Court of Utah.
The Court held that lost profits were the correct damages measure, relying on its general contract line of cases hollding that the "purpose of these damages is to compensate the nonbreaching party for 'actual injury sustained, so that [the nonbreaching party] may be restored, as nearly as possible, to the position [it] was in prior to the injury.'"
The Court also relied on precedent from other state courts for its decision. However, the Court made clear that the plaintiff may introduce the defendant's profits as evidence to support its own damages. This comports with a number of cases from across the country, including a significant opinion applying Illinois law, K.W. Plastics v. U.S. Can Co., 131 F. Supp. 2d 1265 (D. Ala. 2001). Because of the inherent difficulty of proving lost profits, the Court ruled it is entirely appropriate to use a breaching party's gains as persuasive evidence.
A cautionary word is in order, though, for plaintiffs trying to prove lost profits based on the defendant's gains: It must do more than just introduce what the defendant earned as a result of the breach of the non-compete. There must be some nexus, such as a similar cost-structure or distribution channel, which allows a fact-finder to make an inference in favor of the plaintiff based on what the defendant realized.
Finally, the Court held that unjust enrichment is not a proper remedy for breach of a non-compete agreement.
Court: Supreme Court of Utah (certified question from United States District Court for the District of Utah)
Opinion Date: 11/25/08
Cite: TruGreen Companies, LLC v. Mower Brothers, Inc., 193 P.3d 929 (Utah 2008)