cases, commentary and news related to restrictive covenants
Friday, September 17, 2010
Contempt Sanctions May Allow for Double Recovery (Mitchells Salon & Day Spa v. Bustle)
It is a truism most non-compete agreements get resolved well short of trial. To be sure, the settlement options available to parties in non-compete disputes are much more robust, since even the most vigorously fought, emotional contests don't necessarily result in large monetary exposure. Conduct restrictions, in myriad forms, are always potential settlement options. And usually better ones at that.
Given the frequent disparity in resources between the parties, a negotiated resolution sometimes results not just in a settlement agreement but also an actual agreed court order outlining what the ex-employee cannot do in the marketplace. From the employer's perspective, the specter of a court order is much more powerful given the potential for contempt sanctions if the ex-employee gets an irresistable itch to compete. On the other hand, documenting a restriction in a private settlement agreement means the ex-employer would need to sue for a violation on a separate contract claim.
The sanctions for violating a court order can be significant. A recent Ohio appellate case illustrates this. In a dispute between a high-end beauty salon and a hair stylist, the latter agreed to incorporate his non-solicitation covenant into a court order. He soon began violating the order and directly provided stylist services to many of his former clients.
The court's penalty upon a finding of contempt was disgorgement of the profits the stylist earned and extension of the covenant for an additional 11 months so that the salon obtained the benefit of its bargain. Arguably, this constitutes a double-recovery. The stylist also was ordered to pay the salon's legal fees in excess of $15,000 and private investigator fees of more than $52,000. Courts have much wider discretion to impose penalties for civil contempt. It should go without saying that parties have a much greater interest in complying with a court order than a private contract, but the Ohio case illustrates how sweeping those penalties can be.
Court: Court of Appeals of Ohio, First Appellate District
Opinion Date: 4/30/10
Cite: Mitchells Salon & Day Spa, Inc. v. Bustle, 187 Ohio App. 3d 336 (Ohio Ct. App. 1st Dist. 2010)
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