Thursday, February 23, 2012

Recent Decisions of Interest (No. 6)

This week's Recent Decisions highlights a jury verdict in Arkansas arising out of the sale of an accounting practice. In Creed Spann v. Lovett & Co., 2012 Ark. App. LEXIS 192 (Ct. App. Feb. 1, 2012), the Court of Appeals of Arkansas affirmed a verdict where the purchaser of an accounting firm's client list received $434,777 in lost profits after the seller worked with certain restricted clients following the sale.

The decision does not necessarily break any new ground, but it does highlight a couple of important realities clients need to consider when pursuing or defending non-compete suits.

First, the plaintiff - the acquiring firm - retained a lost profits expert to show the amount of damages which would have been realized had the defendant - the selling firm - not worked with restricted clients. The jury accepted the expert's estimation of damages down to the dollar. It did not appear that the defendants put forth a rebuttal expert, suggesting that the expert witness was highly persuasive to the jury. Because damages are so difficult to prove when they are non-liquidated - such as a projection of lost income - experts are essential to a plaintiff's case. Without one, it is highly likely that a court will be left without a basis to award recoverable damages even in the event of breach.

Second, the plaintiff's legal fees in the case totaled over $250,000, an amount it recovered under Arkansas' prevailing party statute. Compared with the verdict award, the amount of fees incurred is relatively high. However, it was far from unreasonable. Competition disputes cost a lot of money, particularly when discovery focuses on triaging the issue of breach, identifying lost clients, and examining what the defendants did with those clients. Preparing for and presenting experts is costly, as well. The opportunity to resolve a case usually is lost once counsel incurs a substantial amount of these fees. Therefore, the best time to explore a business resolution outside of court is right after the issues have been framed in the suit and before discovery begins.

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