Thursday, October 18, 2012

A Lesson In How Not to Do It: Vibra-Tech Engineers v. Kavalek

Competition disputes fascinate me partly because of the ways people manage to screw things up.

For my employee clients who are looking to leave and compete, the advice I often end up giving is simple and straightforward. In a nutshell...

1. Don't take anything when you leave.

2. Be honest and forthright on your way out the door.

3. Know your contractual obligations.

4. Don't compete before quitting.

Of course, there are the inevitable line-drawing exercises that have to be hashed out, as I end up answering countless "what if I do this" questions. But as long as employees can stick to these four basic rules, things can't go too terribly wrong.

Scott Kavalek stuck to none of these rules.

The case is Vibra-Tech Engineers, Inc. v. Kavalek, and if nothing else, it is first-rate primer on how not to compete. Earlier this year, a federal court entered a judgment against Kavalek, his wife, and their two companies in the amount of $3.39 million. The suit was a not-so-garden variety non-compete and duty of loyalty action that Vibra-Tech brought in New Jersey. And the facts were startling to read.

Vibra-Tech is in the business of measuring vibrations in construction, quarry, and mining operations, and it also performs related consulting services. Kavalek was a high-level executive and corporate officer of Vibra-Tech who, years before his termination, set up two competing businesses and actively competed with Vibra-Tech while employed by it.

Among Kavalek's actions:

1. Hiring then-current Vibra-Tech employees to work for a competing entity.

2. Diverting several large customers to his own company, costing Vibra-Tech business.

3. Setting up another company as a "supplier" of geotechnical equipment and causing Vibra-Tech to purchase equipment from this supplier at inflated rates.

4. Lying at the time of termination of his involvement in these companies.

5. Tampering with sales invoices produced in discovery in an effort to hide Kavalek's sales activity with diverted customers.

6. Causing his attorneys to make repeated false representations in court about the production of documents and his association with corporations he controlled.

In a case such as this, contractual obligations almost seem to take a back seat. And indeed, the district court in rendering its judgment makes only passing references to the non-compete's enforceability. To be certain, if Kavalek never signed a contract, the outcome would have been the same.

The only real interesting legal issue to come out of the case is that the district court applied a disgorgement theory of damages, largely under the principles of agency associated with fiduciary duty law. Vibra-Tech had offered alternative damages theories, based on both lost profits and disgorgement. Ultimately, the court had little trouble finding that punitive damages also were appropriate.


Court: United States District Court for the District of New Jersey
Opinion Date: 3/29/12
Cite: Vibra-Tech Engineers, Inc. v. Kavalek, 849 F. Supp. 2d 462 (D.N.J. 2012)
Favors: Employer
Law: New Jersey

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