Many non-compete attorneys think that damages are the tail wagging the dog during the lawsuit. The reason is simple, but not intuitive: plaintiff's attorneys give very little thought to how to prove damages. Instead, they are focused - too much so - on unearthing every conceivable fact about liability.
So the case law - let alone scholarship - on damages in non-compete suits is thin at best. There are a handful of state law cases that intelligently discuss the issue, and a few recent decisions out of the federal circuit courts that do the same. But the relevant body of law doesn't really exceed maybe 30-40 decisions. Given the proliferation of non-compete litigation, this is truly startling.
The biggest obstacle for plaintiffs is tying conduct to particular loss, with defendants often taking the position that it didn't really cause any competitive loss because the plaintiff was going to lose sales or market share anyway. So where does one turn, particularly from the perspective of one trying to come up with a theory of recovery that avoids this common defense attack?
The logical starting point is an old line of cases from...the Supreme Court.
The cases come from Sherman Act and Clayton Act disputes, which deal with monopolization and price discrimination claims. Non-compete disputes are really restraints of trade, and attorneys don't often think to look to federal anti-trust law for guidance. Particularly in the damages realm, that's a valuable source of information.
The first case is Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931), which dealt with a conspiracy to monopolize trade in vegetable parchment. The conspiracy involved the effort of several parchment companies to lower their prices below cost, forcing the plaintiff to lower its price. The Court's damages analysis disapproved of a tactic that resembles what many defense lawyers in non-compete cases often attempt to do: speculate that absent the conspiracy to fix prices below cost, the prices would have dropped anyway. This is not at all different than the defense position that "the customer would have left even if I hadn't solicited it away."
The key part of Story Parchment is its articulation of the wrongdoer rule. This is the passage: "Where the tort itself is of such a nature as to preclude the ascertainment of damages with certainty, it would be a perversion of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts." The Court recognized, in other words, that some cases by their very nature do not allow for the plaintiff to prove damages with any certainty. As long as the fact of damages is certain, there is nothing wrong with speculating as to amount.
The second case, Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946), involved a Sherman Act claim. The case concerned an alleged conspiracy among movie theaters and distributors to show particular films before some independent exhibitors. The idea here was that the preferred release system harmed the independent exhibitors, who suffered lost sales from not exhibiting a hot new movie. With respect to damages, the plaintiff used a comparison of prior years' profits when he could show first-runs with those when he wasn't able to due to the illegal conspiracy.
The defendants balked at the speculative nature of the damages presentation, The Court relied on Story Parchment and found that "the wrongdoer shall bear the risk of the uncertainty which his own wrong has created." When dealing with claims based on illegal restraints of trade, in other words, it is difficult to ascertain damages and figure out what would have happened under "freely competitive conditions." The Court then appeared to go further and stated that "the wrongdoer may not object to the plaintiff's reasonable estimate of the cause of injury and its amount, supported by the evidence, because not based on more accurate data which the wrongdoer's misconduct has rendered unavailable."
The last passage in Bigelow teaches that if the plaintiff presents a damages picture, or reconstruction of what it expected to earn after a non-compete violation, the defendant (even while denying liability) still must portray an alternative picture.
The final, most recent case is J. Truett Payne Co., Inc. v. Chrysler Motors Corp., 451 U.S. 557 (1981), a price discrimination case under the Robinson-Patman Act. The case dealt with a simple set of facts whereby Chrysler appeared to set a sales incentive program up in such a way as to pay one Alabama dealer less than others. The Court's statement on damages is not as complete as in Bigelow or even Story Parchment, probably because the lower courts' hadn't flushed out liability as the other cases had.
The Court did, however, endorse the wrongdoer rule and in particular noted the before-and-after comparison that the plaintiff presented in Bigelow. It is this same before-and-after presentation that often draws the ire of non-compete defendants. With the Court's endorsement of it, that line of attack may not be as strong as defendants think.
The Court's anti-trust cases are under-appreciated when applied to non-compete disputes. The wrongdoer rule derives from this line of anti-trust cases, where the claim itself means there has been a competitive injury. Regardless of what one thinks of non-compete law, a finding of liability is, by definition, a competitive injury.
While plaintiffs cannot engage in unreasonable speculation or make improper assumptions, the wrongdoer rule reflects a policy judgment that defendants cannot erect a roadblock to a damages case by relying on the very uncertainty they have created.