The New Jersey Supreme Court in the case of Totaro, Duffy, Cannova & Company, LLC vs. Lane, Middleton & Company, LLC gave some insight for a Court to award damages for violations of a non-solicit agreement.
The facts of the case are as follows: In 1997, Merritt Lane and David Middleton formed an accounting firm known as Lane, Middleton & Company, LLC. In connection with his employment, Lane signed a restrictive covenant barring him from soliciting clients of the Company for a period of four years should he depart from the Company. In 2001, Lane started his own accounting practice. Lane sent solicitation packages to clients for whom he had previously performed services, including clients of Lane, Middleton & Company. Numerous clients left to join Lane in his new accounting practice.
During trial, several clients testified that they had a relationship with Lane and they were dissatisfied with the Company, and they would not have remained clients of the Company following Mr. Lane’s departure regardless of any solicitation.
The Trial Court found that Lane breached the non-solicitation agreement and calculated losses to the Plaintiff for loss of business following the first year after the departure of Lane. The Trial Court then multiplied the first year’s losses by three to account for the remaining three years on the four-year restrictive covenant. The majority of the Appellate Division affirmed the Trial Court’s Decision.
The New Jersey Supreme Court considered the appeal and reversed the judgment on the amount awarded. The Supreme Court agreed that the Plaintiff’s loss of compliance work for the first year following Lane’s breach was a reasonable consequence of his action. According to the Court, his breach of the agreement precipitated the clients’ departure.
However, the Supreme Court disagreed with the Trial Court’s quantification attributable to the breach and reasoned that the damages must also reflect that Lane’s clients would have eventually left the Plaintiff. The New Jersey Supreme Court found that the evidence did not support the Trial Court’s Decision to triple the damages to account for the three remaining years left on the restrictive covenant.
If there is a breach of a non-solicitation covenant for a term in excess of one year, the Court will scrutinize the potential damages and may limit damages to a reasonable time period immediately following the employee’s departure.