Economic Factors Important in Noncompete Agreement Litigation

While I am not an attorney, I have had a great deal of involvement with noncompete agreements over the years as they relate to corporate financing for companies to whom I have provided financing and business advice.

Considering the vast differences that can exist between competing companies today due to technological and other advantageous factors, noncompete agreements are more important than ever before.

This article presents some observations and comments on the general structure of noncompete agreements, and an explanatory overview of the process for establishing an estimate of the economic damages

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that can result from violating a noncompete agreement.

Structural Considerations for Noncompete Agreements

□ Locational Considerations

There are great variations in how the laws of the various states deal with noncompete agreements.

● A noncompete agreement should be drawn up to follow the law in the state where the employee works rather than the state where the company is headquartered.

□ Noncompete Agreement Factors

Regardless of where the noncompete agreement dispute is taking place, there are several important factors that need to be considered:

● Noncompete agreements usually are allowed to protect against a departing employee stealing or soliciting their former employer’s customers or clients.

● Noncompete agreements usually are allowed to protect against a departing employee stealing their former employer’s employees.

● Noncompete agreements usually are allowed to protect against a departing employee stealing their former employer’s intellectual property, trade secrets, or other confidential information.

● Noncompete agreements usually are not allowed to restrict a departing employee’s ability to obtain or maintain other employment.

● In case the initiation of litigation is required in order to resolve a noncompete dispute, it is important to notice whether or not the noncompete agreement includes a provision to place a hold on the noncompete agreement's expiration date if the former employer files legal proceedings.

Economic Impact Considerations of the Violation of a Noncompete Agreement

When it has been established that a violation of a noncompete agreement has occurred, then the question of the level of damages typically arises next. Here is an overview of the process for establishing an estimate of the economic damages that can result from violating a noncompete agreement:

□ Overview of the Process for Establishing Economic Damages from Violation of a Noncompete Agreement

Recognizing, establishing and effectively demonstrating Economic Damages in noncompete agreement litigation requires a holistic comparative view of the damaged person’s or entity’s situation prior to and after the proximate causal event – i.e., the violation of the noncompete agreement, a realistic and reasonable multi-year projection of how the damages will affect the damaged person or entity in the future, and a net present-value calculation to provide a current damages estimate that will also incorporate future damages.

□ Here is a look at the individual components of this process:

Step 1. Establishing the Economic Situation Before the Proximate Causal Event.

Step 2. Demonstrating the Most Likely Future Economic Situation Without the Proximate Causal Event.

Step 3. Defining the Proximate Causal Event and Tying it to the Damages It Caused.

Step 4. Establishing the Most Likely Future Economic Situation After the Proximate Causal Event.

Step 5. Demonstrating the Difference Between the Most Likely Future Situation Without the Proximate Causal Event and the Most Likely Future Situation After the Proximate Causal Event.

Step 6. Calculating the Net Present-Value of the Difference in the Two Projections.

□ Now, let’s take them one at a time:

Step 1. Establishing the Economic Situation Before the Proximate Causal Event.

The best way to do this is to establish a financial “snapshot” of the person’s or entity’s financial situation as it was immediately prior to the proximate causal event. This should be easy enough to accomplish by using past financial statements and tax returns.

Trends need to be established so as to reflect how the financial condition has changed year over year to arrive at the present “snapshot,” and that can be accomplished by looking at historical financial statements and tax returns for the three to five previous years before the proximate causal event.

Step 2. Demonstrating the Most Likely Future Economic Situation Without the Proximate Causal Event.

Having established the past trend that brought the person or entity to the position that it was in immediately prior to the proximate causal event, you should then project that same trend into the future so as to establish a realistic and reliable estimate of future financial performance.

The projection should be carried out for as many years as it is felt the projection can be accurately made. That projection may be five years, and it may be twenty-five years depending on how reliable you feel a projection can be made.

In addition, if there was any known unusual factor, or factors, present that could positively or negatively impact future financial performance, then that factor, or factors, should be included in the analysis.

Note that the factors had to be known before the proximate causal event because the damages calculation will be as of the date of the proximate causal event. Otherwise, the factors should be thrown out.

Step 3. Defining the Proximate Causal Event and Tying it to the Damages It Caused.

The proximate causal event in this situation is the violation of a noncompete agreement that negatively impacts a person or entity and their ability to generate as much income as they would have been able to generate but for the proximate causal event.

Step 4. Establishing the Most Likely Future Economic Situation After the Proximate Causal Event.

This is the same process as described above in Step 2 except that it includes the negative influence of the proximate causal event. The number of years projected into the future should be the same as used in Step 2 above. In some cases, you will have financial statements that clearly reflect the impaired financial performance of the person or entity. In other cases, the person’s or entity’s ability to generate income may go away completely, for example, if a person is incapacitated and unable to work, or if a business is forced into bankruptcy or otherwise fails. In those cases, the loss is the present value of the entire income stream projected in Step 2 above.

Step 5. Demonstrating the Difference Between the Most Likely Future Situation Without the Proximate Causal Event and the Most Likely Future Situation After the Proximate Causal Event.

Once you have established the most likely future income projections before (Step 2) and after the proximate causal event (Step 4), the difference in these two projections is the gross amount of the loss for the projection period, not taking time into consideration. That is your base number that you carry forward into the next step.

Step 6. Calculating the Net Present-Value of the Difference in the Two Projections.

This is a mathematical exercise that involves net present-valuing the difference in the two projections (Steps 2 and 4) in order to arrive at an Economic Damages value as of the date of the proximate causal event.

□ Range of Values

It is acceptable to produce an Economic Damages value that is a range of values. Due to the level of judgment and speculation that is involved in estimating Economic Damages, it is sometimes necessary to recognize that a particular factor could just as easily be one figure as another figure. In a case like this, it is acceptable to calculate the future financial performance using both factors, and then state the Economic Damages estimate as a range.

□ Expert Strategy

If you are involved in litigation that involves Economic Damages, then hire a professional that is familiar with Economic Damages calculation techniques, and that is highly experienced in providing supporting testimony at deposition and at trial. You can be assured that the expert will be questioned thoroughly regarding every step and factor of their methodology.

□ This methodology of calculating an estimation of Economic Damages is Daubert compliant since it assists the trier of fact to understand the evidence or to determine a fact in issue, is widely published and peer reviewed, is generally accepted as an accurate procedure, and is capable of being replicated by another competent professional.

□ It is extremely valuable for both sides to engage an Economic Damages expert since usually the Plaintiff’s expert will provide an Economic Damages opinion and the Defendant’s expert will either provide an alternate Economic Damages estimate or a critical review of the estimate provided by the Plaintiff’s expert.

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ABOUT THE AUTHOR: Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.