The usual measure of monetary damages for violation of a covenant not to compete, even where the violator was paid a discreet sum for the covenant, is the amount that puts the injured party in the same position it would have been in if the contract had been performed. Briggs v. GLA Water Management, 2014 Ohio 1551 (Ohio App., Apr. 11, 2014).
Summary of the Case
In November 1999, Briggs sold GLA, an industrial water treatment company he owned, to Hamrick, a long-time and high-ranking GLA employee. Briggs executed a covenant not to compete with GLA in Ohio, Indiana or Michigan for 15 years. As consideration for the covenant, the company promised to pay him $3,500 per month from January 2000 through December 2014. Hamrick guaranteed GLA’s promises to make these payments. After a few years, payments for the non-compete allegedly stopped. Briggs sued GLA and Hamrick for breach of contract. GLA counterclaimed, asserting that Briggs had violated the non-competition covenant and demanding damages equal to the contractual consideration for it. A jury determined that both GLA and Briggs breached their contracts, awarding approximately $119,000 to Briggs and $354,000 to GLA. The trial court entered judgment for GLA in the amount of the difference, approximately $235,000. On appeal, the judgment was reversed. The appellate court held that GLA was not entitled to damages because it produced no evidence that Briggs’ breach injured the company.
Motions and Trial
In response to Briggs’ summary judgment motion, GLA offered evidence of his competition but did not claim that his breach resulted in lost profits or other injury. Briggs denied competing but insisted that, in any event, there were no recoverable damages. He made the same argument in motions for a directed verdict at the close of the evidence, and for judgment notwithstanding the verdict or for a new trial after judgment was entered, but all of his motions were denied. Although recognizing that the measure of damages for breach of a non-compete agreement usually is lost profits, the trial judge ruled that there were triable issues of fact such as whether the parties intended the agreed-upon monthly payments to constitute the value of the non-compete clause. The judge also observed that, under Ohio law, when a contract is breached the innocent party may recover the contractual benefits received by the breaching party.
The Court of Appeals held that there was sufficient evidence for a jury to find that Briggs breached the non-competition covenant, but the correct measure of damages was the sum which would put GLA in the position it would have been in if the contract had been performed, that is, lost profits. Here, “GLA would not have been entitled to receive the money back that Briggs had been paid for his agreement not to compete if the contract had been performed.” Since GLA had contracted to make the monthly payments, and there was no evidence that Briggs’ misconduct injured GLA, it sustained no recoverable damages.
The covenant, which was executed by sophisticated business persons in conjunction with a sale of assets, seemingly did not unlawfully restrain trade — even though it had a 15-year term and a three-state geographical restriction — because it appears to have been no more restrictive than necessary to protect GLA’s investment. In any event, Briggs did not protest the duration or area of the restriction. What was problematic, however, was the company’s argument that the parties intended the monthly payments to be liquidated damages for Briggs’ breach. First, that argument flies in the face of the fact that the contract did not express any such intention. Second, a liquidated damages clause must reflect a reasonable approximation of actual damages or else it may constitute an unenforceable penalty provision. Here, there was no evidence that Briggs’ alleged violation of the covenant caused any injury to GLA, much less the more than $350,000 GLA was awarded. The parties’ agreement might have provided explicitly that if there was difficulty proving actual damages for a breach of the covenant, a specified modest sum would be payable to GLA.
Sometimes in contract violation cases involving no provable substantial injury or loss, nominal damages are awarded. A nominal damages award to GLA here might have been upheld on appeal.