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Employment – Noncompete – Auto Body Repair – Liquidated Damages

Deborah Elkins//March 19, 2010

Employment – Noncompete – Auto Body Repair – Liquidated Damages

Deborah Elkins//March 19, 2010

A former employee, shareholder and corporate officer for an automotive dealership violated his employment agreement’s noncompete by forming a competing business and soliciting a coworker while still employed by the dealership, and he must pay damages for breach of fiduciary duty and for conversion of corporate assets, as well as punitive damages, a Fairfax Circuit Court says.

While it is true that noncompete agreements are disfavored restraints on trade, the agreement in this case falls within the bounds established by the Supreme Court of Virginia. The agreement at issue is narrowly drafted. It applied only during the term of defendant’s employment by plaintiff SMI. It is not unduly burdensome nor is it against public policy to prohibit an employee from engaging in another enterprise, similar to that of SMI, during defendant’s term of employment. Likewise, a provision that prohibits one employee from soliciting other employees for another enterprise is also enforceable.

Defendant violated the restrictive covenant. He started MBR, which engaged in the business of automotive body repair. This enterprise was similar to the business activity of SMI, which also engaged in body repair work through its subcontractors. Further, defendant violated the agreement when he solicited Craven, another SMI employee, to work for MBR.

Defendant acknowledges he was paid $111,277.43 for his work for SMI. The employment agreement is clear. Fifteen percent of defendant’s total compensation was consideration for the noncompete agreement. Because the actual damages for violating the noncompete agreement would be uncertain and difficult to determine with exactness and because the court finds that the foreseeable actual damages contemplated in the contract are not out of proportion to the probable loss, the liquidated damages provision is valid. Defendant is liable to SMI in the amount of $16,691.61 for breaching the noncompete agreement.

Defendant also is liable to SMI for $1,738.61, the amount he unilaterally set off against his purchase of a 1998 Ford Taurus, for his salary, and his unused vacation time, which he was not allowed to cash out. He also is liable for $4,585.42 for conversion of SMI assets, through inflating his commissions and falsifying expenses.

Defendant was an employee, officer and director of SMI. He breached his fiduciary duties when he solicited Craven, when he paid himself a salary for a week’s worth of work he did not do, when he inflated his commissions and falsified his expenses and when he misrepresented the cost paid by the dealership for a Chevy van, so he could purchase the vehicle at a reduced cost. Defendant is not liable for breach of fiduciary duties for his failure to timely pay sales taxes, as the officers agreed to postpone these payments because of financial difficulties. Although SMI has now shown damages from defendant’s breach of fiduciary duties, other than the damages previously discussed, the breaches still are relevant for determining punitive damages and whether defendant is barred from specific performance because of the doctrine of unclean hands.

Defendant is not entitled to enforce the stock repurchase agreement, as his breach of the noncompete agreement and of his compensation agreement were both material. Even if the breaches were not material, the court would still decline to specifically enforce his rights under the shareholder agreement because of the clean hands doctrine.

Further, the court awards $5,000 in punitive damages for defendant’s conversion of corporate assets and breaches of fiduciary duty amounting to misconduct and actual malice.

Redden v. Liptau (Thacher, J.) No. CL 2008-13395, Feb. 15, 2010; Fairfax Cir.Ct.; Richard Gardiner for plaintiff; Martin Mooradian for defendant. VLW 010-8-050, 15 pp.

VLW 010-8-050

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