Without doubt, often the most challenging part of a breach of a restrictive covenant case is the ex-employer's ability - or inability - to prove the lost profits they suffered on account of their former employee's diversion of particular business to themselves or a competitor. Indeed, there are a number of cases where the courts have stepped in and either dismissed the plaintiff's damages claims, or even gone so far as to preclude the former employer's experts' testimony on damages when, in the court's view, the basis for that testimony was simply too speculative to pass evidentiary muster.
Naturally, that raises the question:
Why is it so hard to prove lost profits?
Why Proving Lost Profits Can Often be Particularly Challenging for a Former Employer
To answer this question, we must start with the Court of Appeals' seminal holding in the Kenford I case, wherein they summarized the general rule as follows:
“Lost profit damages may be awarded only if: (1) it can be demonstrated with certainty that the damages were caused by the defendant's breach; (2) the alleged loss is capable of proof with reasonable certainty; and (3) lost profit damages were fairly within the contemplation of the parties at the time of contracting.” Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 493 N.E.2d 234 (1986).
Reason #1: Did the Defendants Really Induce the Clients to Leave, or Did the Clients Leave for Other Reasons Altogether?
With regard to the first prong of that three-part test, namely, the plaintiff's burden of establishing that the defendants’ actions proximately caused them to lose profits, New York’s federal and state courts have turned away plaintiffs who failed to demonstrate that but for what the defendants did (or didn’t do), the clients would have remained with the plaintiff(s). See, e..g, Spherenomics Global Contact Ctrs. v. vCustomer Corp., 427 F.Supp.2d 236, 250–52 (E.D.N.Y.2006) (denying claim for lost profits associated with breach of non-solicitation agreement where the plaintiff could not establish that the defendant's breach caused it to lose a customer account); Shred–It USA, Inc. v. Bartscher, No. 02–CV–4082, 2005 WL 2367613, at *12 (E.D.N.Y. Sept. 27, 2005) (refusing to award lost profits where record lacked evidence that defendants caused client to terminate its relationship with plaintiff).
Reason #2: Are Plaintiff's Lost Profit Estimates Sufficiently Reliable to Withstand Judicial Scrutiny?
To be sure, in any case where a plaintiff is claiming that it suffered lost profits on account of what the defendants did, this claim is inherently predicated on the hypothetical assumption that "but for what defendants did, the client would have stayed with me, and we likely would have profited in the amount of X." But the assumptions cannot be without limits and unduly speculative; there has to be sufficient evidence to establish those losses with reasonable certainty:
Lost profit “damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.” Id.; accord Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., 487 F.3d 89, 109–10 (2d Cir. 2007).
In the interests of full disclosure, there is a third reason, as noted above in the Court of Appeals' Kenford I decision, which pertains to whether the losses purportedly incurred by the former employer constitute actual, as opposed to consequential, damages flowing from the breach of the restrictive covenant, and that prong is rather closely related to this Reason #2.
That said, the fine, subtle distinction between actual and consequential damages warrants its own article, which I plan to address in a separate post.
The Takeaway
In short, this evidentiary challenge is just one more reason why noncompete cases really are somewhat of a niche area of the law that should be handled by attorneys who specialize in it. And that is true from both the perspective of a plaintiff/former employer - who needs to make sure they marshal the evidence they need to support their lost profit claims - as well as from the defense side, who need to make sure they put the plaintiff to their proofs, and seek dismissal of the plaintiff's damages claims at the appropriate time, and in the appropriate manner.
