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When NY Courts Will Uphold Liquidated Damages for Breach of a Non-Compete

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Jonathan Cooper
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Although most non-compete agreements that I've seen do not have such a provision, there are some employers who've gone to the trouble of inserting a clause in the contract stating that in the event that the employee breaches the non-compete (or, in legalese, "restrictive covenant"), he may be liable for a multiple of the billable work generated by the client that over the past year - and that has now been lost to the company/employer.

So, here's the question: is such a provision an enforceable liquidated damages clause, or is it an unenforceable penalty insofar as New York law is concerned?

Unfortunately, there really isn't a clear-cut answer, or bright-line test  because each such clause turns on its own unique facts. That said, New York State's highest court has weighed in on the factors that the courts must look to in order to determine whether the particular liquidated damages clause is enforceable or not, stating:

"Liquidated damages provisions, under our precedents, are valid if the "damages flowing from a breach are difficult to ascertain [and under] a provision fixing the damages in advance * * * the amount is a reasonable measure of the anticipated probable harm" (City of Rye v Public Serv. Mut. Ins. Co., 34 NY2d 470, 473). On the other hand, if "the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced" (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420, 425)."

Category: General