Q: What types of damages are available when a former employee breaches a restrictive covenant barring solicitation of his or her former employer’s customers?
A: While parties often focus on the possibility to enjoin a former employee from soliciting a company’s customers, it is possible to recoup lost profits as well, particularly where they are significant. For example, a Massachusetts federal court found a sales representative liable for over $1.6 million in damages for breaching a nonsolicitation clause that prohibited him from procuring business from his former employer’s customers.
Background and Decision
The sales representative’s former employer manufactures products used to treat spinal diseases. In 2011, the company hired him to work for an exclusive distributor in the Boston area. The representative’s territory later expanded to Massachusetts and Rhode Island.
Per his employment, the sales representative entered into a restrictive covenants agreement that included noncompete and nonsolicitation clauses. The noncompete clause restricted him from working for a competitor for one year from the date his employment ended. Under the nonsolicitation clause, the representative agreed not to “solicit, entice, persuade, induce, call upon or provide services” to the company’s customers for one year after his employment ended.
In 2019, the sales representative resigned to work for a competitor in the spinal products market. While there, he procured business from his former employer’s existing customers, including three Boston-area surgeons. The company sued the representative, seeking injunctive relief and damages for breach of contract. Following the company’s motion, the court issued a preliminary injunction enjoining the representative from violating the nonsolicitation clause.
In 2021, the court granted summary judgment in favor of the company on its breach of contract claim. The court later found that the sales representative violated the preliminary injunction, and he destroyed text messages with certain customers.
Following a three-day evidentiary hearing as to damages, the court awarded the company over $1.6 million, including prejudgment interest. In reaching its decision, the court observed that the company’s sales to a particular surgeon dropped by more than 50% after the former sales representative joined the new employer. Meanwhile, the new employer’s sales to the same surgeon increased “ten-fold.” The company’s forensic accountant testified that lost profits for this surgeon totaled between approximately $1.5 million to $1.9 million. Lost profits for two other surgeons totaled approximately $50,000.
The court’s decision serves as a reminder that a restrictive covenant, when legally permissible, can provide employers with substantial remedies in the event of a former employee’s breach.