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Tuesday, March 7, 2006

Computer Consulting Company Denied Lost Profit Damages for Breach of No-Hire Agreement

The Fifth Circuit recently held that Wilson Solutions, a computer consulting company, was not entitled to lost profit damages based on a client’s breach of a no-hire agreement. 

Wilson Solutions entered into a contract with Anorad, a manufacturer, to provide consulting services.  The contract contained a no-hire provision:

Both parties agree to not, directly or indirectly, during the period that Consultant [Wilson Solutions] provides services for Client [Anorad], and for a period of one year thereafter, solicit, employ or hire or induce to hire any person who is or has been an employee of either party unless otherwise consented to in writing.

Wilson Solutions then placed Schwartzman, one of its consultants, to advice Anorad.  Schwartzman was not aware of the no-hire provision between Wilson Solutions and Anorad.  Roughly a year later, Schwartzman resigned from Wilson Solutions.  Thereafter, Anorad’s CFO attempted to obtain consent from Wilson Solutions to hire Schwartzman, and Wilson Solutions refused to consent. 

Wilson Solutions sued Anorad for breach of the no-hire agreement, seeking lost profit damages for the first year Schwartzman worked for Anorad.  Wilson Solutions sought $341,000 – based on an estimate of what Schwartzman would have earned in consulting fees ($450,000) minus his salary ($99,000) and overhead expenses (approximately 10%). In his final year at Wilson Solutions, Schwartzman earned approximately $441,000 in consulting fees for Wilson Solutions and received a salary of $99,000 for himself.

Reviewing the district court determination de novo, the Fifth Circuit held that Wilson Solutions could not establish lost profit damages with “reasonable certainty” because Schwartzman was an at-will employee.  Applying Texas law, the court held:

Wilson Solutions cannot prove to a reasonable certainty the fact that it was damaged by Anorad's breach. The damages request relies on the assumption that Schwartzman would continue working for Wilson Solutions, earning consulting fees for the year in question. This type of contingency, created by his at-will status, is impermissible in Texas. Similarly, a jury would have difficulty estimating the losses suffered by Wilson Solutions. The purpose of lost profit damages it to put the nonbreaching party in the position it would have been in had the contract been performed.  Here, because Schwartzman was an at-will employee, it is impossible to determine that position with the amount of certainty required by Texas law.

The court reasoned that:

Schwartzman could have left Wilson Solutions at any point during the year in question, and, in fact, did leave the company. Therefore, any consulting fees Schwartzman would have potentially received are too uncertain to serve as the basis for Wilson Solution's request for damages.

If you are a company concerned with the breach of a no-hire agreement, perhaps the lesson is to include a liquidated damages clause in the agreement.  The court did note that no-hire agreements and covenants not to compete often have liquidated damages provisions – but the no-hire agreement between Wilson Solutions and Anorad did not contain such a provision.

Blase Industries Corp. v. Anorad Corp. (5th Cir. Mar. 1, 2006).

[Meredith R. Miller]

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