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Contracts with covenants not to compete will typically address the anticipated damages that could occur from an employee’s breach of the agreement. When a contract contains a damages provision that is designed for the sole purpose of penalizing the employee from breaking his or her promise, it may be unenforceable.  Peter Mavrick is a Palm Beach non-compete lawyer who has extensive experience dealing with non-compete agreements.

In the case of Coleman v. B.R. Chamberlain & Sons, Inc., 766 So. 2d 427 (Fla. 5th DCA 2000), a former employer sued to enforce non-competition agreement against its former employee.  The trial court found zero actual damages for Chamberlain, the former employer, but found that it was entitled to liquidated damages in the amounts estimated by Chamberlain’s CPA.

The applicable portion of the employment agreement addressing the subject of damages stated:

During that two (2) year period Employee agrees that he will not provide services to any such client without first compensating B.R. CHAMBERLAIN & SON’S [sic] for the value of that client’s relationship, based on the *429 size of the account and its projected revenue. Id at 429.

Chamberlain argued that they could not anticipate the actual amount of damages that they may incur from a breach of the employment agreement, so the damages were meant to act as a penalty for non-compliance with the employment agreement. The contract also provides that the actual amount of damages would be determined by the value of each client’s relationship as determined by Chamberlain’s own CPA.  At trial, Chamberlain’s CPA testified that Coleman, the former employee, was obligated to pay Chamberlain 200% of one year’s gross revenue for each client of Chamberlain that switched to Coleman’s new company.  The trial court approved the CPA’s calculation and awarded these projected damages but refused to award any actual damages because there was insufficient evidence to prove same.

Coleman immediately appealed and the appellate court reversed the trial court’s decision.  The appellate court held that the liquidated damages awarded were disproportionate to the actual damages incurred and that the method and measure of the liquidated damages suggested by Chamberlain was a penalty and therefore unenforceable.  The Florida Supreme Court has stated that a liquidated damages clause may be enforceable if the “damages are not readily ascertainable at the time the contract is drawn, but … [equity may] relieve against the forfeiture if it appears unconscionable in light of the circumstances existing at the time of breach.” Id. citing Hutchison v. Tompkins, 259 So. 2d 129, 132 (Fla. 1972).

The liquidated damages sought by Chamberlain required Coleman to immediately pay the gross anticipated receipts from his client relationship, which would essentially give Chamberlain more than the amount of its actual damages.  The appellate court did not find this to be an equitable circumstance.  Chamberlain had not argued any basis for actual damages, nor did they present any evidence as to actual damages, so the appellate court correctly held that they were not entitled to any actual damages for the value of the client relationships as to those clients who were used in their CPA’s erroneous computation of the damages.  The appellate court further stated that the enforcement of the penalty unfairly deprives the former employee of his right to pursue his profession and deprives his clients of their right to choose whom to hire. Peter Mavrick is a Palm Beach non-compete attorney who has successfully argued that that where penalty provision is disguised as liquidated damages provision, it is unenforceable. In Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954), the Supreme Court of Florida stated that “in doubtful cases, the tendency of the courts is to construe a provision for the payment of an arbitrary sum upon a breach of a contract as a provision for a penalty….”

This article is not a substitute for legal advice tailored to a particular situation.

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