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Lyle Carlstrom Associates, Inc. v. Lyle

A-0664-05T5 (N.J. Super. App. Div. 2007) (Unpublished)

NON-COMPETITION AGREEMENT; DAMAGES — A jury may reasonably grant an employer a damage award of lost net profits in an action for breach of a non-competition agreement when the evidence demonstrates an estimated amount of business expenses that would be deducted from gross profits, and when the employer could have availed itself of discovery that could have provided a more particular accounting of lost net profits.

An employer required its employee to sign a non-competition agreement. In it, the employee agreed not to work for his employer’s business competitors, nor solicit business orders or employment from any of the employer’s customers, accounts, contacts or clients for a period of two years after employment terminated. The employee subsequently began conducting separate business with one of his employer’s clients, both while employed and then within two years after resigning. The employer sued for breach of the duty of loyalty and for a breach of the non-competition agreement. Discovery did not elicit information about specific declines in the employer’s gross profits. However, at trial, the employee testified to an estimated amount of business expenses that his employer might have incurred that would have reduced the gross profits. A jury award of net profits in favor of the employer was rendered.

Even though the jury ruled in its favor, the employer appealed. It argued that the lower court should not have instructed the jury that the correct measure of damages was the ex-employer’s net profits because the former employee had destroyed all of his own business records and tax returns which would have provided the information necessary to clearly prove the amount of the employee’s net profits derived from the prohibited transactions. The employer argued that the correct measure should have been the ex-employer’s gross profits, or alternatively that the burden should have been on the employee to prove the amount of his expenses to be deducted from gross profits in arriving at net profits.

The Appellate Division affirmed the lower court’s decision. The Court commented that the employer could have acted to obtain evidence of its ex-employee’s net profit by either deposing the employee or by getting an authorization from the employee for copies of the employee’s tax returns from the Internal Revenue Service. The Court agreed with the lower court’s conclusion that the employer had the burden to establish the amount of net profits. It believed that upon the record, which included the employee’s estimates of business expenses, reasonable minds could accept the evidence as adequate to support the jury’s verdict.

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