A long-running non-compete clause dispute has reached the Louisiana Court of Appeal three times. Last month, the court affirmed a $600,000 judgment, plus attorneys’ fees and costs, against an ex-employee who assisted his son’s start-up company compete with his father’s former employer. Pattridge v. Starks, No. 50,351-CA (Louisiana Court of Appeal, Feb. 24, 2016) (Endurall III).
Summary of the case. Endurall, Inc. — a Louisiana manufacturer and seller of rod guides used in the oil and gas industry to prevent well tubing leaks — terminated the employment of corporate officers Billy Joe Edwards and Jimmy Starks, two of its three 33% stockholders. The company and the owners of the other 34% sued Billy Joe, Starks and others in a Louisiana state court alleging, in part, that Billy Joe violated his non-competition agreement by helping his son Gregory Edwards make and sell rod guides.
After a trial, the judge ruled that Billy Joe violated his non-compete agreement, that the company’s four shareholders were irreconcilably deadlocked, and that their stock should be auctioned. That order was affirmed on appeal (149 So.3d 820 (2014) (Endurall I). Next, the trial judge permanently enjoined Billy Joe from, or assisting others in, competing in the rod guide industry. That decision also was upheld (Endurall II ). The trial court then presided over an evidentiary hearing on damages and awarded $600,000 to the plaintiffs. In Endurall III, the Court of Appeal affirmed.
The non-compete and confidentiality agreements. At the time Endurall was created, each shareholder signed a confidentiality agreement. They acknowledged that the non-competes were an essential condition of their stock purchases, and each promised not to participate in any competitive business for two years after he ceased to own Endurall stock
Billy Joe’s alleged breach of his non-compete. In 2012, Billy Joe, his son Gregory, and Starks formed Vector Energy Solutions. Billy Joe was elected vice-president of development. When Endurall and its other two shareholders learned about Vector, they accused Billy Joe and Starks of disclosing Endurall’s confidential information to Vector.
At the court-ordered auction of Endurall’s stock in 2013, the successful bidders were its two shareholders who were not involved with Vector. They paid Billy Joe and Starks $1.1 million each for their stock. Billy Joe went to work for Skye Petroleum which made paraffin products for the oil and gas industry. He and his wife loaned their son Gregory hundreds of thousands of dollars to start DHE, LLC. Billy Joe helped to acquire the building (a few blocks from Endurall) where both he and DHE had their offices, and he touted DHE to his Skye Petroleum customers who had a need for rod guides. In addition, Gregory wrote a letter announcing the creation of his new company, made reference to his work experience with his father, and stated that DHE’s rod guides were superior to those made by Endurall. Quickly losing customers and sales representatives to DHE, Endurall filed suit.
Damages calculation. The plaintiffs called an expert damages witness; the defendants did not. The witness testified that Endurall was injured as “a result of impaired operations” caused by DHE. He said that the damages amount could be determined by (1) comparing the company’s performance before and after the impairment, or (2) using a discounted future earnings approach. The “before and after” method, the expert said, considered Endurall’s sales history and gross profits, minus (a) avoidable costs, and (b) variable costs incurred but not due to lost sales. The discounting approach extrapolated sales data for six years from late 2014, assumed a 14% annual volume increase, and used an “aggressive” time-value-of-money discounting rate.
The expert was cross-examined “rigorously” according to the trial judge, and “ably and thoroughly” in the words of the Court of Appeal. The expert admitted that, among other suppositions, he presumed that Endurall’s current cost of production would not change and that customers lost to DHE would never return to Endurall. He conceded that a 14% annual sales increase was not supported by Endurall’s history, and he acknowledged that DHE’s actual sales volume was substantially less than the amount of sales Endurall claimed to have lost to DHE. However, he said that over time and on average the model he used would be supported. He concluded that, regardless of which method was employed, Endurall lost approximately $900,000 in profits as a result of sales to customers poached by DHE.
The trial judge decided to award damages only through 2016, not all the way to 2020 as the plaintiffs’ expert witness proposed. The court reasoned that technological advances might render rod guides obsolete and, in the appellate tribunal’s words, the trial judge “recognized the significant uncertainty and generous assumptions built into [Endurall’s] damages model,” “the volatile nature of Endurall’s business,” and that the “projected sales over time were speculative.” Even though the trial judge admitted that his computation was “somewhat arbitrary,” the Court of Appeal affirmed because “the record reveals no manifest error . . ., [the] damage award was based on . . . the evidence presented and not on mere speculation,” and “no abuse of discretion” was detected. By awarding 33% less than the expert’s calculation of lost profits, moreover, the trial court adequately took into account the complexity of computing damages.
Billy Joe contended that damages should not have been awarded beyond 2015 when the two-year non-compete expired. The Court of Appeal disagreed. It explained that DJE’s early entry into the market gave Endurall no time to prepare for the competition, and that Billy Joe could have mitigated Endurall’s losses by delaying assistance to his son.
Takeaways. Endurall III contains several important lessons.
First, a signatory to a non-competition agreement who assists someone else to compete can be found liable for violating it notwithstanding the signatory’s apparent lack of a personal profit motive.
Second, the decision provides a thoughtful analysis of the difficulties faced by a trial court called upon to compute damages sustained by a well-established market leader at the hands of a start-up competitor assisted by a knowledgeable alleged non-compete clause violator.
Third, the opinion reminds us that calling a damages expert to testify is not always required just because the adversary has such a witness. Without calling an expert witness, Billy Joe apparently was able to provide “rigorous”, “able” and “thorough” cross-examination of the plaintiffs’ damages expert. Billy Joe avoided incurring the expense of a testifying expert who, in any event, might have been unnecessary or even potentially counter-productive.