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4th Circuit Decides Business Noncompete Case

Published by on March 17, 2009

For those interested in this kind of thing, the Fourth Circuit recently issued an unpublished opinion in the second appeal in a case involving a covenant not to compete given in connection with the sale of a business.  In Western Insulation, L.P. v. Moore, the Fourth Circuit affirmed the district court’s finding that the Moores […]

For those interested in this kind of thing, the Fourth Circuit recently issued an unpublished opinion in the second appeal in a case involving a covenant not to compete given in connection with the sale of a business.  In Western Insulation, L.P. v. Moore, the Fourth Circuit affirmed the district court’s finding that the Moores had breached the covenants in their contracts with Western Insulation, L.P. (“Western”) for the sale of their business and the granting of a permanent injunction.  The contracts included confidentiality, non-competition and non-solicitation provisions, which the lower court previously found to have been violated when Melanie Moore started a competing insulation business within the timeframe covered by the non-competition provision.  The Court’s earlier decision had reversed an award of substantial damages by the district court.  The Court’s unpublished opinion can be found here.  The Court’s opinion in the first appeal can be found here.  More after the break.

In 2001, Hal Moore sold his company, Western Insulation, Inc. (“Insulation”), to Western.  Hal and his wife Melanie, who was Chief Financial Officer of Insulation, signed identical noncompete agreements with Western.  While still under the timeframe of the noncompete, Melanie obtained financing and served as guarantor for the loans for two competing insulation companies founded by former Insulation employees.  Hal entered into a lease agreement with one of the competing companies, and sold some equipment to the other.  He also hired two former Insulation employees.  Western brought suit in Virginia state court, alleging violations of the noncompete agreements and seeking compensatory damages and an injunction. 

Following removal to federal district court, the court held that the Moores had breached their agreements and awarded $943,659 to Western as compensatory damages and denied injunctive relief.  The Moores appealed, and the Fourth Circuit affirmed the district court’s decision with regard to Melanie’s breach.  The court found that Hal had breached his agreement by hiring former Insulation employees, but that Western had failed to prove any compensatory damages with regard to that breach.  The Fourth Circuit disagreed with the district court’s denial of injunctive relief, and remanded for further consideration.  On remand, the district court granted an injunction against Melanie to prevent her from assisting any of Western’s competitors or obtaining any ownership interest pursuant to a loan guarantee, and extended her noncompete agreement for the length of time it determined she had breached the agreement.  The court entered judgment for breach of contract against both Hal and Melaine and awarded Western nominal damages in the amount of $100.

On appeal to the Fourth Circuit, the Moores argued that the injunction against Melanie was too broad in that it restricted her ability to provide personal financial assistance to the founders of the competing companies, there was no evidence that she would violate the agreement in the future, and the extension of the agreement’s timeframe was error.  The Fourth Circuit rejected these arguments in turn. 

First, with regard to the overbroad argument, the court stated that the restriction on personal financial assistance was necessary in light of the fact that Melanie had provided assistance to Western’s competitors in violation of the agreement, and so allowing her to provide financial assistance to the companies’ founders would simply be “moving funds from one pocket to another.”  As to the second argument, the court found that the financial assistance Melanie provided to Western’s competitors resulted in an ongoing breach because by enabling the companies to stay in business, she had exposed Western to continuing damage.  Finally, the court rejected the argument concerning the extension of the agreement because it found that Melanie had received the benefit of the breach during that entire length of time.

With regard to the court’s award of nominal damages, the Moores argued that because the court had previously found that Western had failed to prove compensatory damages, Western could not satisfy the elements for a breach of contract claim.  They also argued that the doctrine of judicial estoppel barred Western’s request for nominal damages.   The Fourth Circuit stated that under Virginia law, parties to a contract have the right to modify elements of a breach of contract claim, including eliminating the requirement of proving damages.  The court pointed to language in the agreement specifying that a breach “shall result in substantial injuries” and entitling Western to seek injunctive relief and monetary damages as a result.  Because Western’s compensatory damages were limited to those it could prove with “reasonable certainty,” and Western had not done so, the question then became whether Western could recover nominal damages.  The court concluded that Virginia law recognizes nominal damages in cases where a breach of contract occurred but where compensatory damages were not proven, and affirmed the district court’s award.  As to whether judicial estoppel barred Western’s claim for nominal damages, the court stated that Western did not act in bad faith in seeking the award, and so judicial estoppel did not apply.

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