Certain service businesses which rely heavily on their customer book of business are more likely to be damaged by the actions of an employee who has left the company with customer lists, trade secret information or other personnel and used it for their own financial benefit. Companies can incur a severe loss of value to their business if an employee leaves the company and takes with them to a competing business their largest customer accounts and key employees. In many cases, employers use non-compete agreements to mitigate these types of risks. However, what if the company does not have non-compete agreements in place with their employees and they are claiming damages for a loss in value to their business?
As the courts have decided, non-compete agreements are not always essential in loss of value damage claims involving current and former employees or the sellers of acquired businesses. Let’s take a look at the below case to illustrate the actions of the previous owner/employees and how the court allowed the expert’s opinions on the damages based on those actions:
Details of the Case:
- Seller (defendant) sold his business which included a modestly profitable freight logistics brokerage. The seller declined employment with the buyer; however, most of the employees continued working at the brokerage post-acquisition for some months.
- No non-compete agreements were in place during the sale.
- According to case documents, less than a year later, the seller formed a competing freight brokerage operation and began recruiting his former employees
- A jury found that within a short period of time, the seller colluded with the employees who stayed with the acquired freight logistics brokerage to transfer the most significant customer accounts (representing a majority of the company’s annual revenue) to the new company and then resigned employment to work for the new company to guarantee “uninterrupted business”.
The financial expert calculated that just before the employee mass resignation at the brokerage, the company was worth $2.1 million based on a consideration of the value of future profits. He further calculated a loss of $330,000 related to costs associated with the employee resignations and to rebuild the business following the customer account transfers. He based his conclusions on a review of the financial results and customer mix of the freight brokerage from the years 2011, 2012, and 2013. Additionally, he considered ordinary business expenses such as overhead, office expenses, discussions with management, growth rates, and industry trends.
The defendants challenged the award on the basis it was an error to allow the financial expert on the opposing side to calculate a total loss of value where the plaintiff did not show its business was completely destroyed. The district court disagreed on the basis there had to be a general association between the damage and the alleged wrongdoing.
In this case, expert testimony and evidence showed a direct impact of the defendant’s actions (transferring customer accounts and subsequent mass resignation) on the plaintiff’s business. Additionally, the Appeals Court concluded that the district court made no error in allowing the expert’s opinions on the damages.
When you find yourself a party in litigation and needing a financial expert, selecting a competent and experienced expert relevant to your business case can be nerve-racking. Whichever side of the table you are sitting on, TDT has knowledgeable and skilled professionals who can provide expert witness testimony, expert witness rebuttals, or other general service relating financial aspects of litigation engagements. As a full-service CPA firm, TDT can assist you with the challenges associated with litigation support, and can also provide services related to your accounting and tax needs. For more information on our services, contact us today!