BFV Perspectives, Noncompete & Trade Secrets, | Feb 07, 2014

Northern District of Georgia Clarifies Damages Pleadings Standard in Non-Compete Cases Where Jurisdiction is Based on Diversity

The United States District Court For the Northern District of Georgia has shed light on the pleadings standard applicable to damages allegations in non-compete cases where the basis of the federal court’s subject matter jurisdiction is diversity of citizenship.  In Direct Response Products, Inc. v. Thomas, 2013 WL5890473 (N.D. Ga., Nov. 1, 2013), the Court granted a Motion to Dismiss based on the Complaint’s failure to plead damages properly. 

Plaintiff Direct Response Products, Inc. (“Direct Response”) staged sales events for car dealerships and was compensated based on the number of cars a dealership sold at a given event.  This was known as “Event Compensation.”  Defendants worked for Direct Response as independent contractors to market the events to dealerships; Defendants and Direct Response agreed to split event compensation equally.  The independent contractor agreement between Direct Response and Defendant also contained a six-month non-compete and non-disclosure provisions. 

In January of 2013, Thomas terminated his independent contractor relationship with Direct Response.  Direct Response then alleged that Thomas violated the Independent Contractor Agreement by working for one of its competitors and by using its confidential information in performing services for the competitor.  Direct Response asserted claims for breach of contract and alleged that it had been damages in the amount of $205,588.80.  It arrived at this sum by dividing in half the total Event Compensation received by the Defendants in 2012.  From this amount, which represented six months’ Event Compensation in 2012, Direct Response alleged that it could derive an estimate of the Event Compensation received by Defendants during the six-month term of the non-compete.

Defendants moved to dismiss, arguing that the Complaint did not satisfy the federal amount-in-controversy requirement for diversity jurisdiction.  Although the $205,588.80 amount claimed did exceed $75,000.00 as required, it was not clear that the amount claimed was adequately tied to the harm allegedly caused to Direct Response by Defendants.  The Northern District of Georgia noted:  “Plaintiff does not explain why the event compensation Defendants generated in six months in 2012 is related to the damages Plaintiff claims to have sustained in six months in 2013.”  Id. at *3. 

The Court went on to note that, in Georgia, the damages recoverable for breach of a restrictive covenant can include lost profits as well as damages for the loss of customers, the loss of employees, and the decreased value of the business property purchased in reliance on the covenant.  In short, recoverable damages can include all damages incident to the breach.  Id.  Because the Event Compensation received by the Defendants during a six-month period in 2012 was not alleged to have been incident to the alleged breach of their non-competition covenant, the Court held that “Direct Response has not here alleged any lost profits, lost customers, or lost employees as a result of Defendant’s alleged breach.”  Id. at 4.  The Court went on to conclude that, because no damages as a result of the alleged breach had been alleged, the amount-in-controversy requirement was not satisfied.  The Court therefore granted the Defendant’s Motion to Dismiss. 

Litigants bringing claims in federal court based on diversity jurisdiction for the breach of a restrictive covenant, accordingly, must be diligent in properly alleging their damages in Federal Court.  If the alleged damages are not sufficiently tied to the alleged breach, a Motion to Dismiss may be sustained on the grounds of a failure to meet the amount in controversy requirement. 

BFV Perspectives, Noncompete & Trade Secrets, | Feb 07, 2014