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The Arrogant Car Salesman in a Non-Competition Agreement

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James Irving
BKK Business Law Newsletter
March 2011

On February 16, 2010, Judge Jonathan C. Thatcher entered an award of actual damages and punitive damages against James J. Redden for breach of contract, conversion, breach of fiduciary duties and breach of his non-competition agreement. The odd thing is that Redden was the Plaintiff, having brought the case before the court by suing his former co-owners of Springfield Motors, Inc (“SMI”) in Springfield, Virginia.

Redden went to work for SMI in 2003 and soon became an officer, director and shareholder in the company. In May of 2004, he and the company entered into a series of business agreements, including an employment agreement that contained a non-competition provision. In pertinent part, the non-compete prevented him from “engaging in any business that was similar to SMI” during the period of his employment with SMI, and from soliciting or hiring SMI’s employees for any outside enterprises.

After hearing the evidence at trial, Judge Thatcher found that Redden had started a competing business (Mobile Body Repair “MBR”), solicited a SMI employee to work for MBR, and stole money from SMI by misstating and falsifying his commissions, all while working for SMI. When he decided to terminate his relationship with SMI in August of 2005, Redden unilaterally decided to set off his unused vacation time against monies he owed SMI for a car he had purchased, although his employment agreement prohibited him from doing so.

As bad as Redden’s record was, it appears he could have gotten away with it all by simply walking away. Instead, he sued the two individuals with whom he had owned the business, demanding that they buy back his stock and elect him to SMI’s board of directors, as, he claimed, was required by SMI’s operating documents. Instead, his co-owners counter-sued.

Judge Thatcher had no trouble finding against Redden on his affirmative claims, because of his prior breach of the Contract and because the doctrine of “unclean hands” barred his access to the equitable remedy that would require his election to the Board of Directors.

Judge Thatcher ruled the non-competition agreement enforceable because it only prohibited competitive business activity while Redden was employed by SMI, not after he had left. The provision prohibiting the soliciting of SMI employees was also deemed enforceable.

Quoting the established case law that “the unbending rule is that the director [of a corporation] must act in utmost good faith,” Thatcher found that Redden had repeatedly breached his fiduciary duties through his course of conduct, but since the Judge had already decided to sanction this conduct by awarding damages under the breach of contract and conversion theories, he awarded no actual damages under the breach of fiduciary duties theory.

Redden’s failure to comply with his fiduciary duties became a factor when the court considered punitive damages. Punitive damages are only awarded “where there is misconduct or actual malice, or such recklessness or negligence as to evince a conscious disregard for the rights of others.” In such a case, punitive damages may be awarded “to punish the wrongdoer and warn others against misconduct.” Judge Thatcher’s award of punitive damages served both purposes, but only because Redden had brought the case in the first place. Be careful what you wish for.