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Torts: Tortious Interference with Business Relationship/Liquidated Damages in Covenant Not to Compete

Posted by Ted A. Schmidt | Sep 02, 2021 | 0 Comments

Torts: Tortious Interference with Business Relationship/Liquidated Damages in Covenant Not to Compete

Tortolita Veterinary Services, PC v. Rodden, No. 2 CA-CV 2020-0070 (App. Div. II, August 27, 2021) (J. Staring) https://www.appeals2.az.gov/decisions/CV20200070Opinion.pdf

LIQUIDATED DAMAGES IN COVENANT NOT COMPETE CLAUSE ENFORCEABLE WHERE IT APPROXIMATES LOSS ANTICIPATED BY BREACH AT TIME OF CONTRACT CREATION OR ACTUAL LOSS/TORTIOUS INTERFERENCE WITH BUSINESS RELATIONSHIP SUPPORTED BY EMPLOYER'S FACILITATING A KNOWING BREACH OF COVENANT NOT TO COMPETE BY EMPLOYEES

Defendant  Dr. Shelly Martin worked 10 years for  Plaintiff Tortolita Veterinary Services PC [Tortolita] before leaving and starting Desert Paws Mobile Service. Five months later Defendant Dr. Aimee Martin, following 6 years of work at Tortolita, left there and joined Desert Paws.  A month later both Martin and Rowan began performing pet dental and surgical procedures at Cimarron Animal Hospital, located within a 5 mile radius of Tortolita. Both plaintiffs had signed a covenant not to compete with Tortolita prohibiting providing such services within that radius.  The covenant had a $60,000 liquidated damages clause. Paying the $60,000 would render the covenant no longer enforceable. Plaintiff sued for breach of the covenant seeking the $60,000 as well as additional damages for tortious interference with a business relationship. 

The trial court granted Tortolita's motion for summary judgment in part finding the covenant had been breached but also granted defendants' motion for summary judgment in part finding the liquidated damages clause unreasonable and unenforceable. This later ruling was based upon the finding that the liquidated damages did not approximate the loss anticipated at the time of contract creation and were “grossly  disproportionate”  to the actual damages resulting from the breaches.  The trial court also found “the difficulty of proof of  loss [was] slight” at the time the contract was signed.  Instead, the court computed damages to be $19,592.96  against Martin and $10,195.94 against Rodden. This computation was made by adding up the income from the surgeries that violated the covenant minus the cost of the surgeries.  The trial court also found Defendant Desert Paws had interfered with Tortolita's business relationship with Rodden rendering it jointly and severally liable for the $10,195.94. Each side was awarded attorneys' fees: Tortolita in the amount of $9,978 against defendants and to defendants, $40,445 in attorney fees against Tortolita.

The Arizona Court of Appeals reversed in part, vacated in part and remanded.

A liquidated damages provision is reasonable if it “approximates either the loss anticipated at the time of contract creation (despite any actual loss) or the loss that actually resulted (despite what the parties might have anticipated in other circumstances).”  Here Tortolita came up with the $60,000 figure based upon the damages contemplated if defendants had gone full time at a full service veterinarian facility. Although this isn't exactly what happened here, it still reasonably approximated Tortolita's anticipated damages at the time the contract was created.  Similarly it would have been difficult for Tortilita to accurately estimate damages at the time the contract was signed. The liquidated damages clause is reasonable and enforceable.

Tortious interference with a business relationship requires: 1) the existence of a valid contractual relationship; (2) knowledge of the relationship on the part of the interferer; (3) intentional interference inducing or causing a breach; (4) resultant damage to the party whose relationship has been disrupted; and (5)  that the defendant acted improperly.” Here Desert Paws knew that allowing its doctors to work at Cimmaron was in breach of the non-compete clause and facilitated them doing that anyway to keep clients who required surgery. The fact that Martin left Tortolita before even creating Desert Paws is of no consequence as the interference with contract occurred later when the defendants began performing surgeries within the 5 mile radius.

Trial court is directed to reconsider the issue of attorneys' fees in light of these rulings.

About the Author

Ted A. Schmidt

Ted's early career as a trial attorney began on the other side of the fence, in the offices of a major insurance defense firm. It was there that Ted acquired the experience, the skills and the special insight into defense strategy that have served him so well in the field of personal injury law. Notable among his successful verdicts was the landmark Sparks vs. Republic National Life Insurance Company case, a $4.5 million award to Ted's client. To this day, it is the defining case for insurance bad faith, and yet it is only one of several other multi-million dollar jury judgments won by Ted during his career. He is certified by the State Bar of Arizona as a specialist in "wrongful death and bodily injury litigation".

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