Restrictive Covenants Violation, Commodities Attorney

QUESTION

What will the courts do when they find that a valid restrictive covenant has been violated?

ANSWER

The courts may award damages to an employer or the buyer of a business that result from a violation of a restrictive covenant. Damages, however, may be hard to prove, and the plaintiff may not be able to recoup all of his losses. For example, it may be difficult for the owner of a new firm to demonstrate the amount of business that was lost as a result of a defendant's violation of a restrictive covenant. For these reasons, courts may enter a temporary restraining order ("TRO") or a preliminary injunction to prevent a defendant from continuing to violate a restrictive covenant. A TRO is an order that is entered for a short period (usually no more than 10 days) until the court can hold a hearing to determine whether a preliminary injunction should be entered. A preliminary injunction, on the other hand, can last until after a full trial has been held, and the court decides whether a permanent injunction should be entered and whether damages should be awarded.

To establish a right to preliminary injunctive relief, a plaintiff must show that: (1) the existence of a right or interest which may be legally protected; (2) irreparable injury should the injunction be refused; (3) no adequate remedy at law; (4) a likelihood of success on the merits; and (5) that the benefits of granting injunctive relief outweigh any possible injury to defendants that may result from entering the preliminary injunction. An employer only has to raise a "fair question" that it has a protectable business interest to warrant entry of a preliminary injunction. Once a protectable business interest is shown, irreparable injury is presumed. A defendant, however, may rebut this presumption by showing that the plaintiff will not suffer any injury as a result of the violation.

The right to a preliminary injunction does not foreclose the right to seek damages that result from a violation of a restrictive covenant. In egregious cases, the courts will award punitive damages if the plaintiff shows that the defendant acted wantonly and willfully. The court may require a plaintiff to post a bond to protect the defendant if it is later determined that the preliminary injunction was not warranted. This determination may be made in response to a motion to dissolve a preliminary injunction or after a full trial to determine whether a permanent injunction should be entered.

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