Page 53 - Economic Damages Calculation

Saks Fifth Ave. v. James, Ltd.

In this trade secrets case, fn 50 the plaintiff sued the defendant for hiring away the plaintiff’s highest-
selling salesman. Purportedly, the salesman had solicited customers from his former employer despite
agreeing to a non-competition clause contained in an employee handbook. The non-competition clause
allegedly prevented his employment by the defendant, whose retail store was within one mile of the
plaintiff’s location.

Prior to leaving the plaintiff’s employment to work for the defendant, the salesman had approximately
40–50 core customers who regularly shopped at the plaintiff’s retail store, comprising approximately
70% of his annual sales. The remaining 30% was attributable to walk-in sales. An essential element of
the plaintiff’s damage calculation was to compare the total annual sales generated by the sales person
prior to his departure to sales made by the plaintiff to the salesman’s core customers subsequent to his
departure. The plaintiff’s expert assumed that this decline in sales was attributable to the sales person’s
violation of the non-compete clause.

On cross-examination, the plaintiff’s expert acknowledged that he made no effort to determine whether
any of the sales person’s customers actually followed him to his new employer and purchased merchan-
dise from the defendant. The plaintiff’s expert also made no adjustments to reduce his damage calcula-
tions for losses attributable to walk-in or sporadic customers, whose sales were included in the sales-
man’s pre-departure totals. Nevertheless, a trial court awarded treble damages totaling approximately
$1.65 million.

This award was overturned on appeal. At that time, the Appellate Court ruled as follows:

[A] plaintiff must show a causal connection between the Defendant’s wrongful conduct and the
damages asserted. . . . [Plaintiff] was thus entitled to recover damages that were "the direct and
proximate result" of that conduct. However, by relying solely on [Plaintiff’s expert’s] opinion
evidence as to damages, [Plaintiff] failed to carry its burden of proving that the wrongful conduct
of [Defendant] proximately caused those damages. . . . Under [Plaintiff’s expert’s] analysis,
[Plaintiff’s] damages were the same regardless of whether [the salesman] left to work at the [De-
fendant’s] store in the same shopping mall or simply retired. Having neglected to show that its
lost profits corresponded to the Defendants’ wrongful conduct, [Plaintiff] failed to show the nec-
essary factor of proximate causation and thus did not carry its necessary burden of proof as to
damages. fn 51

In effect, the court concluded that the plaintiff’s expert’s damage model simply showed the effect of
someone no longer working at the store, not the damages due to his wrongful conduct.

This case highlights the care required of the expert in preparing the damage analysis. While it may have
been appropriate for the expert to assume that causation existed (that is, that the salesman violated the
non-compete clause), the objective of a damage calculation is to make the plaintiff economically whole.
Here, the court viewed that as a result of the plaintiff’s expert’s causation shortcoming, he calculated

fn 50 Saks Fifth Ave. v. James, Ltd., 630 S.E.2d 304 (Va. 2006).

fn 51 Id. at 189–90.

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