Perhaps because they are more familiar with the law in other states or perhaps because they don’t think that non-competes are “fair”, many non-lawyers in Colorado believe that non-competes are rarely enforced. Or they think that they can take a risk and breach a non-compete because damages won’t be awarded. Those errors can lead to costly decisions as demonstrated by Judge Blackburn’s decision on July 21, 2008 in Tax Services of America v. Mitchell.
In Tax Services, Judge Blackburn of the federal district court in Colorado found that one of the defendants had signed a non-compete when she sold a tax preparation business known as Qwik Tax. The other defendants signed non-competes when they were employed by the purchaser of the business. Despite these non-competes, the three defendants opened an office of “Kwik Tax Service” within 135 feet of the purchaser’s business. Defendants then prepared many tax returns for the purchaser’s customers, effectively stealing the purchaser’s business. The purchaser’s business dropped precipitously once “Kwik Tax” opened while Kwik Tax’s revenue increased “exponentially during the same period”.
Judge Blackburn not only entered injunctive relief against the defendants precluding them from breaching the non-compete, he also awarded damages to the purchaser for lost profits. Judge Blackburn also awarded over $370,000 in attorneys fees and costs against the defendants.
Judge Blackburn’s decision should serve as a warning to anyone who considers breaching a non-compete, especially a non-compete which arises out of the sale of a business. Courts are favorably inclined to enforce non-competes arising out of purchase agreements for businesses and damages will be awarded if a purchaser can prove its damages were caused by the competing business.