Employers frequently face challenges in quantifying (and proving) the damages associated with enforcing violations of restrictive covenants by former employees. One strategy some employers have tried is the use of liquidated damages clauses. The advantage of using a liquidated damages clause is that employers have certitude in the damages amount they would be paid in the event of breach by the employee. Employers thus avoid the challenges of proving damages where damages may be in dispute or are inherently difficult to ascertain or quantify. Employers should, however, be aware of the consequences associated with using liquidated damages clauses.

For example, by including liquidated damages provisions, employers should consider whether they undermine their right to seek actual damages, such as lost profits due to loss of client revenue. Similarly, employers should consider whether the availability of a liquidated damages remedy adversely affects their right to obtain injunctive relief that would be needed to prevent irreparable harm to the employer. In this article we analyze how employers who opt to include liquidated damages clauses in restrictive covenant agreements might draft such provisions most effectively.

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