Non-Solicitation Damages: Attrition Benchmarks and Mitigation Offsets
Concord Wealth Partners terminated advisor Diane Ruiz, and she immediately joined a competitor with $85 million of client assets, in breach of a two-year non-solicitation covenant. Concord's damages expert projects five years of lost revenue at 1.20% of $85 million, or $1,020,000 per year, with no cost offset and no attrition, discounted at 6%. Concord's own records show that servicing the departed clients consumed advisor compensation, custodial fees, and support costs equal to 45% of revenue. Industry studies and Concord's eight prior advisor departures show that, absent a breach, 60% of the assets of a departing advisor typically remain with the firm within twelve months. Concord filled the position in month three, paying $150,000 in recruiting costs, and the new advisor has since brought in $20 million of client assets from outside the firm. The case will be tried in a jurisdiction that requires reasonable certainty and permits mitigation offsets.
1. Compute a defensible lost-profits figure and address whether the $20 million of new assets offsets the loss.
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Step 1 - contribution margin. Lost revenue is not lost profit. At a 45% cost-to-service ratio, the contribution margin is 55%: $1,020,000 × 55% = $561,000 per year at 100% attrition.
Step 2 - apply the attrition benchmark. Concord's own eight prior departures are the best evidence available; a 60% retention rate is a documented, defensible basis and satisfies reasonable certainty far better than an assumption of zero attrition. Lost share = 40% × $561,000 = $224,400 per year.
Step 3 - present value. Five years at 6%: ordinary annuity factor 4.2124 = $945,000; annuity-due 4.4651 = $1,002,000. A mid-year convention (factor ≈ 4.337) is the cleanest = about $973,000. The expert should not choose annuity-due merely because it is the highest of the three.
Step 4 - the $20 million. Those assets came from outside Concord's book, so they are not a like-for-like replacement of the lost relationships; only the retained 60% offsets the loss, and it has already been netted. Netting the new business would let the defendant escape liability for the harm it caused while crediting a business decision the firm would have made anyway. Correct treatment: do not net it into the damage figure, but disclose it and note that the defendant will argue for an offset - and that the new advisor's compensation on that $20 million is a real cost that must be separately accounted for if any credit is allowed.
2. How should the $150,000 recruitment cost and the choice of discount rate be handled, and what risk exists in the attrition benchmark?
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Recruitment cost. The $150,000 is a direct, documented cost incurred to mitigate the loss. It is recoverable as a separate item of damages in most jurisdictions if reasonably incurred and evidenced by invoices, but it must not also be embedded in the 45% servicing-cost ratio - check the expert's cost build-up for an advisor-compensation component that already assumed a filled seat.
Discount rate. The 6% rate must be explained. Lost profits are typically discounted at the plaintiff's cost of capital or a rate reflecting the risk of the specific income stream, not the risk-free rate; 6% may be defensible for a recurring fee-based revenue stream but should be tied to Concord's WACC or a published cost of capital study. Separately, ask whether the jurisdiction awards prejudgment interest - discounting to present value and then adding prejudgment interest is a double recovery unless the court intends it.
The benchmark's weakness. Eight departures is a small sample, and if some of those advisors left without breaching a covenant, their retention rates are not a clean comparator - clients may follow a departing advisor even absent solicitation. Obtain the underlying data, test the retention rate by client segment (large relationships behave differently from small ones), and consider whether the 60% figure was measured at twelve months while the damages period runs five years; if attrition continues past year one, the loss is lower still. Present a sensitivity table at 50%/60%/70% retention rather than a single point.
3. Concord has also asserted a claim for the lost "enterprise value" of the departed book, and the defendant argues that only disgorgement of Ruiz's commissions is available. Evaluate both positions.
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Concord's enterprise-value claim is largely duplicative. The value of a client book is the present value of its future profits. Concord has already claimed five years of those profits; adding a perpetuity for the same relationships recovers the same cash flows twice. A lost-goodwill claim can be viable only to the extent it captures profits beyond the damages horizon, and then it must be computed net of the profits already awarded for years one through five. If the covenant runs two years but Concord claims five years of lost profits, the claim already reaches beyond the contractual term and the enterprise-value theory is on even weaker ground.
The disgorgement argument is mischaracterized as exclusive. Lost profits and disgorgement are alternative measures of the same harm and are generally not cumulative. Ruiz's commissions on the migrated assets measure her gain, not Concord's loss, and the two will differ - her payout may be 40% of revenue while Concord's margin was 55%. The defendant's argument has force only against double counting, not as a bar to a lost-profits theory.
Practical recommendation: elect one theory, quantify it with the attrition-adjusted model, and present the disgorgement calculation as a cross-check and settlement benchmark. If Concord pleads both, the expert must show explicitly that no dollar appears in both models.