NAVIGATING NONCOMPETES PART 1: THE BASICS
Written by Patricia Collins
A recent Washington Post article proclaimed that “even janitors have noncompetes now.” New Jersey and Pennsylvania are considering legislation to regulate the terms and enforceability of documents that restrict employees’ ability to compete with their former employees. "Noncompete Litigation Lessons from the 10th Circuit". These restrictions require discussion and attention: they impact the economy, employee mobility, and the trade secrets and good will of businesses. In the coming weeks, we will explore issues relating to noncompetes in order to shed some light on this complex employment law topic, and offer guidance to both employers and employees grappling with the potential risks and consequences of missteps in these agreements.
This week, let’s start with the basics.
Pennsylvania law recognizes that an agreement that restricts the ability to compete is a restraint on trade, and courts should construe them narrowly. Such agreements are only permitted in two contexts: where they are ancillary to the employer – employee relationship (including independent contractor relationships), or where they are ancillary to the sale of a business. The restriction must be reasonable in terms of scope, geography and time. A court will review whether the restriction in the agreement is narrowly tailored to address certain legally protectable interest, such as good will, trade secrets or specialized training.
Such agreements, as with all contracts, must be accompanied by consideration. In the context of employment-related noncompetes, continued employment will not suffice. Instead, the noncompete must be executed at the beginning of the employment relationship, or, if signed during the employment relationship, accompanied by additional consideration such as a promotion, raise or bonus.
Noncompetes come in many forms: restrictions on working for competitors or setting up a competing business; restrictions on soliciting or accepting work from customers, clients, vendors or suppliers; restrictions on working as an employee for a customer, client, vendor or supplier; and restrictions on soliciting employees away from the employer. Limitations on solicitation are generally more enforceable than blanket restrictions on competition. Some noncompetes are accompanied by a period of severance pay, commonly referred to as “garden leave”. Some agreements include provisions for the employer to release an employee from a noncompete under certain conditions.
When an employee breaches a noncompete, the employer has a powerful weapon to enforce the document: the employer can request an emergency order from the court prohibiting the employee, and even the employee’s new employer, from engaging in activity in breach of the agreement. The court proceeding that results in the emergency order, called a preliminary injunction, usually occurs quickly, and such litigation is expensive and stressful. Often, noncompete agreements have provisions that require the employee to pay the employer’s legal fees in the event of a breach. A court is free to “blue pencil” the noncompete. This means that the court can rewrite the restrictions in a manner that is reasonable and consistent with the employer’s legally recognized protectable interests.
In the next installment of my Navigating Noncompetes series, you will see how to apply some of these basics to examine the issues that employers should consider in drafting and enforcing noncompetes.
A corporation or limited liability company provides multiple advantages to business owners which is why business lawyers so frequently recommend their use. Among the most significant of these advantages is limited liability, a concept grounded in the fact that the entity has a separate legal existence from its owners and therefore its obligations are not those of its shareholders or members. Of course an owner may voluntarily agree to be responsible for such obligations as, for example, would be the case if he or she guarantees the entity’s bank borrowing. The shield of limited liability is not, however absolute. It can be breached rendering owners financially responsible for the entity’s obligations. In Pennsylvania, as in most states, there is a strong presumption against ignoring the distinction between the entity and its owners. However certain conduct by business owners will result in the court’s “piercing the veil” – ignoring the distinction between the corporation or limited liability company and its owners. Generally, courts will pierce the veil when those in control of the entity use that control, or use the entity’s assets, to further his, her or their own personal interests. While there is no single test to determine when the piercing of the veil is appropriate courts look to many factors.
These include:
1. Is the entity undercapitalized?
2. Did the owners fail to adhere to requisite formalities such as holding shareholder and directors meetings and keeping appropriate records?
3. Was the entity insolvent at the relevant time?
4. In the case of a corporation were dividends paid or were corporate funds siphoned into the pockets of the controlling shareholders?
5. Was there a functional board of directors and corporate officers managing the affairs of the entity?
6. Was there substantial intermingling of the financial affairs of the entity and its owner(s)? 7. Under the circumstances, was the entity form used to perpetrate a fraud? Generally, the court will pierce the corporate veil when a review of these factors shows that the form is a sham, constituting a facade for the operations of the dominant shareholder or member making the entity effectively the “alter ego” of the individual(s).
What is a contract: Part 2: Offer, Acceptance, Consideration: What’s in it for you?
Written by Joanne Murray
This post continues my series explaining the main elements of a contract, which are outlined on the attached infographic. My goal is to demystify some of these basic provisions to help business owners have a better general understanding of what they are signing.
Moving through the structure of a typical contract, next up is offer, acceptance, and consideration. Together, these clauses define what the offering party is promising to do (or refrain from doing) in exchange for the compensation the other party is willing to pay or provide. They basically comprise the tit for tat, or the meat of the obligations and privileges which are being offered. This is often referred to as a “meeting of the minds.” While this might seem obvious on its face, the devil may be in these details, so it is vital that you know and understand the specific nature of your obligations and be sure that they are sustainable, practical, and likely to result in a benefit to your bottom line or some other benefit to your business. So what can happen when parties fail to clearly memorialize their “meeting of the minds”? Here are a few scenarios that could result:
• The parties might become embroiled in a “battle of the forms”, particularly in the sale of goods context where a buyer submits a purchase order using their company’s form, and the seller responds using their own terms and conditions form containing different and/or additional terms.
• Parties can ask the court to apply certain legal theories to supplement the “four corners of the document” where the intent of the parties may not be clear from the contract itself. For example, even if there is no formal consideration, courts can apply the theory of promissory estoppel to enforce a party’s promise to do something if the other party relied on that promise to his or her detriment.
• Another equitable remedy allows the court to compel a party to make restitution if that party is enriched at the expense of the other party and the surrounding circumstances lead the court to conclude that it is unjust.
• Pennsylvania has a little-known statute called the Uniform Written Obligations Act, which allows the court to infer that consideration exists where the agreement includes language that clearly and expressly states that the parties intended to be legally bound by the agreement.
Stay tuned for Part 3 of this series, which will move to the next element on the infographic: Conditions.
Visit ammlaw.com to learn more about our contract review services, or Joanne Murray.
NONCOMPETE LITIGATION LESSONS FROM THE TENTH CIRCUIT
Written by Patricia Collins
Reprinted with permission from the August 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.
A recent case from the United States District Court for the Tenth Circuit, First American Title Insurance Company, et al. v. Northwest Title Insurance Agency, et al., no. 17-4086, illustrates nicely the complicated issues faced in noncompete litigation, and the risks a good agreement can prevent. Although the case arose in the United States District Court for the District of Utah, the issues confronted and legal principles cited arise frequently under Pennsylvania law.
The individual defendants were employed by First American Title Insurance Company, and had signed various restrictive covenants of one year in duration. All individual defendants were subject to a code of ethics and employee handbook that required employees to use office equipment for company business only, and barred outside activity competing with First American. First American Title Company acquired the stock of First American Title Insurance Company pursuant to a Stock Purchase Agreement. Defendant Smith created defendant Northwest Title Insurance Company, and then quit his job with First American. The day after Smith resigned defendants Carrell and Williams resigned and all individual defendants took positions at Northwest Title Insurance Company, along with twenty-five other employees over the next two weeks. Litigation ensued, and defendants suffered a large jury award at trial.
Lesson 1: File petitions for preliminary injunction early, and make sure to have a tolling provision in the agreement.
The First American District Court denied the plaintiff’s motion for a preliminary injunction after a hearing, finding that there was no irreparable harm. Notably, the individual defendants resigned in March of 2015, and their restrictive covenants, which did not contain tolling provisions, terminated in March of 2016. Plaintiffs filed the petition for preliminary injunction in January of 2016, with only two months remaining on the restrictive covenants, and the motion was not heard until September 2016. The case then proceeded to a trial, resulting in the appeal addressed by the Tenth Circuit. An injunctive order entered early in a case tends to change the dynamic of a case going forward, providing opportunities for sanctions and contempt motions, and an incentive to settlement. Certainly, defendants enjoyed an early victory that rendered this case solely about damages. Indeed, this may well have been the strategy: part of the court’s reasoning on the preliminary injunction was that most of the damage had already been done, in light of the quick transfer of customers and employees.
A preliminary injunction is only powerful when filed early, and it might be worth considering foregoing the motion in certain circumstances, where the tactical advantages of early filing are lost. Most importantly, a tolling provision in the document might have changed the outcome: drafters must include a provision that extends the duration of the restrictive covenant where the employee is in breach.
Before Signing That Commercial Lease – Have You Reviewed it with Counsel?
Written by Stephanie M. Shortall
As a business owner, after spending countless hours researching and visiting commercial space, and finally finding the right location, you are often presented with a lengthy commercial lease. Many will focus on the rent and term of the lease, but overlook the other details. It is important to have an attorney review any commercial lease, whether you are entering a new lease or renewing an existing lease. Far too often, the business owner only consults an attorney when a problem arises – and they are surprised to find out that the terms do not mean what they thought at the outset.
Key areas that the business owner should review with their attorney are:
• Common area maintenance costs and calculations
• Confessions of judgment
• Responsibility for repairs
• Insurance requirements
• Subletting and assignment
• Legal options in the case of a breach.
Often there is room for negotiation, but even if there is not, you can gain valuable knowledge by consulting with an attorney so that you have a full understanding of your rights and obligations, and can plan accordingly.
While consulting with an attorney may result in a modest increase to the amount of legal fees associated with the cost of starting up a business, it is important for small business owners to recognize the long term impact of signing a lease that has not been negotiated, or at least reviewed, by an attorney, and may save money in the long run.
Antheil Maslow & MacMinn, LLP, a Bucks County-based full-service law firm, is pleased to announce the addition of Mariam W. Ibrahim to the Firm’s Family Law practice group. Ms. Ibrahim
practices exclusively in the area of family law, handling a variety of issues, including divorce, child support, alimony/spousal support, equitable distribution and child custody matters. Prior to joining the firm, Ms. Ibrahim served as a judicial law clerk to the Honorable Judge Jeffrey G. Trauger in the Bucks County Court of Common Pleas.
Learn more about Mariam Ibrahim.
Probate vs. Nonprobate Property in Your Estate – Your Will is Not the Only Way
Written by Elaine T. Yandrisevits
So you have finally wrapped your head around the fact that you need to create an estate plan in order to determine to whom and in what amounts your property will pass upon your death. Estate planning attorneys realize that it is difficult to think about one’s own mortality, and getting clients to this point is half the battle. What you will want to consider as you go through this process is that your estate planning documents may not control the distribution of your entire estate. The distributions of some types of assets, categorized as nonprobate assets, are controlled by operation of law instead of the estate planning documents. While the creation of wills, trusts, and other estate planning documents is a crucial part of the estate planning process, it is equally important to understand how your nonprobate property will be distributed upon your death and, if necessary, coordinate the passage of the nonprobate property with your estate plan.
For estate planning and estate administration purposes, there are two broad categories of property: probate and nonprobate. Probate property is the property a person owns in his or her individual name that does not include a beneficiary designation. Common examples of probate property include individual bank accounts, vehicles, individually-owned real estate, and tangible personal property. An interest in jointly-owned property that is owned as tenants-in-common is also considered probate property because the individual’s interest in this property is severable from the other joint interests.
In contrast, nonprobate property is made up of two main types. The first type of nonprobate property is the property that a person owns as an individual but for which the person named beneficiaries by completing a beneficiary designation form provided by the financial institution holding the funds. This type of nonprobate property typically includes retirement accounts (401(k)s, 403(b)s, IRAs, etc.), life insurance, and financial accounts with a “payable on death” (POD) or “in trust for” (ITF) designation. The second type of nonprobate property is property that a person owns jointly with other individuals that is designated as being owned as tenants by the entireties (if the co-owners are a married couple) or jointly with the right of survivorship. Jointly-owned property may include real estate or financial accounts; in fact, Pennsylvania law provides that a jointly owned financial account is automatically considered to be owned jointly with the right of survivorship unless there is clear and convincing evidence that the co-owners intended for the account to be owned as tenants-in-common.
Most estates are a combination of probate and nonprobate property; however, recent trends show that nonprobate assets comprise a larger portion of an individual’s estate than in the past. This trend is important to note in an estate planning and estate administration context because nonprobate assets will be distributed by operation of law to the named beneficiaries under the beneficiary designations or the surviving joint owner, not to the beneficiaries named under the decedent’s estate planning documents. For this reason, it is important not only to know which assets are nonprobate at the time the estate plan is created, but also to update beneficiary designations (or even reconsider the titling of joint assets) after the estate planning documents are executed. Updating beneficiary designations is particularly important for older nonprobate assets, such as a 401(k) from a first job, that have beneficiary designations that were completed many years ago and may no longer reflect your life circumstances, let alone your estate plan.
A few examples illustrate these points. As a first example, suppose that a husband and wife execute Wills that leave all assets to the surviving spouse upon the first spouse’s passing. However, the husband has a large 401(k) through his employer, and he completed the beneficiary designation many years ago naming his mother as the beneficiary, as he was not married at the time. If the husband dies without updating his 401(k) beneficiary designation, that asset will pass to his mother instead of his wife. In a second example, suppose that a parent has three college-age children, and has created trusts under his Will to hold assets for his children until they reach age 40; however, the parent named his children outright as the beneficiaries of his life insurance. Without changing the beneficiary designation to name the trusts for his children, the life insurance will be payable directly to the children upon the parent’s death. Finally, consider the example of a mother who has an adult daughter and an adult son and executes a Will leaving her estate equally to the children. The mother also owns a house, but she retitles the house from her individual name to joint with right of survivorship ownership with her daughter. Upon the mother’s death, the daughter will be the sole owner of the house, while the son will not have any beneficial interest in the house.
While updating beneficiary designations after executing estate planning documents may seem like just another step, it is a crucial part of the estate planning process to ensure the you have coordinated the distribution of nonprobate assets with the distribution of the probate assets controlled by the estate planning documents, and that your overall strategy reflects your intentions. Working with an experienced estate planning attorney is real benefit as you go through this important process.
Michael W. Mills, JD, CFP, CPA, a Partner of Antheil Maslow & MacMinn, LLP in Doylestown, PA, presented – “Qualified Business Income Deduction Under IRC Sec. 199A” at the Financial Planning Association of the Philadelphia Tri-State Area’s September 27th Bucks County Continuing Education Study Group Breakfast meeting at the Doylestown Country Club.
This informative program outlined the mechanics of the QBI Deduction to highlight issues that will allow Financial Planners to identify opportunities and challenges with the deduction and review planning strategies.
Mills has 26 years of experience as an attorney and CPA representing closely-held businesses and their owners with a particular focus on tax planning/compliance by reason of his CPA license and advanced tax degree.
AMM founder Sue Maslow joined three other panelists at the American Bar Association Business Law Section's Annual meeting in Austin, Texas on September 15th. Maslow addressed questions surrounding identifying the client when representing corporate entities and the tension between state Rules of Professional Responsibility, SEC Rules and personal moral codes of conduct when evaluating permissive disclosures. The panel also provided guidance in navigating the limits of the attorney-client privilege, conflicts of interest and attorney withdrawal with illustrations from recent headline events and movies like Roman J. Israel, Esq.
From a Litigator’s Desk: Key Questions to Consider in Commercial Litigation
Written by Thomas P. Donnelly
People often ask, “What kind of lawyer are you?” After my stock (and feeble) comedic response of “a good one”, I often say I am a “commercial litigator”. I explain that our practice includes litigation of disputes which arise between businesses and business owners. Commercial litigation includes a wide range of potential issues ranging from business torts to breach of contract, both internal to a business entity, and between two or more separate entities. While there are a wide range of potential issues which must be considered, there are certain basic tenets which I always discuss with our clients before recommending litigation or taking on their representation.
First, do you have an agreement which might apply to the situation and, if so, what does that agreement say about your position? Agreements can come is various shapes and sizes, such as corporate by-laws, a formal shareholder agreement, a proposal combined with an acceptance or performance, or even a simple exchange of emails. Documentary evidence is key, as a litigator is challenged to explain why the written word should not be impactful.
Second, what is your goal? The kiss of death as to our representation is a client who says “it’s not about the money, it’s the principle”. When I was a young lawyer I had a mentor who gave sage advice when he communicated the firm’s policy that litigation was only appropriate when money was involved. He would politely say, “we don’t litigate over principle”. In many ways and in most situations that adage applies. However, in the corporate setting, sometimes the connection to money is not readily evident or direct such as with regard to disputes over corporate control or enforcing a covenant not to compete. In many situations, I caution stakeholders to take the long view and weigh the probable outcomes from a purely practical standpoint, taking care never to lose sight of their long range business goals.
Third, what is your capacity for litigation and business distraction? Litigation not only costs money in terms of attorney fees, accountant fees, experts and costs, but participation also requires commitment of a leader’s most valuable commodity; time. Business people are first and foremost concerned with business (daily operations, management and the bottom line). Litigation invariably requires substantial client involvement in developing strategy, reviewing pleadings, searching for documents, reviewing documents produced by other parties and preparation for testimony. I advise potential parties to litigation to think long and hard about the cost/benefit to the business of such an undertaking.
Fourth, what can you hope to recover or save; and what will it cost to do so? While a corollary to litigation about money, it is not the same question. The evaluation of potential cost is complex and issue dependent. In a recent case, settlement discussions in a commercial litigation setting were driven by the anticipated six figure cost to translate thousands of pages of information from Chinese characters to English. Costs of experts on any issue involving an opinion on issues ranging from the standard of care applicable to a corporate officer, to whether a machine functioned in the way represented, can rapidly accumulate. Unless there is a provision in an agreement which provides for the recovery of attorney fees or such recovery is otherwise permitted under law, those fees and costs are not recoverable.
The above is not to discourage litigation of bona fide disputes; of which we handle many. It is simply imperative that the lawyer and the client be on the same page as to expectations, risks and litigation management. These questions can assist in forming the framework of a solid attorney client relationship in a commercial litigation setting, which goes a long way toward developing realistic expectations, reducing the stress inherent in the process, and optimizing the chances of a successful outcome.