Archive for the ‘Noncompetes’ Category

You may have signed many contracts with boilerplate language whereby your company agreed to indemnify and “hold harmless” the other contracting party.  Most people have some concept of what this means, but really do not think through the ramifications of such an agreement.  Whenever possible, delete these provisions from any contract provided by the other party.  If you are forced to agree to indemnity clauses, have your lawyer suggest reasonable changes and explain your company’s risk.  Also, check with your insurance agent to see what will be covered.

The word “indemnify” is usually thought to refer to claims by third parties who are not parties to the contract.  If your company agrees to indemnify ABC company, your company will pay any judgment as well as the cost of defense.  Hold harmless, in the opinion of some legal minds, is slightly different; this could mean that you will not sue ABC company if a third party sues your company for something that ABC company allegedly did wrong.  Both indemnity and hold harmless agreements are subject to judicial review for public policy and reasonableness, and certain statutes apply, both of which can temper their literal interpretations.  However, your best option is either to not sign them at all, or insist on some reasonable parameters.

Even lawyers do not completely understand all of the complexities of indemnity and hold harmless provisions.  Often, these are inserted as boilerplate provisions, with little thought by the lawyer about what they mean.  Many lawyers who draft such provisions are contractual lawyers, not trial lawyers, so they do not fully appreciate the practical implications of indemnity and hold harmless provisions.

Vague indemnity and hold harmless provisions create a lot of unanswered questions.  Do you have to indemnify ABC company if it was negligent?  If it committed an intentional act?  If it sexually harassed someone?  If one of its drivers caused a fatal auto accident?  Can ABC company hire any lawyer it wants to defend it from a third-party claim?  A law firm that charges $500 an hour?  Can the firm engage in a scorched earth defense on your dime?  Can ABC settle the claim for any amount and make you pay it?  Do you have any say in the selection of lawyers and defense of the case?  Does the indemnity provision prohibit you from suing ABC company if it harms your company? Will you have to pay ABC’s legal fees if you sue it?

If you do not know the answers to these questions, or the provisions are simply silent, you need a lawyer to write better provisions.  Plain English is preferable to archaic language that lawyers and courts interpret differently.

The same applies if the coin is flipped and you require ABC company to indemnify you and hold you harmless.  You don’t want to have to rely on vague provisions.  Get the protection you need specified in clear language.

If you have a question about any indemnity and/or hold harmless provisions, call me at 617.338.7000.

By Adam P. Whitney

You’re a high level or very successful salesperson or other professional with a noncompete agreement or a nonsolicitation agreement, or the like. Your boss is a dysfunctional tyrant. You want to leave to start your own business. Or you’re a partner, LLC member, or shareholder of a small business and it is not working out. How do you form an exit strategy?

There is no one size fits all strategy, as each situation and set of legal documents are unique. I’ve represented a number of clients in these situations. Although I’m usually on the business owner’s side, representing these clients is rewarding because I help them to leave an intolerable, or at least undesirable, situation. They then become business owners and employers themselves.

Here’s the good news. You can make the leap from indentured employee to successful business owner. Although the first steps are hard, you will probably never look back. You’ll wonder why you didn’t do it sooner. Many of your clients will eventually do business with you. You’ll grow your business and get new clients. You’ll wonder why you ever feared that dysfunctional tyrant who you called your boss, and regret that he got rich on your talent and efforts.

Here’s the bad news. That dysfunctional tyrant may make it hard for you to leave. He may hire expensive lawyers to try to bury you in litigation fees and to get a court order to stop you from earning a living and feeding your family. You will incur some legal fees fighting this, and there is no guaranty that you will win.

I’m not going to lie and tell you that it’s easy, but if you believe in yourself and your abilities to do it better than that dysfunctional tyrant, I can promise that you can get through it, and be a whole hell of a lot happier in your life. I can also promise you that we can come up with a strategy for your situation which, as stated above, must be determined on a case-by-case basis.

No matter what your strategy, there are some basic do’s and don’ts for every employee (or partner, etc.) who is contemplating or planning on leaving to start another business or even to go to another employer. These are common sense, but people get them wrong in their zeal to succeed in their next endeavor. Basically, be honorable and treat your employer the way you would want and expect to be treated once you are the boss of your own business, even if the tyrant doesn’t deserve it.

Do continue to be loyal to your employer. Keep servicing the clients. Keep reporting to the boss. Do your job.

Don’t solicit or recruit clients to come with you while you are still on your boss’ dime. Although this is very tempting, and it would be comforting to know if your best clients will follow you, avoid the temptation. You owe your employer a duty of loyalty and good faith. Moreover, you will look like a dishonest sneak if it comes out in court that you were doing this.

Don’t steal any customer information, company trade secrets, etc. You can recreate your customer list from memory and using the internet (or you may have them socially networked anyway), so don’t do a bush league move and e-mail yourself a list of customers. If you do that, you become the bad guy, and the dysfunctional tyrant looks like the victim.

Don’t assume that non-competes and other restrictive covenants are not enforceable. Generally, they are enforceable. But there may be ways to work around them. You need to consult with a lawyer to understand what you can and cannot do, and what your risks are for doing it.

Do document everything that could support a claim against your employer. Sometimes the best defense is a good offense. If your employer is not paying you commissions, is doing something unethical, sexually harassing you, etc., etc., you may have a good legal or practical defense to get out of a non-compete.

If you’re an interest holder, such as a stockholder of a small corporation, a member of an LLC or a partner in a partnership, there are special considerations. You will need someone to review your company documents to see if there is any built-in exit strategy.

If you are ready to leave the dysfunctional tyrant, give me a call at 617.338.7000. Assuming I have no conflicts of interest (I represent mostly business owners, but none of them are dysfunctional or tyrants), I can discuss some of the options available to you.

By Adam P. Whitney.

If you sign a contract for your business without understanding all of the terms, you could expose your business to serious damages.

No one likes to pay legal fees, I get that, but don’t be penny wise and pound foolish.

All that legalese and boilerplate has meaning. Yes, it can be tedious and boring to read and amend the provisions, but it must be done. Many business people mistakenly believe that contracts are standard, boilerplate, that the terms aren’t enforceable, etc. Many think that the legal terms of contracts aren’t negotiable, so why bother. That’s a defeatist, head in the sand attitude that will only lead to trouble.

Red flag terms that you absolutely need a lawyer to review include the following: indemnification, hold harmless, choice of law, arbitration, continuation or renewal provisions, cancellation provisions, limitation of damages provisions, liquidated damages provisions, noncompetes, non solicitation provisions, legal fees provisions. Personal guaranties, etc.

A quick test will determine whether you need a lawyer’s review. Ask yourself, do you understand all of the terms? Do you know what your exposure is? A good lawyer is like contract insurance. You might pay $1,000 for a lawyer to review, revise and negotiate a contract (it could be more, it could be less), but you could save yourself tens or hundreds of thousands in liability.

I can’t tell you how many times I’ve had a business client come to me after the business dealings went awry, and their either being sued, or they are looking to sue because of the other party’s wrongdoing. When I examine the contract, I see numerous unfavorable or poorly drafted provisions that easily could have been addressed before signing. But (insert clichés about barn doors and horses, trains leaving stations, and ships sailing).

If you’re a Massachusetts business faced with a vendor or other contract with some of the above terms, or if even if your own contract needs a tune up, give me a call at 617.338.7000. I’ll look at it and give you a quote on cost before charging you a dime (assuming there is no conflict of interest).

By Adam P. Whitney

If you don’t understand the law of noncompetes, you are less likely to have an enforceable agreement. The below is a basic overview that I wrote for another site. If you have any questions on noncompete or nonsolicitation agreements in Massachusetts, give me a call at 617.338.7000.

What is a Noncompete?

A Noncompete (also called a noncompete agreement, a non-competition agreement, or a fair competition agreement) is a general term for a written agreement whereby an employee agrees that, after he leaves the employer’s employment, he will not take a job with a competing business. Noncompetes usually contain various other provisions to protect the employer, such as not allowing the employee to solicit customers of the employer after the employee leaves.

Noncompetes are seen most often in sales jobs (to protect goodwill, described below) and in high technology jobs (to protect confidential information and trade secrets, described below). Some jobs involve both of these issues. They are prevalent in other types of jobs and in various industries.

Are Noncompete’s enforceable?

Yes and no. It depends. Typical lawyer answers, but they are the right answers here. Noncompete agreements are enforceable, but only if they protect a legitimate business interest and only to the extent that the legitimate business interest is reasonably in need of protection. Forget about what your cousin Joe or your sales buddy down the hall says. Only a competent lawyer can tell you if a particular agreement is likely to be enforced.

“Noncompete” is somewhat of a misnomer because Noncompetes are not enforceable solely to prevent fair competition. Public policy is in favor of free competition and the courts, therefore, look at Noncompetes very carefully before they enforce them. Only two legitimate business interests have been recognized in Massachusetts: (1) confidential information or trade secrets; and (2) goodwill.

Confidential information and trade secrets are valuable business assets that are worthy of protection. For example, a high technology employer may have developed software, equipment, etc. If an employee were to go to work for a competitor, the employee might provide the information to the competitor, thus greatly harming the original employer.

Goodwill simply means the reputation of the employer in the mind of a specific customer. The customer has a good impression of the business and will continue to do business with the company. Courts recognize that a salesperson is the face of the company, and customers can associate the goodwill toward the company with the individual salesperson.

There are a number of other reasons why a court may not enforce a Noncompete. Each case is determined on a case by case basis. Courts are sensitive to the fact that employees need to earn a living. Accordingly, they may examine every aspect of the Noncompete and the circumstances surrounding the agreement, as well as the equities involved in enforcing the Noncompete and the potential harm to be caused to the employee and the employer. The agreements are “strictly scrutinized,” in the words of the courts.

Can a Noncompete be enforceable even if the employer fires the employee?

The answer is the same as above (it depends). Most Noncompetes will state that they are enforceable even if the employer fires the employee, but the court may find this to be inequitable.

Can an employer have its employees sign Noncompete solely to prevent future competition?

No. At last, a straight answer from a lawyer. As stated above, Noncompetes are a misnomer because they are not enforceable if there only purpose and effect is to restrict otherwise legal competition. There must be a protectable interest, as described above, for a Noncompete to be enforceable.

Are there any limits on a Noncompete?

Yes. The Noncompete will only be enforced, if at all, to the extent that it reasonably protects the employer’s legitimate business interests (things are different, however, if the Noncompete is tied to the sale of a business). For example, if an employer only operates in the Boston area, it is unlikely that a court would rule that the former employee could not work in Springfield. Also, a court will only enforce a Noncompete for set period, normally a year or two, sometimes three years.

Also, certain jobs are not appropriate for Noncompetes. For example, the courts will not enforce a Noncompete against a doctor. The reasoning is that patients should be able to choose their own doctor, and if a doctor was prohibited from working at a competitor (or prohibited from working with patients), the patient would not be able to choose the doctor. A similar rule applies to lawyers.

What advice is given to an employer to make their noncompete enforceable?

There are several considerations. The first is to carefully consider why a Noncompete is needed and what legitimate business interest is in need of protection. If confidential information or trade secrets are at issue, the employer must take reasonable steps to protect the information and treat it as confidential. Otherwise, no protection will be given. If goodwill is at issue, the Noncompete should contain specific nonsolicitation provisions addressing the specific danger the employer wants to protect against.

It is most important to have a well-drafted written agreement that is specific to the employee and the situation. Make sure the agreements are up to date with an employee’s job changes and changes in salary and other employment terms. Also, some courts are requiring separate consideration (a sum of money or some other benefit) over and above continued employment to make a Noncompete enforceable.

How can an employee get out of a noncompete?

There is no magic bullet. Unless your employer agrees to waive your noncompete, or unless a court rules that the noncompete will not be enforced, the noncompete will stick with you for its duration (typically one year). This can be burdensome because you should tell new employers that you have a noncompete agreement. Employers in certain industries will ask you if you have one. Even those employers who do not ask should be told if the new job will implicate the noncompete. Your new employer will not be happy with you if they receive a nasty letter from your old employer’s attorney if that is the first time that they are finding out about the noncompete.

How does the employer enforce the noncompete?

The employer should consult with a qualified attorney with experience litigating these types of cases. The attorney can assess the situation, review the noncompete language, and determine the best course of action based on the employer’s goals and budget. I do not recommend that you use a general practice attorney as there are many tricks of the trade that could make or break your case. Possible courses of action include the following: (1) do nothing because the Noncompete is likely not enforceable and/or because it will not be cost effective to enforce it; (2) start by sending a letter to the new employer demanding that they respect the Noncompete; or (3) filing a suit in court and asking for a preliminary injunction (described below).

What does the employee do if he is sued for violation of a noncompete?

The employee should hire a competent lawyer to defend the case and/or to try to resolve the matter with the employer. Ignoring the matter will not make it go away. Usually, the employee will have only a very short period time to respond to the employer’s request to obtain a preliminary injunction (described below).

What is a preliminary injunction?

It’s a fancy term for a court order telling someone that they cannot do something. You would be crazy to violate a court order, because you could face significant sanctions or even be subject to arrest and jail. In noncompete litigation, the employer will ask the court to issue an order that the employee cannot work for a certain employer or a certain class of employers for a certain length of time. These injunction requests are sometimes successful, and sometimes not. Much depends on the facts of the case, the strength of the agreement, and the skill of your lawyer.

Adam P. Whitney. 617.338.7000.

If you hire a new employee from a competitor, you should make damn sure that the employee did not bring any trade secrets or proprietary information from the former employer. Otherwise, you could face significant exposure to your company, especially if others at your company participated in use of the trade secrets (the term “trade secrets” can be broad to include any proprietary business information, including customer lists and customer information).

This is the lesson of the attached case report, People’s Choice Mortgage, Inc. v. Premium Capital Funding d/b/a Topdot Mortgage. In the interest of full disclosure, I was the trial attorney for People’s Choice Mortgage (“PCM”), the prevailing party in the case.

The following is a summary of the case report, which is a public record: PCM employed Mr. Bodden, who turned out to be a dreaded Rogue Employee. Mr. Bodden then went to work for Topdot while still employed at PCM, and kept working for PCM for an additional five weeks. Bodden had access to PCM’s customer information. Because his commission structure was better at Topdot, Bodden used the PCM documents at Topdot to solicit and close loans. The Court concluded that Topdot had constructive knowledge that Bodden was using PCM documents. The case report makes for an interesting read.

The awards themselves against Topdot and Boddon were not large. PCM prevailed against Bodden in the amount of $39,005 ($64,589.20 after interest). PCM prevailed against Topdot for $12,279, which was doubled to $24,558 under Chapter 93A, which became $31,773 with interest. The bigger award was the attorneys’ fees and costs award against Topdot of $88,170.57.

That comes to a total of $184,532 against Topdot and Bodden for their use of PCM’s trade secrets. Not to mention the costs that they incurred on their own attorneys and other legal costs, which could bring the total exposure to a quarter million dollars.

If you have any questions regarding how to protect your trade secrets, what to do if a former employee is using your trade secrets, or how to make sure a new hire is not exposing your company, call me, Adam P. Whitney, at 617.338.7000.

Findings of Fact, Rulings of Law, and Order for Judgment

The decision to sue a former salesperson or other employee should not be taken lightly. Otherwise, you can spend tens of thousands of legal fee dollars and get nothing to show for it. A recent case decided by a Massachusetts Superior Court Judge, Scully Signal Co. v. Guay is a case in point.

Guay worked for Scully as a salesman and also signed a noncompete agreement with the company. The noncompete was very specific in that it precluded Guay, when he left Scully, from working for specifically named competing companies for 9 months after he left Scully. A specific noncompete agreement is much more likely to be enforced. (You’re damned if you don’t draft a good one, a topic for another day).

Guay left Scully and he went to work for one of the “competitors” on the list of employers for whom he agreed not to work. Scully sued for a preliminary injunction to bar Guay from the new position. However, in spite of its attorney’s foresight, the Court denied the request for a preliminary injunction.

Why? The Court concluded as a factual matter that the new employer was not an actual competitor of Scully – the two companies had only a very small amount of overlap in the products that they sold. The fact that the noncompete agreement said otherwise was not enough for the Court. Thus, the Court reasoned that Scully would not suffer any “irreparable harm” as a result of Guay’s new job. Without proof of irreparable harm, an employer cannot obtain a preliminary injunction.

This ruling surely came as a shock to Scully, but it reaffirms something fundamental about enforcing noncompete agreements. Such agreements are only enforceable if they protect a legitimate interest of the employer – either customer goodwill or confidential business information. They are not enforceable to restrict ordinary competition or to simply prevent an employee from leaving for other employment. The lesson for employers is to understand that noncompetes are only enforceable in certain circumstances and even the best noncompete will not be enforceable if those circumstances are not met. The other lesson is that the employer’s lawyer should not rely on the noncompete agreement itself as a substitute for actual proof that the new employer is actually a competitor.

The employee’s lawyers did a nice job. They did not simply accept the language of the noncompete agreement, but attacked it directly to show that it was not enforceable. Frankly, many attorneys would not have thought of this. Many attorneys would have simply accepted it as a given that the new employer was a competitor because the agreement said so and would have tried a different route to invalidate the agreement. But you should expect that your opponent will have a crackerjack lawyer on their side. You should not take anything for granted, and you should carefully explain to the Court why your opponent’s new employer is a competitor and, more importantly, explain why you will be harmed by loss of goodwill or disclosure of trade secrets. If you cannot, you probably should not waste your time and money to sue.

Losing the injunction does not mean the employer loses the case, but 90% of the time employer’s end up dropping the case if the injunction is not successful (with good reason, which is beyond the scope of this blog). That appears to be what happened in the Guay case.

By Adam P. Whitney, 617.338.7000.