Non-Compete Counsel

Tuesday, September 9, 2014

The Key To Ensuring Your Non-Compete Agreement Is Enforceable

There's nothing worse for a corporate client than to discover after a key employee has left that the enforceability of its non-compete agreement is questionable.

It happens all the time.

These clients are surprised to learn that a blanket non-compete prohibiting a former employee from "directly or indirectly" owning, managing, operating, joining, controlling, or accepting employment with "any business which is competative with the Company" is almost always unenforceable on its face and is generally unenforceable as applied.

They are surprised to learn that a non-compete that exceeds two years will usually be frowned upon.

They are surprised to learn that if the geographic scope of the non-compete is worldwide, they better have a darn good reason.

"But any competition is harmful," my clients will say.

And it's true - in some circumstances, some employees are so valuable that their mere presence in the same market as their former employer poses a significant threat to their former employer's business.

There is a solution. It's simple.  And it's so brilliant that I'm pretty irked that I didn't cook this up myself.

Liquidated damages.

I know, I know - they get a bad rap. Sometimes courts view them as penalities if they aren't reasonable. (As an aside - have you noticed how the law LOVES using a reasonableness standard?  I mean, what is that, anyway? Who gets to decide what is reasonable? This, my friends, is the subject of a whole other post.)

But think about it: with a liquidated damages clause, if Susie Q chooses to compete in violation of her agreement, she is absolutely free to do so.

She just has to pay for it.

It completely takes away the argument most former employees make, which is that they cannot work if the agreement is enforced. With liquidated damages, they get to work, but at a price.

And it is setting the price that allows a lawyer to really make her money, because that's where the fight will be. The value in this is obvious: everybody gets to keep proceeding with life while the lawyers argue not about the enforceability of the contract, but rather about whether the amount set in the contract for the liquidated damages is reasonable (there's that word again).

Is it perfect? No, it's not perfect.

And it's not going to work for every situation.

Maybe the employer WANTS to go for an injunction and prevent an employee from working.

Maybe the employee isn't collectible.

But for high-level executives with dough, who stand to bankrupt a company if they compete within a former employer's market? These are the types of employees that a liquidated damages clause is designed to address.

So how should the liquidated damages provision be worded? How should the price be determined? I'm sorry to say, friends, that I can't give all my secrets away here. I mean, lawyers have to eat too!

But I'm happy to help you if you reach out to me.  I love hearing from people who read the blog! (Mostly, I love knowing that people actually read!) Do you need more information? Would you like to see an example? Shoot me an e-mail and I'd love to keep the conversation going.

Liza Favaro
Non-Compete Counsel

* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.

Thursday, August 7, 2014

Venue Clauses are Unenforceable

Hello, dear readers! Where have I been, you ask? WORKING! Plus, it's summer, and I'm a slacker when it's summer (Michigan had a rough winter, so pardon me for not wanting to be parked in front of a computer when the sun actually makes an appearance).

But I just HAD to stop by and share my thoughts on something that's been popping up a lot in a few of my cases lately: venue clauses.

For the uninitiated, a venue clause allows the parties to choose where they want to battle it out in the event a dispute arises out of the contract.  It's no secret that disputes always arise. So while this isn't sexy, it's incredibly important.

The rule is very simple: the contract doesn't matter.

I know, right? How can this be?

There are at least two instances that are relevant for our purposes where what the parties agreed to in their written document won't be enforced by a court. One instance is where the non-compete is unreasonable. We've covered this here.  There's more to be said about it, so maybe I'll come inside from the summer weather one of these days and actually write a bit about it. But for today, all you need to know is that the whole "freedom to contact" thing doesn't work if the parties enter into a non-compete agreement that's unreasonable.

The same is true with respect to venue clauses. In Michigan, there is a statute that provides where parties are to file lawsuits. It basically says that a venue where either party resides is where the lawsuit should be filed. Kind of makes sense, right?

So why is this important?

In Michigan, it's important because we now have these nifty business courts. Again, another topic for another day (apparently I will be busy in the coming weeks). But as a practitioner in the business courts, I can do a little forum shopping, provided that the venue statute allows for it.

Let me give you an example: I recently had a case where one party "resided" on the Western side of the state. The other party (my client) "resided" in Southeastern Michigan - specifically, in a suburb called Bloomfield Hills, which is in Oakland County. The venue clause in the agreement provided for lawsuits to be filed in Wayne County, which is where Detroit is located.

I represented the plaintiff, who wanted to enforce a non-compete against a former employee. Filing in Wayne County made no sense, despite what the parties agreed to and it wasn't proper to file there under the venue statute.  Michigan law says that the venue statute wins, which meant I got to file the case in western Michigan or in Oakland County. I know the business court judges in Oakland County and I like them. Plus the courthouse is ten minutes from my house. So that's where I sued.

It irritated the heck out of the defendant, because he would much rather litigate a case somewhere other than where my client resided. He was doubly ticked when he realized that although the venue clause he agreed to was unenforceable, the personal jurisdiction clause was enforceable - and that clause stated that he agreed to be subject to personal jurisdiction in any court in the State of Michigan.

I feel like this post may raise more questions than provide answers, but know this: venue clauses are one more reason to ask a lawyer to get involved before anyone signs a non-compete agreement. Trust me on this.

Next time, I'll be doing a post on Michigan's Business Courts. Here's a preview: I'm a huge fan. But for now, I'm headed back outside.

Liza Favaro
Non-Compete Counsel

Thursday, May 29, 2014

Business Development: Don't be an Introvert

My new favorite topic is business development. I am driving just about everyone I know crazy (sorry, honey!) because it's basically all I talk about. True, I haven't written about it since this post back in March, but that's because rather than write about it, I've been out doing it!

But today, I'm not going to tell you what to do. I'm still learning, so I'm not quite sure what to do myself. But I definitely know one thing NOT to do: DON'T Be an Introvert.

Weird, I know. But hear me out.

People are so surprised to hear me say this, but I am not a naturally social person. There is a big difference between being able to speak publicly, which I do often, and being able to make small talk with relative strangers. In the latter situation, I'm just ... awkward. Picture Mary Katherine Gallagher. But without the smelly armpits. (I swear.)

Seriously. There aren't not many excuses I haven't used to get out of social events. And business networking events? Those are the WORST. Let's call a spade a spade - I suck at relationships.

But this is the WRONG kind of thinking! When I look around at the rainmakers I know, they have one thing in common: they are social people. They have relationships with other people!

Because I am not one of those people, it would be so easy for me to hang this whole thing up, declare that introverts cannot develop business, and continue to be a worker bee for the rest of my life. That would be the "safe" approach. But it isn't going to help me achieve my goals.

And so I have been forcing myself out of my comfort zone by engaging with as many people as possible in any way possible.

I am - for the first time - utilizing my firm's season tickets (and by utilizing, I mean inviting people to go with me, not by giving them away as I would have done before).

I am going out to lunch. All.the.time.

I am reaching out to lawyers with whom I've done cases just to remind them of who I am.

Every interaction is a business opportunity. Parents at my kids' sports games. People at church. Old law school buddies. These people are all potential clients or referral sources.

What I stepped back and viewed the many people I know as a collective group, I realized the potential that's there with people I already know.

It is impossible to overstate what a huge step this is for me.

No, I'm not out meeting a lot of new people yet.  But that's not really the point. New people aren't really the best people to give me business.  Clients are often friends first. They go see a professional who they know, trust, and like.

So that's been the first step of my business development plan. Stop being an introvert. Seize social opportunities that sound remotely fun. Actually talk to others.

People out in the world do this everyday.  I am now one of those people! And don't tell anyone, but ...

... I am kind of enjoying it!

~ Liza Favaro
Non-Compete Counsel

Friday, April 11, 2014

Judicially Imposed Non-Competes

Yes, you read that right.

Judges impose non-competes on people who never bargained for one. Usually, it's to punish a defendant for bad behavior.

Consider the client who - in the middle of the night and after his employment terminated - used the key he forgot to give back when he left earlier that day to enter his now-former employer's office and download customer information onto his laptop.

* facepalm *

This client had no non-compete agreement and no non-solicitation agreement. He was free to call anyone he wanted and solicit their business. But one foolish mistake changed all of that: the judge ordered my client not only to return all of the plaintiff's information, but also to stay away from every client whose information he had downloaded for a WHOLE YEAR. Never mind that there were 450 or so customers - too many for my client to possibly remember - he was ordered to STAY AWAY. And you better believe the plaintiff watched him like a hawk in the hopes of busting him for violating the injunction. (Thank goodness the client was a good boy and followed the injunction to the letter).

Can judges do this? Well, they're not really supposed to. Courts have almost universally stated that, in the absence of a non-compete, there's generally nothing wrong with contacting and continuing relationships with customers a departing employee knew through his former employer.

But these types of cases almost always come before a court on a motion for preliminary injunction. Such proceedings give courts the freedom to exercise their equitable powers, and that they do. Concepts like unclean hands, estoppel, and "you did a bad thing" come into play.

It was the latter concept that His Honor used in the above-referenced case.

It wasn't the first or the last case I had involving this kind of problem. It comes up more frequently than you would think. And so for you, dear friends, are three rules that you should WRITE DOWN NOW and REMEMBER the next time you are thinking about jumping ship.

Rule #1: If you have a non-compete and circumstances are such that you need the ability to compete, go see a lawyer. Don't stop. Don't pass go. Don't collect $200. Spend $200on a lawyer. Do it before you do anything else. This is not self-promotion. This is for your own good. I promise you.

Rule #2: If you don't have a non-compete and you have a good enough idea of who your customers are that you could figure out how to contact them after you leave your employer without the assistance of a customer list (even if doing so is a pain), then for the love of all that is holy, do NOT take the customer list with you! Take no information of any kind belonging to your employer. None – not even the sticky note on your desk with your latest phone message. Trust me on this.

Rule #3: If you have a choice in the matter, don’t resign abruptly. It’s kind of rude. But more than that, it just causes a cloud of suspicion to settle over you. Put on your big boy or girl pants, go talk to your boss, and give two weeks’ notice. Offer to clean up projects you will be leaving behind and go to your going away party. This is just good business. Don’t burn bridges.

NOTE: I compiled the information for this post from many different cases that I’ve worked on in the past. If you are one of my clients and you are reading this, first – holla for reading! But if you are thinking “OMG, this woman is judging me,” I assure you, I am not. Rather, I am paying it forward on your behalf – enabling others to learn from your mistakes. Everyone makes mistakes, especially when they act without consulting an attorney. It’s really not the end of the world. I promise you! Be grateful for the pearls of wisdom that I am able to grace others with, thanks to you.

Liza Favaro

Non-Compete Counsel

Monday, March 31, 2014

I Don't Want To Be An Employee Anymore

I have been MIA lately, I know. You see, when things happen in life that rock your world, it's time to stop, take stock, and re-group. That's what I've been doing.

The "thing" that rocked my world may not seem Earth-shattering to some, but to me, it completely changed my view on my role in my community and in my law firm.

I figured out that I don't want to be an "employee" anymore.

An employee is someone who answers to somebody else. An employee shows up for work, does what other people tell her to do, and has very little say over how her day, week or month is scheduled. An employee rides other people's coattails. An employee cashes a paycheck, but never really invests in the future of her employer or, incidentally, herself.

Since I began my law career more than seven years ago, I've always been an employee. A good employee, for sure, but ....

But.

Being a good employee is no longer enough for me.

The lightbulb in this regard went on in November 2012. Two attorneys in my firm who I admired greatly were on their way out, and not entirely of their own choosing. I was dismayed to see people who had mentored and trained me so well be tossed aside. And I couldn't for the life of me figure out why it happened.

All I knew is that I didn't want that to happen to me.

I learned later that the common thread between these two attorneys is that they had no book of business of their own. They were mere "worker bees" who had fallen out of favor with the firm leadership for whatever reason.  They couldn't fend for themselves and no one wanted to "feed" them anymore.

When I realized this, I almost immediately hired a business development coach. Of course, I expected to land clients overnight. This didn't happen.

What did happen is that I changed my thinking.  Before November 2012, my thinking was that of an "employee" - - I separated life from work. I went to my kids' sports events, attended church, and went to school functions, without considering any of the inevitable interactions I would have as business opportunities. I thought of "networking events" and drinks with my superiors after work as time away from my kids. I hid in my office and ate my salad at my desk, rather than venturing out and *gasp!* having the audacity to ask a co-worker, let alone a potential client, to lunch.

Post-November 2012, I viewed these ordinary events as opportunities. But I blew nearly every opportunity I had. The reason is because I suck at making small talk. People want to tell me about their day, their spouse, their kid's class project - and while I wish I was interested, I'm just ... not. Friendships - especially with other females - have never been my strong suit.

So here I was, having changed my thinking, but not really able to find a way to demonstrate this new thinking. And then my best friend at my firm - an associate to whom I delegated many tasks - left. And all the crap on her desk (which probably caused her to leave) came pouring back onto my desk. I was back on the bottom of the totem pole. I was buried in monotony.  I had no time for marketing, no time to work on building business, and although my thinking had changed, I had no real clue about where to start.   And I was mad as hell.

Something had to change.

* New job? I could write a whole post about why a new job wasn't the answer.

* Mid-life crisis?  Nah - I'm still young! (37 is young, right?)

* Put on my big girl panties and actually talk to my boss about my desire for mentorship in business development? Ding, ding, ding!!!

I pride myself on being a good communicator. But in this regard, I failed miserably. For some reason, unknown to me, I NEVER spoke with my boss - likely the number one rainmaker in my firm - about my desire to grow my book of business.

Until last Friday.

The result was surprising.

He welcomed it. He answered my questions. He promised to make me accountable, to give me time to market, and money to fund it. This too is a whole other post.

And so today I announce to you, dear readers, my intention to grow my business. I mean really grow my business. I intend to FINALLY transition from employee to employer.

Unlike an employee, an employer has people working for her to whom she can delegate tasks. An employer has control over the clients she services and the practice areas she focuses on.  An employer sews her own coattails, signs her own paycheck, is an owner of the firm where she works and has freedom like an employee will never know.

How does one go about doing this? To tell you the truth, I haven't the foggiest idea. But I know I'm not alone. And so while I intend to continue documenting the highs and lows of practicing in the non-compete and trade secrets arena, I also expect that it will be a place where I can share the work that I'm doing to develop my book of business. I also hope it will be a place where people who know how to do this will be willing to share with me and my readers their tricks and tips for obtaining and retaining clients.

Can you smell that? Yes, it's spring ... all things are new in spring, and so too is my outlook. In my next post, I'll tell you how I plan to get started.

~ Liza Favaro
Non-Compete Counsel

Tuesday, February 11, 2014

Cents, Peppercorns, and Continued Employment ... a Lesson on Consideration

I'm happy to report that the Polar Vortex hasn't sufficiently paralyzed the courts to justify taking any snow days in the last week, so I've been a busy little beaver. One of the things that I've come across on more than one occasion recently is "consideration." Ugh, I know. The dreaded topic (at least for me) from first-year contracts class. You remember, right? "A bargained-for exchange." What do law professors really think they are teaching when they use such language to describe such a basic concept? I digress ...

Let's break it down: consideration is the thing that is exchanged between the parties that gets a deal done. It is one thing of value in exchange for another. A key component of any contract, a deal dies when consideration is absent.

Money is easy - obviously it is valuable. Money for professional services. Money for goods. Consideration is readily identified in contracts such as these.

What about forbearance? Forbearance = not exercising a legal right. This is the stuff settlement agreements are made of. "I won't sue you for any claims I may have against you and everyone in your family, business, etc. from the beginning of time through the present" in exchange for something of value (usually money or desired goods).

Here's the thing about consideration - courts refuse to consider whether it is adequate. It has long been the rule that "[a] cent or a pepper corn, in legal estimation, would constitute a valuable consideration." Whitney v. Stearns, 16 Me 394 (1839).

It is for this reason that in the non-compete context, a non-compete agreement will not fail for lack of consideration even when the employer asks the employee to sign it long after the employee is hired. The law in Michigan (and many other states as well) is that a promise of continued employment is more than enough to support a non-compete agreement. These agreements are sometimes referred to as "afterthought" non-competes because they arise only after the employer spots a problem with employees leaving for competitors and tries to put non-compete agreements in place to solve it. (Shameless plug: these types of employers really need a Non-Compete Counsel, no?).

Is this fair to employees? State senators in Michigan didn't think so and they drafted up Senate Bill 786, an amendment to Michigan's statute allowing for non-compete agreements. Under that bill, employers who fail to require a non-compete agreement from a new employee don't get to ask for one later. The text of the bill reads:

An employer shall not require and a court shall not

enforce an agreement or covenant under this section as a condition

of employment if the employer did not inform the employee of the

requirement at or before the time of the initial offer of

employment.

It was no surprise to me that this bill died an early death - it never even made it out of committee. After all, if a "cent or a peppercorn" is sufficient, not getting fired is clearly sufficient.

But I think the bill died for another reason: it would discourage employers from promoting employees internally. For all of my preaching about narrowly tailored agreements, such agreements are hard to write until an employee's value to a company is really known. An employee who starts off with small sales numbers, for instance, but finds himself as a significant player two years into his employment, should clearly be considered a threat to his employer and required to sign a narrow non-compete agreement if he wants to keep his job. A perfectly reasonable non-compete agreement under the statute would be invalidated simply because of the circumstances in which it arose. That seems wrong. Isn't it in everyone's best interest that such employees are promoted within the ranks of a company?

Although the bill died more than a year ago, I bring this up now because I am seeing employers request established employees to sign non-competes more frequently now than ever before. Mobility in the workplace is growing. People are moving around and employers are nervous. They are taking action to protect themselves. Good for them.

My advice to employers with employees who won't sign such agreements? Tell the employee he can keep his job, and he can have a cent and a peppercorn for his trouble. Then send him to bed without dinner and order him to get to work on time in the morning.

Liza Favaro

Non-Compete Counsel

Friday, January 24, 2014

Clients Behaving Badly

"The only thing I don't like about being a lawyer is the clients." How many of us attorneys have heard that one?

I tend to disagree, for the most part. I've had the great fortune of working for some really great people and organizations. But they can't all be roses, can they? Clients can sometimes make our jobs very difficult; they can be rude, disorganized, slow payers ... I'm sure I don't need to elaborate.

But all of that is manageable. What I struggle with are clients who behave badly. And in the context of a non-compete or trade secrets lawsuit, bad client behavior can lose an otherwise winnable case.

Take, for example, the client who was a defendant in a trade secrets case who downloaded client information in the middle of the night using a copy of the key he returned when he was resigned the day before. He had no non-compete. But I think you know what happened. He was ordered to return the information, he was barred from contacting anyone on the client list he took, and he was taken out behind the court house and beaten (well, not beaten, but I certainly tried to put the fear of God into him).

Or what about the client with a non-compete that prohibited him from working for a specific, named competitor? That shouldn't be too hard to understand, right? WRONG. Even though everybody knows you can't do indirectly what you can't do directly, my client formed a company of which he was the sole member and employee and his new company worked for that competitor. Um .... that's pretty hard to defend.

Even when bad behavior doesn't lose a case, it can certainly be embarrassing. My favorite example is the client who literally took his work laptop with him when he walked out the door of his former employer. You shouldn't do that. I told him he would have to give it back and that I would offer it up at the hearing.

But at the preliminary injunction hearing, my client informed me for the first time that he would give all of the former employer's information back, but that he really, really wanted to keep the laptop. His reason? Porn. Yup, his laptop was filled with it. To the brim. It was everywhere. My poor, poor IT guy. He was tasked with segregating all of the former employer's information from my client's "personal" information. IT guy couldn't looked at me without blushing ever again.

I'd be willing to bet you, dear readers, have some whoppers. So let 'em rip. Don't tell any tales out of school. Change all names to protect the ~~innocent~~ guilty. But do tell - what's your favorite "Client Behaving Badly" story? I'll feature them in a future post.

Liza Favaro
Non-Compete Counsel