An Effective Way to Analyze Your Restrictions

“Limits, like fear, are often an illusion.”

– Michael Jordan

ACTUAL CASE HISTORY: For two weeks we were in a pitched battle in Federal court, trying to convince a Federal Judge to negate a non-competition agreement. Both sides had submitted legal briefs, and the Federal Judge ordered “oral argument,” which is each side giving its position, and the Judge hammering away at each side’s arguments with his questions.

Our client was a salesman in the field of medical devices, specializing in the sale of manufactured, artificial heart valves to hospitals for surgical replacement of damaged valves. After leaving his prior employer, he took a new job, and was doing quite well – until he was sued, and his new employer placed him on “Suspension – Leave of Absence” until the case was over.

In preparation for the upcoming “oral arguments” in perhaps my tenth reading of the non-competition agreement, I discovered something that no one else had discovered before, not even the Judge: the non-competition agreement was not, in fact, a non-competition agreement.

My careful reading revealed that working for a competitor was not, in fact, prohibited. What the supposed non-compete agreement prohibited was “working for a competing medical device manufacturer, anywhere in the eastern half of the United States, that sells to hospitals replacement heart valves based on the same technology.”

That last phrase, those final five words, and their importance, had somehow escaped notice by several people. There was no prohibition against working for a competitor, but only on working for a competitor while selling heart valves based on the same technology. The restriction was on using a certain technology more than it was on working for a competitor.

In fact, the new employer did not sell manufactured, artificial heart valves, but instead heart valves derived from the hearts of pigs. Neither the lawyers nor the Judge were familiar with the technology, and just assumed the same technology was used. Fortunately, I recalled hearing of the distinction during my initial, in-depth consultation with my client.

We asked permission to submit a supplemental brief to the Court on this very point, and the Judge permitted it. After conferring with their client, the former employer’s attorneys withdrew the case. Noticing just five words – based on the same technology – that’s all it took.

LESSON TO LEARN: When it comes to non-competition and non-solicitation agreements, “The answer to your question is almost always right there, in the words.” Reading dense legal agreements can sure put a lot of people to sleep – including lawyers. That’s always the case in law, but there is no substitute for careful reading and analysis, especially when it comes to non-competition agreements and non-solicitation agreements.

I have seen it time and time again: the applicability, effect, validity, and duration of non-competition and non-solicitation agreements being misread and misunderstood, and for this reason unnecessarily limiting the client’s career by false fears. I’ve seen it time and again: highly qualified and experienced lawyers telling their clients “Sorry, there is nothing we can do” when, in fact, all that is necessary to win a person’s employment freedom is to read and analyze carefully.

To assist you in doing that for yourself, in my 30+ years of handling non-competition and non-solicitation disputes, I’ve devised a rather simple way to analyze non-competition and non-solicitation agreements. It’s what I have come to call “C.A.T.C.H.,” which stands for (1) Competition, (2) Activity, (3) Time, (4) Conditions, and (5) Horizon.

This is not the usual, hackneyed “Geography, Duration, Scope” legal analysis that so many lawyers will refer to when discussing non-competition agreements. What they would be talking about is that a Judge will often look at the reasonableness of the restrictions’ “Geography, Duration, Scope” and cut one or more of them down if the Judge thinks they are unreasonable.

Our “C.A.T.C.H.” analysis is more immediate, more valuable and more important: “Does this non-competition or non-solicitation agreement even apply to you?” Might careful reading and analysis reveal you have no reason to hire an attorney, due to potentially unfounded fear based on an incorrect analysis? Why hire an attorney, and consider going to Court, if you really don’t need to? More importantly, why turn down a job offer, or not seek one, if you are not really restricted?

This endeavor is not “legal nit-picking.” Instead, it is the essential task of every employed person: to protect your employment freedom, and to utilize your business skills, experience and relations to your very best advantage.

I hope you find my “C.A.T.C.H.” analysis helpful, and its title a little “catchy.”

WHAT YOU CAN DO: Here’s eight steps you can use to help yourself understand whether or not, how badly or not, you may be restricted by a non-competition agreement or non-solicitation clause you have signed, or you may be asked to sign. And, too, they may help you understand how to get around any such restrictions. As Michael Jordan says, “Limits, like fear, are often an illusion.”
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Question: I am a Business Development Specialist for a large Wealth Management firm. When I started my job four years ago, I was required to sign a non-compete agreement.

The non-compete agreement says that, if I ever leave my job with the firm, for any reason, for 12 months I can’t solicit or transact any business with “customers or prospective customers” of the firm. Isn’t everyone a “prospective customer?” If not, then who is and who is not?

Leon
Louisville, Kentucky

Answer: Dear Leon: I’m glad you submitted your question, because it’s a very commonly one. It comes up nearly every time I counsel a client regarding a non-compete agreement or a non-solicitation agreement. This is what I counsel my clients:
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Question: I signed a contract with my former employer that contained a non-compete agreement.

My employer went insolvent, and then the very next day started up business again under a new name. I never signed a new contract or non-compete agreement with the “new name” company.

I have left and started up my own business of the same nature, but my former employer claims the non-compete agreement I signed is a “rolling” one, and prohibits me from competing with the “new name” company. Are they right?

Heather R.
Gateshead
Tyne and Wear, United Kingdom

[Note to Readers: Tyne and Wear is a metropolitan county in the North East region of England, around the mouths of two rivers, the Tyne and the Wear, bounded on the east by the North Sea.]

Answer: Dear Heather: From the facts you have shared with me, and the general rules of interpretation of agreements in most countries, it seems to me that this “new name” company probably has no right at all to enforce the non-compete agreement you signed with your “old name” employer. However, there are two possible exceptions that could change my conclusion. Let me explain:

1. As with an agreement of any kind, a proper analysis requires that you read and understand each and every word and punctuation mark. This is a “rule of prudence” for every person who is interested in understanding the legal rights and responsibilities that arise from an agreement. Can you imagine asking your doctor to give you a diagnosis of your medical problem without letting him or her give you a medical checkup? That would be as foolish for the doctor to do as it would be for a lawyer to give you a legal opinion about a document without having read it. As I have not had a chance to review your non-compete agreement, I cannot give you a clear opinion regarding your non-compete agreement.

Even for experienced attorneys like myself, it is often the case that I truly understand an agreement only after the third or fourth time I have read it carefully, and thought about, word for word.

That said, I can share with you my views from the facts you do provide, from my many experiences with non-compete agreements, and the application of general rules of agreement interpretation common to most countries.

Our 185-Point Master Guide & Checklist to Non-Competition Agreements is a perennial favorite. It takes you step-by-step through everything you need to know. To obtain your copy, just [click here] Delivered by Email – Instantly! 

2. Here’s the first general rule you should follow: “Unless an agreement says otherwise, it is binding only on the two parties who have agreed to it.” If you and your former employer entered into an agreement, only you and your former employer are bound by it, and can claim its potential benefits. It is not binding on your cousin, or beneficial to her. And, it is not binding on a different company or new company owned by the same owners as you last company, or beneficial to that “third party.” So, your cousin could not claim your former employer owes her any money, and a different or new company owned by your former employer cannot claim you owe it a duty not to compete with it.

3. This is an exception to that first general rule: some agreements say that they are also for the benefit of “others,” or those “others” can enforce them. So, for example, if your non-compete agreement said, “This non-compete agreement is also for the benefit of, and can be enforceable by, any other company owned by the same owner as this company,” and you agreed to that, then the “new name” company can probably enforce it. (That would be called a “related beneficiary” or “successor” clause.)

As another example, if an agreement says “You agree that you are employed by ‘old name’ company, but because “old name” company paid you a bonus, you agree that in the future you will not compete with ‘new name’ company.” That would be called a “third party beneficiary” clause.)

So, both “successor clauses” and “named beneficiary” clauses can give “third parties” rights and benefits they can enforce.

If you feel that your non-compete agreement is being enforced (a) without legal basis, or (b) in an improper, illegal or discriminatory basis, you may want to proactively seek a resolution of your non-compete dilemma with your former employer before a legal dispute arises. We offer a “Model Letter: Proactive Attempt to Prevent a Potential Non-Compete Dispute” that shows you “What to Say, and How to Say It.” To get your copy, just [click here.] Delivered by Email – Instantly!

4. Your first task: Carefully read your non-compete agreement to see if there are any (a) “successor clauses” or (b) “third party beneficiaries in it. such as these anywhere in your agreement? If there are not, then you are not obligated to avoid non-competition, but then must review the second “general rule,” below, and how it might apply to you. If there are such clauses in your non-compete agreement, then this would make your non-compete agreement what you employer refers to as “rolling.”

5. Here’s the second general rule you should follow: if you only changed your name, you – with the old name or the new name – could enforce the agreement. The same goes for your former employer. Said with greater simplicity: name changes do not change legal obligations. So, for example, if you were married, and you changed your name from Heather to Matilda, you would still be married to your husband, and you would remain entitled to the benefits and be responsible for the burdens of your marriage – even if your name was now Matilda. The same rule applies to employment relations – and for both employees and employers – changing a name does not change legal rights or responsibilities.

6. Your use of the word “insolvent” about your former employer suggests to me that, in effect, it actually legally “died” and with its “death” your relation to it “died,” as well. When people say a company becomes “insolvent,” it usually means it closed down and, in the law, it “died.” Sometimes, though, company owners, after making a mistake, or in trying to avoid taxes or other debts, then immediately open up a brand new company, making the two companies just like two different people, one dead and one alive, not one person with a changed name. I have seen this happen many times. It is a kind of “business redemption” the law permits, assuming it is done honestly.

So, imagine that you are married, and your husband passes to the other side. The next day his brother says to you “I am now your husband, and you are now my wife, because your dead husband and I had the same parents.” I don’t think you would say “Yes, I now owe you loyalty and devotion of a wife.” The same is effective here: if the “old name” company legally “died,” you do not owe the “new name” company any obligations, including the non-compete obligation.

7. Your second task: In a written letter sent by email or courier, ask if your former employer’s company is either (a) “just renamed” or (b) legally “dead.” If you think about the analogy I have made to marriage, you need to ask if the man claiming to be your husband is (a) your husband with a new name, or (b) a different man. By sending a letter to your former employer, and asking him or her to tell you what has happened to the “old name” company, and sending it by email or courier, you will likely find out the answer to the second question that will determine whether you need to honor the non-compete agreement you signed.

Heather – or I will call you Matilda, if you prefer – I have a strong feeling that you have no non-compete problem. I say this because I have seen a good number of “new companies” claim that they have the benefits – although none of the burdens – of “old companies” former employment relations. That is, they want to take the “good” but do not want to take the “bad.” They cannot do this; they can only wish they can – or frighten you into believing they can.

Don’t let them frighten you. Go forward without fear, ask for information, and even if you are told they are simply “renamed,” you should ask for written proof of that. Employers are no more and no less honest than employees, and that means not all of them are honest. There is no reason at all to give up your freedom without first fighting for it; it is just too precious.

“I have a Non-Compete Agreement, but I’d like to go to work for a Competing Employer. What should I do?” The answer is almost always to proactively seek a resolution of your non-compete dilemma with your former employer before a legal dispute arises. We offer a “Model Letter: Proactive Attempt to Prevent a Potential Non-Compete Dispute” that shows you “What to Say, and How to Say It.” To get your copy, just [click here.] Delivered by Email – Instantly!

Always remember to keep copies of letters you send, and always send them in a way you can later prove was sent and delivered. The truth is the truth, and I think the truth will set you free.

I hope this has been helpful to you. And, whether or not you are married, I hope you will not take offense to my use of marriage as an analogy. I use analogies to explain concepts, and it often works very well.

I applaud you for seeking information and insight from our blog to use in standing up for yourself. We all need to do that a bit more. The more we all do just that the less employers will seek to frighten anyone.

I hope this is helpful to you. If it is, please consider telling a friend or two of our blog, and how it might help them. And – I almost forgot – Good Luck in your new business!

My Best to You,
Al Sklover

P.S.: One of our most popular “Ultimate Packages” of forms, letters and checklists is entitled “Ultimate Non-Compete Package” consisting of six Model Letters/Memos for non-compete navigation and negotiation, as well as our 185-Point Non-Compete Guide and Checklist.” To obtain a complete set, just [click here.]

© 2013 Alan L. Sklover, All Rights Reserved.

Question: My employment agreement contains a non-solicitation clause prohibiting me from “direct or indirect” solicitation of “any client or customer contacted by” me in the past.

I understand this is different from a non-compete clause, but I am wondering if your advice for dealing with non-solicitation is similar to your advice on non-compete’s.

Specifically, when/how should I inform a prospective employer? I do not think this non-solicitation will have much applicability to the role I am being considered for. What is the best way to convince a prospective employer that this should not be a concern?                                                       

Terry S.
Centerville, Ohio

Answer: Dear Terry:  

1. Generally, you should handle a non-solicit the same way you should handle a non-compete. Both are restrictions on your future employment that you have agreed to, and that you need to take into account in your future interviewing and working. Both requires a degree of care and thoughtful concern to avoid a “career crash.”

2. Bear in mind your employer may have ideas about your future activities that you do not.  It is not at all uncommon for an employer and an employee to have different ideas of how the position will play out. For example, while you may believe you are going to supervise salespeople from the home office, your employer may believe you will make sales calls with your subordinates. Your idea of the position would not be a clear violation of the restriction, while your boss’s idea may be a clear violation. It is not uncommon for these different perspectives to remain dormant in interviews, either intentionally or unintentionally. So, while you don’t think there will be a problem, better to raise the point before taking the job, and not after.

3. Wait until you have an offer in hand, and then raise the subject. As I suggest regarding non-compete’s, I think the right time to raise the issue – if your prospective employer has not already raised it – is when you have a job offer in hand. It is best raised in a late-stage interview, after you have been offered the job, and it is best raised by (a) providing a copy of the clause, (b) accompanied by a letter that explains your view that it should not be an obstacle to hiring, and (c) the reasons why. That letter should address the subject clearly, in good faith, but without identifying any of your present employer’s customers – that could put you in jeopardy of sharing confidential trade secrets.

Terry, we offer a Model Letter entitled “Disclosing Your Non-Compete to a Prospective Employer” that you might adapt and use for this purpose. If you’d like to obtain a copy, just [click here].  

4. Non-solicitation provisions are easier to “work around” than are non-compete’s. One thing that differentiates non-solicits from non-compete’s is that you and your employer can often take steps to ensure that you avoid violating a non-solicit’s effects. These steps might include: (a) identifying all of those clients you should not have any contact with, (b) assigning those clients to other employees, and (c) alerting other staff (such as receptionists or call center personnel) of the need to avoid accidentally referring calls, letters or inquiries to you.

Thanks for writing in, Terry, and allowing me to illustrate these points. You are truly “work-wise” to consider this potential stumbling block, and to consider how to overcome it. Good luck in your transition. 

Best,
Al Sklover

 Repairing the World –
One Empowered and Productive Employee at a Time ™

© 2012 Alan L. Sklover, All Rights Reserved.

Question: Hi, Alan. I am currently working full-time at a company as a Marketing Director. I signed a non-compete agreement when I started.

My question is this: is it okay if I do freelance marketing for clients on my own time so long as it doesn’t violate the terms of my non-compete?

Lorraine  
New York, New York

Answer: Hi, Lorraine,        

1.  Like any other agreement, a non-compete agreement means what it says, no more and no less. Most non-compete agreements are not difficult to read, or understand, for lawyers and non-lawyers alike. The usual language is something like this: “During your employment and for one year (or some other time period) after your employment, you will not render any services  (a) for any company that competes with this company, or (b) in competition with this company, whether on your own or working with others.” If that is pretty much how your non-compete agreement reads, then so long as the work you do on the side is not (a) for a competitor, or (b) competing with your employer, it is not a violation of your non-compete. 

Our 185-Point Master Guide & Checklist to Non-Competition Agreements is a perennial favorite. It takes you step-by-step through everything you need to know. To obtain your copy, just [click here.] Delivered by Email – Instantly!

2. Beware, though, that besides your non-compete agreement, your employment contract (if you have one), your company’s employee handbook and its policy manual might also contain prohibitions against your doing “side work.” Because we sometimes see restrictions on activities outside the workplace in these other places, I highly recommend you review these documents to see if they contain prohibitions against “side work.” You might ask your Human Resources representative how you can obtain a copy of these materials. You might consider even posing the question you asked me directly to your Human Resources representative, to see what he or she says in response.  

3. Even if “side work” does not violate your non-compete agreement or other express restrictions, your employer might still be upset if it finds out you have a “side business.” Many employers feel that “full-time” means “all of your working efforts,” and all of your time other than personal or relaxation time. Also, many employers are concerned that “side work” might be distracting to you, for example that it might result in telephone calls during the day. Employers also have concerns that “side work” might even involve them in lawsuits related to the employee’s “outside work.” In my own law firm, I am clear that I don’t want attorneys who work for me to have “side law practices” for those very reasons.
 
4. To prevent bad feelings and to protect your job, I would suggest that – to be safe – you ask for your employer’s prior written consent to your “side work.” The safest route would be to ask for written approval of your doing “side work.” If consent is granted, you are in the clear. If consent is not granted, you probably saved yourself from a potential problem down the line. If consent is not granted, and you want to do “side work” anyway, at least you know that you had better be extremely careful in doing so.

On our Model Letters section of our blogsite, we offer a Model Letter you can use to Request for Consent to Do “Side Work.” If you’re interested, simply [click here]. 

Many employees like to supplement their incomes by engaging in side businesses related, or even unrelated to their “day jobs.” As you can appreciate, the last thing people like yourself need to do is to lose your full-time employment as a result of “side work.” You’ve got to be careful, because there’s a lot “on the line.” This is a good example of why we all need to learn to “navigate” the employment relation to our best abilities.

Lorraine, I hope this has been helpful. Though it may seem a bit more complicated, requiring more than a simple “yes” or “no” answer, when looked at correctly it all comes down to being careful to protect your interests at work. Some might call it “defensive driving to avoid a head-on collision.”   

Thanks for writing in. Please consider using our advertisers by clicking to them from our blogsite – that’s how we “pay the bills” and stay online. And please visit us again. 
 

Best, 
Al Sklover

© 2011 Alan L. Sklover, All Rights Reserved.