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By Lipman G. Feld, B.S., J.D. Legal contracts about specific types of non-competition between businesses or individuals are some what rare in the electronic-servicing field. There are several reasons why this is true. The small size and limited financial resources of the average service shop tend to discourage owners or managers from considering any legal contracts, especially those that might require a courtroom trial to settle any serious disagreements. Many shop owners are not aware that non-compete agreements can be valuable for protection of their rights. If they know there are such contracts, they might be tempted to copy a complicated version out of a book of legal forms. As shown later, most of these agreements are worthless and unenforceable. There are two types of non-compete agreements involving service shops. One deals with competition following sale of a business, while the other involves a contract of employment. Selling or buying a business A mutually fair and enforceable contract is essential for the sale or purchase of an operating business. The following information is for the protection of both seller and buyer. In addition to the selling price, the terms and a listing of all items to be sold, one section often is inserted for protection of the buyer. For example, the seller might agree to be employed by the new owner for one year, and afterwards to be forbidden from direct competition in a specified area for a period of five years. This protects the buyer from unfair immediate competition and provides continuity of know ledge and skill. In the vernacular of lawyers, this is called a restrictive covenant ancillary to the sale of a business. These restrictions and terms appear outwardly to be fair to both parties, and non-legal people usually see no problems until the time for enforcement arrives. According to the number of restrictive covenants disallowed or changed by judges in past years, these judges are finding some contract terms to be too severe. Generally, the courts have ruled that the validity of a restrictive agreement depends on its reasonability. So, a knowledge of what is considered reasonable can be helpful in preventing problems. Test for reasonability are di vided into several parts. For the restraint to be reasonable, it must be vitally necessary for the buyers protection. It cannot be based on vague fears or imaginary suspicions. Equally important, it must not be overly oppressive to the seller or injurious to the interests of the general public. These last two considerations are the ones that most often cause contracts to be declared invalid. Other restrictions, such as the length of time the competition is forbidden and the territorial area where it is disallowed, usually are considered by the judge according to the exact circumstances in each particular case. Perhaps the radius of the forbidden circle is too long, thus enclosing too much area. Or the restriction might be oppressive because of the population density and the exact locations of thickly inhabited neighborhoods. Another question about possible damage to the general public hinges on whether or not there are a sufficient number of competitive stores in the area of question that can provide adequate alternate sources of supply. Paper corporations All restrictive covenants should bind the seller personally, in addition to any corporation he is a part of now or could be in the future. Corporations are very easy to form or dissolve. It would be worse than a cruel joke after a sale is completed, if an asset-less and dormant corporation (owned by the seller) was restricted from direct competition with the buyer, but no contract prevented the officers or directors of the selling corporation from entering into competition on a personal basis. The following is a portion of contracts used successfully to pre vent such loopholes: "For a period of three years following the closing, Seller shall not own or have any interest, direct or indirect, or act as an employee, agent, director, representative or consultant of or assist in any way, any organization en gaged in the business of offering to the public electronic service or sales within the corporate limits or metropolitan area or adjacent to..." The city and county are listed next. Restrictions on ex-employees It is advantageous for each employer to arrange for training and upgrading of all employees so they can accomplish more work of higher quality in less time. This is central to being a good manager. However, the addition of new employees, either unskilled beginners or competent technicians, also brings a potential danger that these workers might learn all of the secrets of success and start their own competitive businesses. Or they might command premium salaries from competitors because of the valuable knowledge gained from their employer. Without exposing a business needlessly to the damage that is possible if they later become competitors, how can an arrangement be made for these employees to learn the things that allow them to work efficiently? Business survival might depend on a method or lack of one. One way is to have each employee sign a non-compete agreement that lists specific restrictions. Samples of such agreements are available, but some are less than worth less, for most judges would declare them unduly harsh. Few judges will enforce any agreement that absolutely prohibits the former employee from working in the only field where he is trained and has competency. Reasonable geographic and time limits must be stated. These same judges also keep in mind the damage that is possible to your business if some restrictions are not allowed. There are few trade secrets in the servicing business. If a business has actual valuable and exclusive trade secrets, then a general description should be included in a restrictive covenant signed by each employee. However, no trade secrets are involved if a business has the same knowledge and techniques which are used commonly in other similar shops. Lists of customers--One of the few distinctive features of a business that should be protected is a list or file of the names, addresses and phone numbers of all previous customers. Many judges will no uphold any agreement that forbids a former employee from continuing to work in his chosen field. Bu usually they will uphold a clause that forbids the ex-employee from stealing his former boss' clientele. If a non-compete agreement has been drawn up, signed legally, and then later comes to court because the employee has violated the agreement, the shop owner should prepare a strong factual argument in preparation for a courtroom appearance. Proof must be given that the list of customers was actually unique, so its loss would be an extreme hardship. In considering both sides of the case, the judge no doubt would try to find out if these customers commonly patronize the employer's competitors or if the patronage is exclusive. Only an exclusive following is likely to rate as a valuable asset. ------- Sample employer/employee restrictions Employee acknowledges and recognizes that the Employer's customer lists are valuable, special and unique assets to the Employer's business, and were acquired at considerable expense to Employer, and that said lists are confidential and are valuable trade and business secrets belonging to the Employer. Therefore, the Employee agrees that he will not at any time during his employment with the Employer, or within two years after leaving such employment, for himself or any other person or company, divulge the names and addresses or any information concerning any customer of the Employer. Employee further agrees during said two-year period not to disclose any information obtained while in the employ of Employer, without the consent of the Employer; said restriction to include Employer's methods of conducting business; further, the Employee will not solicit or do business with any active or inactive customers of Employer, and Employee shall not influence any other Employee of Employer to quit his or her employment to work for Employee or for a competitor of Employer. Employee shall not publish his photograph or cause it to be published or use his name in advertising in connection with the same or similar employment. Employer and Employee, recognizing that irreparable damage will result to the Employer in the event of the breach of any covenant contained herein, agree that in the event of such breach on the part of the Employee, the Employer shall be entitled, in addition to other legal or equitable remedies and damages available, to an injunction to restrain the violation thereof by the Employee and all other persons acting for or on behalf of such Employee. It is agreed that in the event of violation of such paragraph and in the event that any court shall finally hold that the time of the restitution or territory or any other provision constitutes an unreasonable restriction against Employee, then the parties agree that the provisions of this Employment Agreement shall not be rendered void, but shall apply as to time or territory or to such other extent as such court may judicially determine or indicate, or if such court does not so determine or indicate, to the extent that any pertinent statute or judicial decision in the jurisdiction of such court may indicate constitutes a reasonable restriction under the circumstances. --------- Also see: |
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