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[Biz Talk] No compete clause


#1

What are your feelings on this?

We have had them before in other businesses we have owned. They were
recommended by our attorney.

I am wondering if they are used in the jewelry world.

Thanks for your input.
Angela Hampton


#2

As I was told by my lawyer as someone tried to sue me for No Compete,
The law reads that No Compete Clauses are Illegal and have been for
years. The only way to possibly get one to stick is if the person
signing the no compete is an officer of the company, i.e. VP or
Treasurer, etc. I was not an officer of the the company, only Mid
level Management for a jewelry manufacturer. By the way… I won.

Steve


#3

Angela,

I think they are very necessary if you want to insure your
designer/provider/modelmaker will not share your on the
initial level. The problem with all new designs/models etc. is that
once it hits the market and makes a big splash, it will get knocked
off. A lot of people spend a lot of money to try and prevent this.
As far as I know the FTC requires that an original model has to be
changed at least 10% to be a new design. Check their guidelines to
be sure. Well, 10% is not very much…

Good Luck!
Russ Hyder
The Jewelry CAD Institute.com


#4
What are your feelings on this? 

Appropriate in any business where an employee might take away either
proprietary knowledge or clients. It has to have a reasonable time
limit, though.

Al Balmer
Sun City, AZ


#5

Hi Angela;

Am I missing an earlier part of this thread? Not sure what you’re
asking. If it is in regards to an employee signing an agreement not
to work for another jeweler in town if he/she quits or is fired, I’m
no attorney, but I’m certain that can’t be enforced. My father-in-law
is a labor law attorney and I’ve discussed this with him before.
People have a right to pursue gainful employment if they are not
under a binding contract. You can’t maintain a contract beyond the
one implied between and employee and employer under federal and state
labor law during employment, and no contract, as far as I know it,
can violate the terms and limits of labor law.

Personally, I wouldn’t work for anyone who approached me with
something like that. Same with lie detector tests and drug testing.
Personally, when it comes to hiring a jeweler, it’s about the
references, the rest is for amateurs and corporate types. As far as
I’m concerned, an employee with a good skill set has too many options
to have to subject his/herself to being treated like a
burger-flipper… because integrity is most important part of a good
skill set. Loyalty is a close second.

As for an employee not working for or working on the side for a
competitor, that’s reasonable and probably wise, and I believe that
could be legally enforced in some cases where it could be
demonstrated that there are confidentiality issues. Labor law does
nothing to support a business achieving a monopoly of resources, at
least not yet…

If we’re talking about a sub contractor, again, it’s probably not
enforceable, but if there’s a contract, it’s a different class of
legal agreement. Might be the best you can expect is a verbal
agreement.

David L. Huffman


#6
You can't maintain a contract beyond the one implied between and
employee and employer under federal and = state labor law during
employment, and no contract, as far as I know it, can violate the
terms and limits of labor law. 

But many employees are “exempt” payroll, and not subject to much of
the labor law. Also, of course, you may want non-compete or
non-disclosure clauses in a non-employee contract, where there are
few restrictions.

I would expect that any employee that an employer would worry about
would be in the exempt category. Clock-punchers generally are not in
a position to steal clients or trade secrets.

Non-compete agreements are common, legal, and have stood up to court
tests. As a software engineer, I’ve signed several. As you might
expect, some have also failed court tests. Sometimes the term is
unreasonable or not specified, sometimes a reasonable geographic
area isn’t specified, and sometimes just aren’t specific enough to
cover things you’re worried about, or so general that they cover too
much.

Exception - California invalidates non-competes except in special
circumstances. But California employers can use non-solicitation and
non-disclosure agreements to accomplish the goal.

If you’re not worried about losing clients, a somewhat simpler
non-disclosure agreement may do.

Here’s a NOLO overview:
http://www.nolo.com/legal-encyclopedia/article-29784.html

Al Balmer
Sun City, AZ


#7
They were recommended by our attorney. 

An attorney almost blew my first time at bat with a no compete.
Scenario… I was buying the company from my boss at his retirement.
He gifted me X amount of stock and resigned from the co., board (now
me!) elected me pres., and entered an aggreement for the company(me)
to purchase the balance of the stock with payments over time blah
blah blah. Sweetheart deal if ever there was one. “Here’s the keys,
send me a check now and then, I’m going fishing.”

My lawyer chimes in, “Hey wait a minute, we want this that and the
other thing”, one of which was a no compete clause. This is AT the
closing. Surprised me too. My boss got so ticked off he almost walked
out. I mean, here he is giving me my future and my lawyer insults him
with his demands.

Take whatever lesson you will from that.

But let me just add that any contract clause is only as good as the
enforcebility and actual enforcement of it by the parties involved.
I’m not a lawyer but if the no compete clause simply said, “Person A
will not compete with person B”, then without any agreed to
mechanism for enforcement it becomes meaningless. Unless you want to
fund your lawyers retirement.


#8

As an attorney (now turned jewelry maker), I am always concerned
when I see non-lawyers giving legal advice in any forum. I just read
a thread here where someone stated “The law reads that No Compete
Clauses are Illegal and have been for years.” This is totally
incorrect. Whether a non-compete clause is enforceable is generally
governed by state law and varies according to what state you reside
in. It IS legal in many states to require certain employees to sign
non-compete clauses. But sometimes the non-compete clauses employees
are forced to sign are not considered legally enforceable by a
court.

Generally, courts in all states will enforce clauses that are
reasonable and will not enforce clauses that are unreasonable.
Certain factors determine if the clause is reasonable, such as the
nature of the job – the more senior the job, or the closer you are
to trade secrets, the more likely the clause will be considered
enforceable. Other factors affecting enforceability include: the time
period you are prevented from working with a competitor and whether
the clause specifically prevents you from working in a specialized
area where you can give a competitor the advantage over your former
employer.

The best way to know if the non-compete clause that you signed is
enforceable is to consult with an attorney who has experience with
employment or business law.


#9

I’m not an attorney, but I have discussed this with attorneys and
friends in the trade that have faced it, from both sides of the
equation.

As I understand it, and as I’ve seen it play out, the spirit of the
law is that an employer cannot interfere with the ability of a former
employee to provide for their own livelihood beyond the extent to
which they are allowed to protect their own. That’s where a courtroom
comes in.

If you have serious questions as to the applicability,
enforceability and/or legality of a no-compete clause, you should
check with an attorney licensed in your town.

On the other hand… Beware of attorneys padding their bills. It
would not be completely unheard of for an attorney to recommend a
contract that he knows is completely unenforceable, just to create a
charge of $300 a page. I’m just sayin’.

My anecdotal experience is that the max the courts will consider
reasonable from the employer’s standpoint for a no-compete clause is
three to five miles (the same and adjacent zip codes), for one, maybe
two years if the employee is opening their own business, maybe even
less if they are just going to work for a competing employer. If it
is only for a year, the case probably wouldn’t even get to court
before the time expires. Another consideration, an employer trying to
prevent a former employee from getting a job (or creating jobs in the
case of starting a business) in these days of high unemployment may
not be looked upon favorably by a court, or the neighborhood in
general. At any rate, a no-compete contract case can be tough for an
employer to win, unless there is employee theft involved as well.

A former employee initiating direct contact with the former
employer’s customers by taking and using a full or partial customer
list (even a memorized phone number), taking molds or waxes, a price
list or design secrets isn’t just a violation of a no-compete clause,
it can be argued by a competent attorney that it violates laws
applying to employee theft. An employer doesn’t need a no-compete
clause, or any other type of contract to pursue legal remedy for a
case involving employee theft of physical or intellectual property,
they just have to prove it. In such a case, the side that has the
best records and best proof of their claim can usually prevail. One
might think that a no-compete clause might help clear the legal
muddy water or help to bolster a case like this, so even though on
it’s face, such a clause may be unenforceable, it might not be a bad
thing to have, if you think you may have problems later.

So, just like any other legal aspect of doing business, keep good
records and consult an attorney if you have serious questions, from
either side of the contract.

Personally, as an employer, I would never ask a prospective employee
to sign such a thing. We entrust our employees day in and day out
with pretty much all of our life savings and everything we have
worked for to get to the point we can become employers. Making a new
employee sign a contract like that right off the bat could easily set
up an atmosphere of mistrust, negativity and even paranoia, and might
very easily keep the very best people from joining the team, imho.

As a prospective employee, I wouldn’t sign one either. Too much
handwriting on the wall. They’re telegraphing how they view their
employees and may even be giving a little glimpse of how they treat
former employees, however they might get to that point. I’d just go
to the shop across the street. Or open my own place. Maybe even
across the street if there isn’t one there yet. The competition for
good help and trusting clientele shouldn’t be too tough.

Dave Phelps


#10

The advise I gave WAS based on the law as it pertained to my case, as
I stated. I’m not a lawyer and never pretended to be one. I went
trough this situation actually Twice, and prevailed both times, so I
was stating personal experience. In both situations I was told, at
the time, that no competes were illegal and were for years. I was
told that by attorneys whom I employed and found out that they were
right. I did go on to state exactly what you did, that certain
employees can be made to sign them such as officers of the company
i.e. V.P.'s, treasurers etc., which you seemed to have left out of
your statement that I stated.

The advise I gave was based on the law and the info I received I
simply restated.Of course I advise people to seek out professional
legal advise and it was not my intent to come across as an expert. I
simply stated my situation and felt it applied to the topic.

I certainly am glad you are a jewelry maker now and can see why.


#11
In both situations I was told, at the time, that no competes were
illegal and were for years. 

Do you live in California?

I referenced this before:

http://www.nolo.com/legal-encyclopedia/article-29784.html

A simple Google search should convince you that no-compete contracts
are legal (though limited) in most places, and can be legally
approximated even in California.

Al Balmer
Sun City, AZ


#12

No, I live in Ohio, and believe me, I know that I prevailed…
TWICE, on the basis that they were not enforceable because of the
constrains to earn a living and I was NOT an officer of the
companies, as I previously stated. I won, both times. I’m sure of
it!.. Yup… I’m sure. My attorneys won also, unfortunately, they
always do.


#13
No, I live in Ohio, and believe me, I know that I prevailed...
TWICE, on the basis that they were not enforceable because of the
constrains to earn a living and I was NOT an officer of the
companies, as I previously stated. I won, both times. I'm sure of
it!... Yup... I'm sure. My attorneys won also, unfortunately, they
always do. 

But now you’ve changed the story from “illegal” to “not
enforceable.” I covered that earlier:

" As you might expect, some have also failed court tests. Sometimes
the term is unreasonable or not specified, sometimes a reasonable
geographic area isn’t specified, and sometimes just aren’t specific
enough to cover things you’re worried about, or so general that they
cover too much."

If you really need a non-compete agreement, it’s perfectly legal in
most localities, but you’d better hire a lawyer who knows how to
write it.

Al Balmer
Sun City, AZ


#14
The advise I gave was based on the law and the info I received I
simply restated.Of course I advise people to seek out professional
legal advise and it was not my intent to come across as an expert.
I simply stated my situation and felt it applied to the topic. 

I certainly am glad you are a jewelry maker now and can see why."
Steve, your post essentially stated that you were told that non-
compete clauses were illegal and have been for years. While this
could have been true in your jurisdiction, your post did not mention
that the law varies state by state. I was concerned that someone
reading thiswould be under the impression that non-compete clauses
are illegal, period. I wanted to clarify that this isn’t true in a
lot of states. I was fortunate enough to retire relatively early from
a very successful law career, and do not see the need for unkind
remarks in this forum.

Lynn