1.1 Polling of attendees as to level of experience in drafting and litigating
non-competition agreements
1.2 Different Contexts
(A) Purchase of a Business
(B) Employment Agreement
(C) Shareholders or LLC
Members Buy-Out or Buy-Sell Agreement
We will not be discussing context (C)
1.3 Why there are relatively so few reported cases in
this area
(A) See the cases listed in Annex A and read them very carefully
(B) the temporary and preliminary injunctive proceedings- what happens after the TRO
and/or Preliminary Injunction hearings with the grant or denial of the relief sought
II. Non-Compete Agreements Incidental to the Sale of a Business
2.1 The legal background
Courts are more likely to enforce non-compete agreements incidental to a sale of a
business
Coskey's T.V. Sales,
etc. vs. Fonti 253 NJ Super 626 (App. Div. 1992),
Heuer vs. Rubin
1 NJ 251 (1949)
2.2 Asset Sales and Stock or LLC Membership Interest
Sales
(A) this issue is rarely covered in the letter of intent or outline of term
(B) fact finding as to
the necessary protections for the Buyer-need for careful definition of:
*
the Restricted Activities
*
the Restricted Period
*
the Restricted Territory
(C) Allocation of a portion
of the Purchase Price to the restrictive covenant; payment over a period of time and
conditioning of obligation to pay the installments upon non-violation of the Covenant
(D) Negotiations by the Seller or its principals for relief from the
Covenant where there is a default on post-closing payments due them
III. Post-Employment Non-Competition Agreements
3.1 Confidentiality and Non-Disclosure Agreements-why
they may not be sufficient protection for the Employer
3.2 The Legal Background
A restrictive covenant will be enforced by the
Courts of New Jersey so long as it:
"protects the legitimate interests of the employer, imposes no undue hardship on the
employee, and is not injurious to the public"
Karlin vs. Weinberg, 77 NJ 408, 417 (1978)
Restrictive covenants ancillary to employment agreements will be enforced only if they are
reasonable under the circumstances.
Solari Industries, Inc.
vs. Maladay, 55 NJ 571 (1970)
3.3 Again, your duty is to fact-find on the nature of
the Business-its niche and the competition-speed of information roll-over, etc., the
Employee's role in the Company.
What are the legitimate interests of the
Company in protecting:
(1) trade secrets;
(2) confidential information;
(3) customer relationships; and
From what types of employees does the Company need protection and what type of protection?
*
sales employees
*
technical and manufacturing
*
financial
Need for careful definition of
*
the Restricted Activity
*
the Restricted Period
*
the Restricted Territory
If your client wants you to write restrictions that are over-reaching, with the intent of
terrorizing the Employee, your duty is to persuade that prudence and morals both make this
an unwise approach
Example: Sussex County physician with two offices, one in Newton and one in Vernon
Township. 3 Year 30 mile radius restriction or an in lieu payment of 50% of gross income
What hardships would be suffered by the particular employee or type of employee after
cessation of employment because of the non-competition covenants?
3.4 Special Problems with respect to Non-Compete
Agreements for lawyers, accountants, doctors, financial advisors, stock brokers.
Mailman, Ross, Toyes
& Shapiro vs. Edelson
183 NJ Super 434 (Ch. Div. 1992)
(two year covenant by accountant not enforced)
Schuhalter v. Salerno
279 NJ Super 504 (App. Div. 1955)
(covenant by one of two partners in split up agreement
not to perform services for his partner's clients held
unenforceable)
Karlin vs. Weinberg 71 NJ 408 (1978)
(physician)
As to lawyers, see R.P.C. 5.6 (a) prohibiting
non-compete agreements
3.5 Conflicts of laws considerations-in some states
non-compete agreements are virtually non-enforceable (California). In some states some
consideration other than continued at-will employment is required
3.6 Different Approaches to the employee or employees
depending on whether:
* the person is an
at-will employee
* the person has an
employment agreement for a term
* the person is a
prospective employee
Manner of Presentation to Existing Employees
*
counseling the client on the nature of the task and some important "do's" and
"don'ts"
*
quid pro quo to employees?
*
affording the opportunity for the employee to have a lawyer review the document
IV. Miscellaneous Drafting Issues
4.1 Choice of Law
4.2 Use of Recitals to the effect that the Employee
has been specially trained, and/or received access to confidential and proprietary
information and acknowledgment that violation could cause irreparable harm
4.3 Provision expressly permitting assignment by the
Employer
4.4 Is it useful, non-useful or counterproductive to
include a provision that if the Company seeks an injunction, it shall not have to post a
bond?
V. Some Alternative Approaches
5.1 severance pay compensation (with or without
credit for monies received during the Restricted Period from employment which does not
violate the covenant)
5.2 in lieu of non-competition covenant:
(A) forfeiture of certain
rights the employee would otherwise have retained; or
(B) payment of portion of income derived from the prohibited competition
***end***
Annex A
Some New Jersey State Court Cases
A.T. Hudson & Co, Inc. vs. Donovan 216 NJ Super 426 (App Div. 1987)
(former employee of a consulting firm restrained from soliciting
business from a
customers)
Cosky's Television and Radio Sales, Inc. vs Foti 253 NJ Super 626 (App Div. 1992)
(Employer sold and serviced communication systems, primarily through
its contacts with architects, engineers and other professionals who
specified the employer's products in their proposed projects. Defendant
Foti was a former sales employee who had 31 years of experience in the
industry in dealing with such referral sources...signed a 3 year
non-compete
Court overturned a preliminary injunction.
Very good approach in analysis of the competing considerations and
impact on the employee vs. needs to protect the employer)
Hogan v. Bergen Brunswig Corp. 153 NJ Super 37 (App Div. 1977)
(acknowledgment by employee that continued at will employment is
sufficient
consideration)
J.H. Renarde, Inc. vs. Sims , 285 NJ Super 195 (Ch. Div. 1998)
(manufacturer of plush toys sued to enforce non-compete agreement
against
its former Vice President of Sale)
Karlin v. Weinberg 71 NJ 408 (1978)
(landmark care-employing physician sought to restrain ex-employee
physician
from competing)
Mailman, Ross, Toyes & Shapiro v. Edelson 183 NJ Super 434 (Ch. Div.
1992)
(two year covenant by accountant not enforced)
Platinum Management V. Dahms 285 NJ Super 255 (Law Div. 1995)
(It cited Cosky's, supra, and enforced a 1 year agreement re existing
but not
prospective customers)
Schuhalter vs. Salerno 279 NJ Super 504 (App. Div. 1995)
(covenant by one of two partners in split up agreement not to perform
services for his partner's clients held unenforceable)
Solari Industries vs. Malady 55 NJ 571 (1970)
(Salesman of informational boards known as teleindicators
such as those at airports and train terminals
The court enunciated the three-part standard as to enforceability:
(1) the covenant must
protect a legitimate interest of the employer
(2) it may not impose
an undue hardship on the employee and
(3) it must not impair
the public interest).
Federal Distsrict Court Cases
Campbell Soup Co. v. Desatnick 58 F. Sup. 2nd 477 (D.C. N.J. 1999)
(at-will Vice President of Global Marketing and Promotion enjoined from
violating the restrictive covenant-)
Earthweb, Inc. vs. Schlack 71 F. Supp. 2d. 2999 (S.D. NY 1999)
(The Court found that a one-year duration of the
restrictive covenant
was too long
given the dynamic nature of the industry)
***end***
Annex B
SAMPLE PROVISIONS
I. Miscellaneous Provisions
Sample 1
Choice of Law
This Agreement shall be interpreted, and the rights and liabilities of the parties hereto
shall for all purposes be governed by and construed and enforced without giving effect to
the principals of conflicts of laws, in accordance with the laws of the State of New
Jersey applicable to agreements executed, delivered and performed within New Jersey.
Sample 2
Acknowledgments by the Employee
The Employee acknowledges that during the Employee's employment with the company the
Employee will have had the benefit of opportunities and training provided by the Company
and the Company's Confidential Information and that in such circumstances, the Company
would be acting reasonably if it imposed a reasonable post-employment non-competition
covenants upon the Employee with respect to the Company's clients [customers], whether
serviced by the Employee others.
Sample 3
Remedies
12.1 Right to Specific Performance
The Employee acknowledges that the Company and its Affiliates will be irreparably damaged
by any breach by the Employee of Paragraphs 10 or 11 hereof; and, therefore, the Employee
agrees that the Company shall have the right to seek specific performance thereof and/or
to obtain an injunction against any threatened or actual breaches thereof.
12.2 Other Remedies
Nothing herein shall be construed to prohibit the Company from pursuing any other
available remedies for such breach or threatened breach, including the recovery of damages
from the Employee.
12.3 Disclosure of this Agreement by the
Company
The Employee agrees that the Company or any of its Affiliates may disclose to any other
party, either during or after the cessation of the Employee's employment, the provisions
of Paragraphs 10, 11 and 12 of this Agreement.
II. Confidentiality, etc.
Sample 4
Confidential Information
10.1 Disclosure by the Employee
The Employee agrees that during employment hereunder Employee will promptly reveal to the
Company all confidential information and all other information, opportunities, development
and other matters coming to Employee's attention which pertain or may be relevant to the
operation of the Company or the conduct of its business and affairs, or which may be of
significance to any material aspect thereof. The foregoing shall apply to any items which
are patentable; and the Employee shall make no patent applications in the Employee's own
name.
10.2 Non-Use and Non-Disclosure
The Employee agrees that Employee will not, during or at any time after
the cessation of employment by the Company, use for the Employee or others, divulge or
convey to others, or aid or abet others to divulge or to convey to others any confidential
information in anyway obtained by the Employee while employed by the Company or in any way
obtained by other employees of the Company.
10.3 Return of Confidential Information
Upon the Company's request during employment or after the cessation of
employment with the Company, the Employee shall promptly deliver to the Company any copies
of confidential information and of any notes or note books, memoranda, data sheets,
computer programs, research reports, technical data, tapes, microfilm, records, customer
lists, documents and other written, printed, magnetic or other forms of information in
which the Company or any of its affiliates or any of their customers or any parties under
contract with any of them have any right, title or interest and/or which relate to any
work done by the Employee during his employment with the Company, whether prepared by the
Employee and/or others and which are in the Employee's possession or under Employee's
control or in the possession of any party holding the same for the benefit of or on behalf
of the Employee.
10.4 Documents and Other Records
At no time when the Employee may have access thereto will the Employee make for the
Employee's own personal use or remove from the office of the Company, except for temporary
use in connection with employment hereunder, the originals or copies of any such
confidential information and/or other items listed in Paragraph 10.3.
III. Employment Agreement Provisions
Sample 5
Prospective Salesperson with a "Following"-
Grand fathering of Accounts-No Restricted Territory
(Manufacturing or Sales/Distribution Company)
6.1 Excluded Accounts
Attached hereto as Schedule A is a list of customers of the Employee which the parties
agree are "Excluded Accounts".
6.2 Non-Competition
(a) In consideration of the Company's employing the Employee, the Employee agrees that for
a period of eighteen (18) months following the cessation of employment for any reason the
(the "Restricted Period") the Employee will not, directly or indirectly, either
individually or through or on behalf of any corporation, partnership, limited liability
company, trust, association, joint venture or other unincorporated business, except as
provided in subparagraph 6.2(b), solicit or sell index tabs to:
(i)
any accounts of the Company at the time of cessation
of employment; and
(ii)
any accounts which were accounts of the Company within two (2)
years prior to the time of cessation of employment; or
(iii) any active
prospects of the Company.
Question: should the
agreement attempt to define what is meant
by an "active
prospect"?
(b) The provisions of subparagraph 6.2 (a)
shall not apply to the Excluded Accounts.
Sample 6
7. Obligation of the Employee to Make "Compensatory
Payments" to the Company After Cessation of Employment
(Financial Services Company)
7.1 Acknowledgment by the Employee; the Company's
Agreement
Not to Impose any Post-Employment
Non-Competition Covenants
(a) Employee acknowledges that during the
Employee's employment with the Company the Employee will have had the benefit of
opportunities and training provided by the Company and the Company's Confidential
Information and that in such circumstances, the Company would be acting reasonably if it
imposed a reasonable post-employment non-competition covenants upon the Employee with
respect to the Company's clients, whether serviced by the Employee or others.
(b) However, in consideration of the Employee's
agreement to make the "Compensatory Payments" to the Company set forth in
paragraph 7.2, the Company is not imposing any post-employment non-competition covenants.
7.2 "Compensatory Payments"
(a) For a period of two (2) years from the cessation of the Employee's
employment, regardless of the reason, the Employee agrees to pay to the Company a
"Compensatory Payment" equal to the following percentages of "Gross
Receipts" from fee based investment management for clients (or their affiliates) who
were clients of the Company at the time of cessation of employment or who were active
prospects of the Company at such time:
(1) if the Employee is
in business for himself or herself or an entity owned or controlled by the Employee,
directly or indirectly, fifty (50%) percent of the "Gross
Receipts"; or
(2) if the Employee
works for an unrelated third party, twenty-five (25%) of the Employee's Gross Receipts.
(b) Compensatory Payments shall be due on the fifteenth of each month and shall be
accompanied by a report in reasonable detail setting forth the client and the monies
received.
(c) The Company shall
have the right at any time and from time to time, on reasonable advance notice, to inspect
the Employee's books and records to determine whether the Employee has paid the Company
what is properly owed.
(c) Any Compensatory Payments not made when due shall bear interest at the rate of ten
(10%) percent per annum.
Sample 7
11. Non-Competition and Non-Solicitation
11.1 Non-Competition
[In consideration of the "Severance
Pay" provisions of Paragraph 7 of this Agreement] [In consideration of the Company's
being willing to (continue to) employ the Employee], the Employee agrees that for a period
of one (1) year following the cessation of employment for any reason (the "Restricted
Period") the Employee will not, directly or indirectly, either individually or
through or on behalf of any corporation, partnership, limited liability company, trust,
association, joint venture or other unincorporated business, perform any services for,
engage in or acquire, be an employee of, have any financial, beneficial or equity interest
in, or have any interest based upon the profits or revenues of any business in competition
with the business of the Company or its then affiliates, anywhere within [the continental
United States of America] the following (the "Restricted Territory"):
The Restricted Territory:
e.g. Essex, Hudson, Bergen, Passaic and Middlesex Counties
e.g. the State of New Jersey, Rockland County
New York, Fairfield
County, Connecticut and the five boroughs of
New York City
11.2 Non-Solicitation
During the Restricted Period the Employee will not solicit any of the
Company's employees to take employment with the Employee or any entity other than the
Company.
Sample 9
14. Post-Employment Restrictive Covenant
(At Will Employee-Manufacturing/Sales Distribution
Company-No Territorial Restriction)
The Restricted Period and Restrictions
In consideration of the Employer's being willing to employ (continue to employ) the
Employee, the Employee agrees that, for a period of twenty-four (24) months after the
termination or expiration of the Agreement (the "Restricted Period"), the
Employee will not directly or indirectly, own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership, management, operation or
control of any business which manufactures or markets products with are equivalent to the
products manufactured and\or marketed by the Employer at the time of the termination of
this agreement.
Sample 9
9. Non-Competition and Non-Solicitation
9.1 Non-Competition
In consideration of the "severance
pay" provisions of Paragraph 7 of this Agreement and in consideration of the
Company's being willing to employ the Employee, the Employee agrees that for a period of
six (6) months following the cessation of employment for any reason (the "Restricted
Period") the Employee will not, directly or indirectly, either individually or
through or on behalf of any corporation, partnership, limited liability company, trust,
association, joint venture or other unincorporated business, perform any services for,
engage in or acquire, be an employee of, have any financial, beneficial or equity interest
in, or have any interest based upon the profits or revenues of any business in competition
with the business of the Company or its then Affiliates (there being no affiliates at this
time), anywhere within the continental United States of America (the "Restricted
Activities" and the "Restricted Territory").
9.2 Non-Solicitation
During the Restricted Period the Employee shall not solicit any of the
Company's employees to take employment with Employee or any entity other than the Company.
IV. PROVISIONS INCIDENTAL TO A PURCHASE OF A BUSINESS
Sample 10
10. Non-Competition and Non-Solicitation
(Financial Services Company Purchasing an Interest of One of the
Shareholders)
10.1 Non-Competition
For a period of three (3) years following the "Closing" hereunder (the
"Restricted Period"), Elaine agrees that she will not, directly or indirectly,
either individually or through any corporation, partnership, limited liability company,
trust, association, joint venture or other unincorporated business, perform any services
for any person or entity:
(a) who was a client of
the Company at the time of the Closings;
(b) who had been a
client of the Company within two (2) years prior to the Closing; or
(d) who was an active prospect of the Company at the time of cessation of employment.
Question: Should the agreement attempt to define "active prospect"?
10.2 Non-Solicitation
During the Restricted Period Elaine agrees not to solicit any of the Company's employees
to take employment with Elaine or any entity, whether or not Elaine is associated with the
entity.
Sample 11
7. Seller's and Seller's Shareholder Covenants not to Compete, etc.
(Sale of a Retail Location)
Covenants Not to Compete
Seller and Norman covenant and agree that for the five (5) year period
from the Closing Date, they will not, on behalf of themselves or any firm, corporation,
partnership or association, directly or indirectly:
(1) interfere with or endeavor to entice away from
Buyer, any of Buyer's employees or customers;
(2) compete with Buyer within a fifteen (15) mile
radius of the Store.
Sample 12
11. Asset Sale Agreement; Seller's and Seller's Shareholders Covenants
not to Compete, etc.-One of the Shareholders is Taking
Employment with the Buyer
11.1 Covenants Not to Compete
(a) Carol's Employment
Agreement provides for a five (5) year non-compete agreement containing the same covenants
as in this Paragraph 11, but commencing upon the cessation of her employment with the
Company. The consideration for the non-competition agreements by Carol in her Employment
Agreement is expressly understood to include her portion of the purchase price hereunder.
(b) Seller, Roger and Don
each covenants and agrees that for the five (5) year period from the Closing Date (the
"Restricted Period"), they will not, directly or indirectly, either individually
or through any corporation, partnership, limited liability company, trust, association,
joint venture or other unincorporated business, perform any services for, engage in or
acquire, be an employee of, have any financial, beneficial or equity interest in, or have
any interest based upon the profits or revenues of any business similar to and in
competition with the business of the Company (the "Restricted Activities")
anywhere within the continental United States of America.
(the "Restricted Territory").
11.2 Non-Solicitation
During the Restricted Period, Seller, Roger and Don each agrees not to solicit any of the
Company's employees to take employment with them or any entity, whether or not they are
associated with the entity.
11.3 Right to Injunctive Relief
The parties acknowledge and agree that the time period, territory and
scope of the activities proscribed in paragraphs 11.1 and 11.2 are reasonable to protect
Buyer in the conduct of the Business and that damages cannot compensate Buyer in the event
of a violation of said paragraphs. Therefore, Seller and the Seller's Shareholders agree
that in the event of a violation or breach of paragraphs 10.1 or 10.2, Buyer, in addition
to any remedies which it might otherwise be entitled to in law or in equity, shall be
entitled to injunctive relief .
