Articles Tagged with Non-Compete Agreement

photo-employee-leaves-for-competitor-300x169Depending on your business and number of workers, it may be common for employees to leave for opportunities elsewhere. You may be disappointed to see a valued colleague and genuinely good person leave, you may actually be happy if the person is an under performer who’s hard to get along with or the person’s departure may make you upset or uneasy if he or she is a critical part of your team who’s joining (or starting) a competitor.
If that’s the case, after going through your emotions, it’s time to take action. One action you could consider is making a counter-offer. Perhaps you didn’t really appreciate the value of the person’s skill set and experience on the open job market. Given the time and effort that may be needed to find a replacement, the cost if you use a recruiter and the disruption that may be caused by having the position vacant for an unknown period of time, along with the fact you may potentially have to pay a higher salary anyway for a replacement, this might be the way to go.

If that’s not what you want to do, or if your counter-offer is rejected, there are steps you can take to protect your business. Depending on the facts of the situation, if the person had access to trade secrets or intellectual property and whether or not a contract between your firm and the employee was signed (and if so, its language), you may have some options based on state, federal and contract law.
Here are some suggestions on what to do…

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photo - Ascension - Underwood by Boston Public LibraryIt’s not uncommon for businesses to incorporate under Delaware law even if they have no contact with that state. Delaware law is considered more business friendly than California law. In one case a business in California, incorporated under Delaware law, unsuccessfully tried to have a Delaware court enforce a non-compete agreement between a California resident and a business located in California.

The case, Ascension Insurance Holdings, LLC v. Underwood, involves a Delaware limited liability company that bought assets and goodwill from an insurance company partially owned by Robert Underwood, who lives in California. Ascension only does business in California, but the purchase agreements stated that any disputes would be resolved under Delaware law. Ascension sued Mr. Underwood in Delaware to enforce a non-compete agreement under Delaware law.

Delaware courts will generally go along with choice of law provisions in legal documents, but this case shows it’s not that simple. California was seen as having a materially greater interest in the outcome than Delaware so California law was applied. Just because an agreement states Delaware law applies, a Delaware court may find otherwise.

California law and public policy run against non-compete agreements because of the goal of wanting employees to be able to freely take advantage of the job market. There’s an exception if the sale of a business (including its good will) are involved and the non-compete is part of the overall agreement.

Ascension was unsuccessful because of is the number, complexity and timing of all the agreements between it and Mr. Underwood.

  • A non-compete provision in the asset purchase agreement was enforceable under California law because Mr. Underwood sold his equity interest, including his goodwill.
  • Ascension attempted to enforce an extension of Mr. Underwood’s original non-compete which was part of another set of investment documents Mr. Underwood signed six months after the original deal closed.
  • The court found Ascension couldn’t merge the first, enforceable non-compete agreement with the later documents because those documents weren’t finalized at the same time Mr. Underwood sold his business interests.
  • The later extension was not viewed as an exception to California’s non-compete ban and was unenforceable.

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Legal DocsNon-compete agreements are generally not enforceable in California. Although, there are 3 main exceptions to this rule: the business owner exception, partner exception, and trade secret exception. There is also a backdoor exception if the parties use a choice of law provision. This article will review the extent to which choice of law provisions may be used to craft valid non-compete agreements.

What is Choice of Law?

In both contracts for services and goods the parties, in some circumstances, can choose the law that governs the agreement in the event of a dispute. These governing law provisions are known as choice of law provisions. This means that contracting parties may decide to have a law other than California law govern their agreement.

Choice of law provisions can take away a California court’s ability to strike down a non-compete. For example in the case of Advanced Bionics v. Medtronic, 29 Cal.4th 697 (2002) the California Supreme Court decided that a lawsuit to enforce a non-compete agreement could not be stopped by a California court while the lawsuit to enforce the non-compete was already underway in Minnesota.

When Can Choice of Law in NonCompetes be Used?

Choice of law provisions are not valid just because you write the law of another state governs your agreement. For a choice of law provision to hold up in court the judge must analyze the provision to determine whether the parties or the transaction has a substantial relationship Continue reading