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Author: Matthew Harrison

Sometimes You Have to Shoot the Mules

 

The classic Academy Award winning film for Best Picture, Patton, follows the exploits of the famous U.S. Army General George S. Patton during World War II.   General Patton was an extremely driven, successful, and sometimes controversial figure during his military career.   However, even most of General Patton’s  critics agree that his successes during key times and battles during World War II were a catalyst for the Allies victory against the Axis Powers in Europe.

Gen. Patton’s exploits during World War II depicted in the film range from accurate to somewhat apocryphal. One incident depicted in the film occurred during Patton’s successful campaign across Sicily. General Patton’s troops drove the Axis Powers from the island and set the stage for the invasion of Italy.     During the campaign he encountered a column of U.S. Army soldiers, vehicles and equipment that was at a standstill on the road.   The stationary soldiers were an easy target as German fighter planes began to strafe the column causing considerable damage and casualties.   Upset by the fact that the column was vulnerable to the fighters, he raced to the front of the column.   Once there, he found two mules pulling a cart who had sat down and refused to move in the middle of a bridge spanning a river gorge.   Surrounding the stubborn and immovable mules were several servicemen and their  owner.  All were engaged in unsuccessful attempts to coax these mules to their feet to move them across to the other side of the bridge thus ending the stoppage.

General Patton was incensed with the fact that these two stubborn mules had caused the Army column to stall, be exposed to enemy fire, and incur damage and casualties as a result.   He quickly assessed the situation, pulled out his revolver, shot both mules dead (to the surprise of all those around him), and ordered the troops to throw the mules’ carcasses into the river.   Thereby, allowing the military column to move forward.

What does this have to do with business, success, and legal issues?   It comes down to the concept that decisions need to be made.   As outlined in previous posts, we have highlighted examples where indecision is just as damaging (if not more so) than making the incorrect decision to begin with.   Certain decisions by nature will be difficult, but they still need to quickly and efficiently made.

A question a business will often want to ask is are there “mules” blocking your company’s road to success.   These “mules” may be an area/aspect of the business that you just cannot get off the ground to be successful, or a client that your employees spend an inordinate amount of time handling, but who does not constitute a large amount of profit.   The “mules” can also include company personnel that are just not working out no matter what you do or a marketing plan that you have invested resources into but have seen very few results.   Like the troops at the front of the column trying to coax the stubborn mules to their feet and not realizing the destruction occurring in the stalled column behind them, businesses often become too fixated on attempting to fix the problem or “make it work” and neglect to realize the actual long-term damage this continued focus is causing to the business.

Instead, the business and owner(s) should just “shoot the mules” and move on.      “Shooting the mules” in a business setting may involve ending unproductive business relationships, eliminating marketing and other strategies that are ineffective, or terminating those employees who are not part of the company’s future.     In order to be a successful business decisions need to be quickly and efficiently made. Failure to do so can have disastrous results.

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Hands-Off and Anti-Piracy Provisions in Employment Contracts

 

Hands-Off and Anti-Piracy Clauses: Narrowly-Tailored Restrictive Covenants

Most business owners are familiar with non-compete agreements which restrict an employee from competing with a former employer after the employee leaves the company. Non-compete agreements vary and can include language that prohibits an employee from working in the same industry for a specific period of time or within a certain geographical area. However, many businesses are unaware that non-competes or “covenants not to compete” are actually just one of several “restrictive covenants” available in the employment law context.

“Hands-off” or “anti-piracy” provisions are one type of restrictive covenant that prohibits a former employee from contacting customers or using proprietary information gained as a result of his or her position. Properly drafted, this type of restrictive covenant allows employers to hold onto their customers without compromising employees’ rights.

Carefully crafted anti-piracy or hands-off provisions can be very helpful for Arizona employers, who occasionally run afoul of state law by including overly broad non-compete provisions in their employment contracts. Instead of attempting to completely curtail a former employee’s activities, employers can draft narrowly-construed provisions that protect valuable customer relationships and information.

Arizona Case Examples

In practice, hands-off and anti-piracy provisions are aimed at preventing former employees from stealing customers from their former employers. This becomes especially relevant in service industries and sales-based companies, where employees tend to interact one-on-one with clients, building relationships, trust, and familiarity. When these personnel move on, there is always a risk that the client – reluctant to start over with someone new – will follow. Employers are also aware that salespeople and customer service managers often leverage their customer contacts to obtain more lucrative employment offers elsewhere. Hands-off restrictive covenants aim to stop this behavior without prohibiting past employees from earning a living.

One of the most often-cited cases in the realm of hands-off restrictive covenants is Olliver/Pilcher Insurance, Inc. v. Daniels, a 1986 decision by the Arizona Supreme Court. The defendant, Robert Daniels, was sued by his former employer, an insurance company, for allegedly violating the terms of his employment agreement. The Supreme Court ruled that the applicable provision was not a standard non-compete agreement; rather, it was a hands-off provision that prohibited Daniels from soliciting business from his former group of clients. When Daniels left his old insurance firm, 19 clients went with him, prompting the lawsuit and perhaps justifying the company’s position. The Arizona Supreme Court ruled that the hands-off provision would have been enforceable by itself. Unfortunately for the employer, it also contained language that imposed a 67 percent commission penalty on Daniels for each former customer that signed on with his new employer, regardless of whether Daniels had directly worked with them in the past. The provision also applied to the entire state of Arizona, even though Daniels’s business had been almost exclusively concentrated in the northern region of the state. Because of these overly-broad and punitive restrictions, the Court ruled the hands-off provision completely invalid.

In contrast, the Arizona appellate court upheld a hands-off provision in Alpha Tax Services, Inc. v. Stuart (1988). In this case, two former employees, tax preparers, broke off from Alpha Tax to form their own tax preparation service. Shortly after opening their own business, they mailed hundreds of fliers and coupons to their former customers. They also, utilizing the information acquired from their past employer, contacted and solicited former customers directly by phone. Citing Olliver/Pilcher, the court held:

“This type of agreement, which has been called an antipiracy or hands-off agreement, is less restrictive than a covenant not to compete and is designed to prevent former employees from using information learned during their employment to divert or to steal customers from the former employer. Such an agreement, statewide in scope, is not considered unreasonable or oppressive and is valid.”

-In a more recent opinion, Orca Communications Unlimited, LLC v. Ann J. Noder et al. (2013), the Court of Appeals ruled that a company’s hands-off provision was invalid because it was too broad in scope. The employment agreement attempted to restrict Ann Noder, Orca’s former president, from drawing prospective as well as former clients away from Orca. The court ruled that, although Orca had a right to protect its interests in any current clients, it could not claim any interest in former or future clients.

Drafting Effective Hands-Off and Anti-Piracy Provisions

As the case law demonstrates, employers must be careful when including hands-off provisions in employment agreements. As with non-compete clauses, provisions that prohibit an employee from interacting with former clients or using information gained during their employment must always balance the employer’s legitimate business interests against the employee’s right to earn a living in his or her chosen field. Because the law in this area is complex and the costs of making the incorrect decision are high, it is imperative to work with an experienced employment and business law attorney who can help you get it right.  

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

The Ins and Outs of Non-Compete Agreements

 

Use and Popularity of Employee Non-compete Agreements

Employee non-compete agreements are popular tools utilized by many types of employers when hiring new employees. It is easy to understand why. Employees today are considerably more mobile than in past generations. When a new job opportunity arises, an employee is more likely to move on than his or her predecessors were. The days of spending one’s entire working career with a single employer are a thing of the past. With such a fluid workforce, understandably, employers need to protect their information, including accounts, relationships, and access to customers. In many situations, an employer accomplishes this by requiring a new employee to sign a non-compete agreement.

Arizona courts have held that these covenants not to compete must be narrowly tailored to protect an employer’s legitimate business interests. A non-compete agreement cannot be overly restrictive when it comes to duration or to geographic scope. In other words, businesses cannot handcuff a former employee’s job prospects for the sake of their bottom line.

How can a business draft a non-compete agreement that holds up in court? If one provision within the agreement is found to be invalid, is the entire agreement found to be invalid? To examine these circumstances, one must look to the “blue pencil rule.”

Why You Want “Severable Portions” in Your Non-Competes

If you are an Arizona employer, “severable portions” should be part of your evolving business vocabulary. Also known as step-down clauses, these provisions in an employer’s non-compete agreement refer to either a specific alternative time or a territorial provision that creates the restrictions in the covenant agreement. To be enforceable, the non-compete agreement must provide a clearly stated alternative as to either time or geographic location in its restrictions.

The blue pencil rule allows a court to strike out restrictions that conflict with each other within an agreement. However, it is not acceptable for the employer to include both provisions in their agreement and to simply give the Court “revision authority” so as to attempt to be more restrictive in its agreement language. Doing so risks the validity of the entire agreement.

The Arizona Supreme Court addressed this very issue in Varsity Gold, Inc. v. Porzio. In this case, the drafting party included a reformation clause that granted the Court authority to revise the non-compete agreement in question to conform to acceptable standards in lieu of a step-down provision. The Court held that granting it revision authority to modify the non-compete agreement was not a valid step-down provision and as such, deemed the entire agreement unenforceable. The court stated, “Although we will tolerate ignoring severable portions of a covenant to make it more reasonable, we will not permit Courts to add terms or rewrite provisions.”

Covenants not to compete are complex documents that can be easily invalidated by Arizona courts. Laws favor employees as the non-drafting parties. It takes a carefully crafted agreement to ensure that the parties on both sides of a non-compete agreement are protected and understand their rights and obligations.

©2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Let’s Be Reasonable: Geographic and Time Limitations in Non-compete Clauses

 

When employees move on to other pursuits, they take their knowledge of the former employer with them. If you are a business owner, a well-drafted non-compete agreement can ensure that former employees do not directly compete with your business. Because many employees leave to work for competing firms (or start their own), a non-compete agreement is essential to protect, at least for a time, what you have worked so hard to build A business must draft its non-compete agreement in such a way that it will protect itself to the greatest extent possible, but remain legally enforceable. Creating such an agreement often involves a delicate balancing act that a business must constantly keep in mind.

In general, non-compete agreements “are disfavored and thus are strictly construed against employers.” Hilb, Rogal and Hamilton Co. of Ariz., Inc. v. McKinney. For example, to be enforceable, non-compete agreements must include reasonable time and geographical limits. What courts consider “reasonable” is generally determined on a case-by-case basis, but certain guidelines have been established. Arizona courts have held that these limitations must be specifically tailored to protect an employer’s legitimate business interests. In Valley Med. Specialists v. Farber, the Arizona Supreme Court held that non-compete agreements will be enforced as long as they are “no broader than necessary to protect the employer’s interest.”

Non-compete agreements that attempt to impose lengthy time restrictions and overly broad geographical limitations will not be enforceable. As an example, no court in Arizona has ever upheld a non-compete agreement that imposed a statewide geographical limitation. In Liss v. Exel Transportation Services, Inc., the court ruled that a non-compete agreement essentially banished an employee from his chosen industry. The agreement prohibited the employee, a truck driver, from “directly or indirectly engaging in any work associated with motor freight transportation services for three years, regardless of where the business is located.” Unsurprisingly, the court held that the agreement was overly broad. Therefore, employers must carefully draft these agreements to balance their business interests against their employees’ right to earn a living.

Reasonableness Factors

Arizona courts will consider a number of additional factors when examining the scope of time and geographical limitations. Among these other factors, the court will examine the type of business, the employee’s specialized knowledge, and how long it will take an employer to train the employee’s replacement.

For example, in Amex Distributing Co., Inc. v. Mascari, the court held that a 36-month blanket restriction that prohibited the employee from working with any competitor was unreasonable. The court stated: “When the restraint is for the purpose of protecting customer relationships, its duration is reasonable only if it is no longer than necessary for the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness.”

In Bryceland v. Northey, the court also refused to enforce a non-compete that included overly broad time and geographical limitations. Not only did the agreement prohibit a disc jockey from providing professional services to any client within a 50-mile radius of Phoenix or any of his other job sites, it did so for two years. Similarly, in Lessner Dental Labs v. Kinney, the court held that a non-compete was unenforceable because it prevented the employee, a dental technician, from working with any competitors within the entire county for two years.

Conversely, in Bed Mart, Inc. v. Kelley, the court held that a non-compete agreement was enforceable. The agreement imposed a six-month, 10-mile restriction on the employee working for any company whose business was comprised of more than 50 percent mattress sales.

Contrasting Bed Mart with case examples where the non-compete agreement was deemed un-enforceable, it is easy to see the differences in how the geographical and time restraints were drafted. Because the non-compete provisions in the Bed Mart agreement were specifically and narrowly tailored to protect the employer – without being unduly burdensome to the employee – the court determined them enforceable.

Conclusion

Often employers attempt to utilize a “one size fits all” non-compete agreement that fails to focus on the unique nature of their business, the specific knowledge and skill set of certain employees, and whether the geographic and time limitations within these boilerplate agreements would be considered reasonable. This is an area where a “one size fits all” approach can be detrimental to an employer’s ability to enforce an agreement and emphasizes the need to specifically draft a non-compete agreement to an employee’s skill set.  

©2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Prenuptial Agreements for Business Owners

 

Premarital Agreements in Arizona 

Although prenuptial – or premarital agreements, as they are called in Arizona – are not viewed as the most romantic documents in the world, they are an essential business protection tool for business owners contemplating marriage.  Carefully drafted and properly executed in accordance with Arizona law, a premarital agreement can save a business owner time and money in the courtroom litigating ownership of business interests in the event of a divorce.

Requirements for a Valid Premarital Agreement in Arizona

To be enforceable, a premarital agreement must satisfy every requirement under Section 25-202 of the Arizona Revised Statutes. These requirements include:

• The agreement must be made in writing and signed by both parties (the agreement does not require consideration)

• Signed voluntarily by both parties

• Each party must make a fair and reasonable disclosure of all personal property and debts

• Neither party can waive in any way his or her right to the other party’s disclosure of all personal property and debts

• A properly executed agreement is unenforceable if it is later discovered that one of the parties did not have, or could not reasonably have had, adequate knowledge of the other party’s property or debts

The Importance of Disclosure In Premarital Agreements 

When a premarital agreement has been properly drafted, both sides have made a full disclosure of their assets and debts, and it has been signed, the agreement will override the community property rules of Arizona by preventing one spouse from receiving half of the other spouse’s business in the event of a divorce.

Although making a full disclosure of assets and obligations may seem straightforward, it is a common area of attack in the context of premarital agreements.  A spouse who seeks to invalidate a premarital agreement is likely to claim that the opposing spouse did not make a full disclosure of all assets.  Alternatively, he or she might claim that the opposing spouse concealed debts. This scenario is especially common when one spouse is a business owner.  Thus, business owners who wish to protect their assets through the use of a premarital agreement should strongly consider including a list of their own assets and obligations – along with a list of their spouse’s property and debts – as part of the agreement itself.  Additionally, both spouses should sign and date each page of the agreement, along with the lists of assets and debts.

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.