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Author: Matthew Harrison

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.

The Dangers of Online Business Incorporation

 

Because starting a business is generally expensive, many new business owners are tempted to incorporate by using an online do-it-yourself service. They believe they will save money by bypassing an attorney in favor of using the Internet. The popular television commercials make it look easy, and the price seems right. In reality, this type of “representation by search engine” contains numerous pitfalls.

It Is Not a Cost-Savings

Many of the online incorporation services advertise a deceptively low up-front rate, only to upsell or over-charge business owners for unnecessary services later on in the process. A new business owner who is unfamiliar with the laws in Arizona may not be aware of what is mandatory and what is optional. In many cases, an attorney is actually a more economical option.

Revolving Charges

If the Internet incorporation service requires the user to select the service as the user’s registered agent, the service will charge the user an ongoing annual fee. This fee might be much higher than the fee a business owner would pay by using a local attorney. These types of hidden charges are typically where Internet incorporation services make the bulk of their money.

Liability Risk

In their finished state, the forms offered by these websites have not been reviewed by licensed attorneys who practice in Arizona. Moreover, they are not even reviewed by an attorney licensed to practice in any state. The user submits information through a series of questions, which populates a pre-made form. The disclaimer page of one of the most popular form websites states that it “is not a substitute for the advice of an attorney” and “is prohibited from providing any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options, selection of forms or strategies.” It goes on to state that it “can only provide self-help services at [the user’s] specific direction.” There is no guarantee that the forms provided will comply with the laws of Arizona.

© 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.

Construction Delays and Damages

 

Founding father, Benjamin Franklin, is credited with a number of sayings that still resonate today. One of his most famous – “time is money” – is especially relevant in the world of construction. The construction industry is acutely aware that time delays will cost you. In commercial construction projects with large price tags, these costs can be enormous.

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Construction delays usually end up costing not only the contractor but the owner as well. Contractors pay as workers and equipment sit idle waiting to complete a phase of a project. Owners’ businesses suffer when they are unable to take possession of their property. With large sums of money at stake, it is no surprise that these construction delay disputes often end up in court, where the costs of litigation add even more to the final tab.

To guard against liability for construction delays, both owners and contractors frequently address delays in their bids and contracts. The majority of commercial construction contracts include liquidated damages clauses that assign a penalty for each day a project goes over its target completion date. Without careful drafting, however, even delay provisions and “no liability” clauses can fail to hold up in court.

Technology Construction, Inc. v. City of Kingman

In an Arizona case decided in June 2012, the Arizona Court of Appeals granted delay damages to the contractor, Technology Construction, Inc. (TCI), against the City of Kingman. The Court of Appeals upheld the trial court’s award of $324,933 plus prejudgment interest of $117,785 and post-judgment interest of 10 percent per year even though the City’s contract included a “no liability” provision and lacked a materials escalation clause.

The case, Technology Construction, Inc. (TCI) v. City of Kingman, 229 Ariz. 564, involved construction of a $5.2 million railroad underpass for the City of Kingman. The project was split into two phases, with the first phase slated to begin June 1, 2005. Work was delayed, however, when the City failed to present TCI with a contract until July 7, 2005. The project was pushed back even further when the City did not give TCI a notice to proceed until November 3, 2005. The court determined that TCI was not responsible for any of these delays.

During this time, Mother Nature threw the project another curveball when Hurricane Katrina hit the Gulf Coast in August 2005. The disaster caused the price of oil to skyrocket, which impacted construction projects all over the country – including the City of Kingman’s railroad underpass. Resulting from the increase in oil prices, TCI ended up paying more for asphalt, a material which was utilized prominently in the project. TCI’s initial asphalt bid priced asphalt at $54.10 per ton. However, the company had to pay $85.40 per ton for asphalt by the time the project got underway. This resulted in an overall cost increase of $324,933.

When TCI submitted its request for payment to the City of Kingman, the City refused to pay for the increased costs. As a result, TCI filed a lawsuit for breach of contract under the Arizona Prompt Payment Act. At trial, the court held that the City of Kingman was solely responsible for the construction delays and that the increased materials costs were in no way attributable to TCI.

On appeal, the Court of Appeals found conflicting provisions within the City’s construction contract which further established their liability under that contract. Although the contract contained a “no liability” provision, it also permitted delay damages in the event the owner requested changes or created project delays – both scenarios were supported by the facts in this case. The TCI Court further stated that there was no way TCI could have anticipated the increased cost of materials due to a natural event such as Hurricane Katrina.

Careful Drafting: Anticipating Delays

Any number of events can create both foreseeable and unforeseeable construction delays. The lessons to take away from TCI are twofold. First, courts always construe conflicting contractual provisions in favor of the non-drafting party. The City of Kingman’s contract included both a “no liability” clause and language providing for delay damages. In the presence of a delay damages clause, the Court invalidated the “no liability” clause. Secondly, the City failed to include a force majeure clause in its contract, which could have protected it from increased materials costs related to Hurricane Katrina. Without it, the City was stuck with a substantial increase in construction expenses. Careful contract preparation cannot completely absolve a party from all construction delay liability, but it is a good start.

©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.

Steps for a Business to Avoid The Culture of “Maybe”

 

As outlined in a prior article, a culture of maybe develops in a business when a decision that impacts a business needs to be made and the company’s leadership or owner avoids a “yes” or “no” determination.   Instead, business leadership finds themselves getting trapped in “analysis paralysis” where either no decision is made or a decision is made too late for the business to take the best advantage of a situation.   This article will discuss steps a business can utilize to avoid analysis paralysis and the culture of maybe.

Speed is Often not the Best Solution

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When a business encounters or there is a corporate habit of indecision, their leaders often first look for options to accelerate the decision-making process. It is regularly the situation that a faster decision-making process is usually not the solution to the underlying problem.

Unfortunately, leaders then often go too far in the other direction and seek shortcuts rather than developing a proven system for decision-making. While looking for shortcuts to streamline the decision-making process, business leaders mistakenly eliminate important procedural steps that would help them make a correct decision.   Oftentimes, these leaders then began to look for analogies more frequently and leave their business vulnerable to flawed analogical reasoning.   For example, they attempt to find correlation to disparate areas of their investigation where no correlation exists.   In addition, these leaders also often adopt the “conventional wisdom” approach in both their industry and organization to the point where they become a permanent carbon-copy of their competitors. Simply copying your business rivals would be unlikely to lead to any long-term competitive advantage.

When examining a business decision, it is best for leaders to avoid term “faster” as the answer to effective decision-making. Instead, the terms “smarter” and “efficient” are the better approaches.   A business needs a comprehensive decision-making process. This process should include certain deadlines and milestones in order to arrive at a decision in sufficient time to be effective—whether the decision is yes or no.

Develop a Clear Set of Expectations

When a business has developed a clear set of expectations for how a final decision will be made, it has often eliminated the opportunity for “analysis paralysis” to take hold.   These expectations must start from the top with a clear and concise set of procedures and goals that are implemented from the leadership downward.   Vagueness becomes subject to interpretation, which breeds delay due to a lack of definitive purpose or goals.

Establish a Deadline When the Decision-Making Process Changes

Often times, the language used by business leadership leads to a culture of maybe because personnel cannot determine exactly when all information is to be compiled and continued investigation completed.   A system in place that helps business leadership communicate to their personnel that the decision process will change at a critical juncture from information gathering to decision making helps achieve a timely decision.   A set deadline or the establishment of thresholds when certain portions of an investigation are complete allows the organization to move toward a known goal and final decision.

Imitation is the Highest Form of Flattery

            As outlined above, it is important that a business avoid an exact duplicate of what their competitors are doing because copying your business rivals is unlikely to lead to any long-term competitive advantage.   However, analyzing and adopting the procedure and behavior of a successful business can be utilized—especially when the business has no current procedure in place.

            Although copying the decision-making process of a successful business may not lead to a competitive advantage against that competitor, it does allow a business to initially stand out from your other competitors who have either not developed a successful procedure for decision-making or are in the throes of “analysis paralysis.”   Then, over time, a business should hone its own individual decision-making processes which capitalize on its unique situation and also the lessons learned from their successful competitor.

Develop a Third-Party Confidante

Every business should build a relationship with an independent confidante who will not only offer sound advice but can also bolster the leader’s confidence when he or she becomes indecisive and overly risk adverse.   An outside consultant, friend, business advisor, or legal counsel can be utilized in this position.   This individual’s primary purpose is to look after the best interest of the organization itself.   Since the individual is not totally beholden to leadership, he or she would be more likely to provide the blunt assessment that most decision-makers need to arrive at a final conclusion.

Once a Decision is Made Closure Should Occur

Once a decision is made, the organization must immediately move forward.   If the decision is “yes,” the plan must be implemented wholeheartedly.   If the decision is “no” then the organization should move on to new decisions and goals.   Constantly looking back and questioning the decision made, can lead to “analysis paralysis” on future decisions because there is no finality to any decision.

In addition, a business needs to develop a culture where there is no sense of recrimination within the organization.   If individuals or sub-entities were on the opposing side of the ultimate decision, they need to know that their input was needed and that there would be no negative effects because of the position taken.   This allows for a culture where new ideas and opposing viewpoints are allowed and welcomed—instead of the business developing a culture of “yes,” which has its own inherent dangers as well.

©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.