Enforcement of Non-Competition Agreements Depend on Competition

Investing in employees is important for all businesses, and the appropriate use of a non-compete agreement can help protect an employer from making these investments and then watching their employees leave to work for a competitor. Whether a non-compete agreement will be enforced, however, can be significantly impacted by whether the old employer and new employer are actually competing, according to a recent U.S. District Court ruling.

Like most requests to enforce a non-compete agreement, the ruling was part of a request for a preliminary injunction, which is made at the initial stage of litigation and requires a clear set of facts for the judge to rule on. In this case, the former employer provided recording keeping and administrative services to Section 529 savings plans; in contrast, the new employer provided recording keeping and administrative services to Section 529 prepaid plans. Ultimately, and in part because of the difficult standard that must be reached in a request for preliminary injunction, the court determined the employee had created enough doubt regarding whether the record keeping functions between the two employers were similar enough to constitute competition. Because the court could not determine the employers were actually competing, it declined to enforce the non-compete agreement.

This case is a very good reminder that whether or not a non-compete agreement will be enforced is often determined when the agreement is drafted, LONG before a dispute arises. If you have questions about non-compete agreements, or would like to discuss any employee issues within your company, contact us at mgove@govelawoffice.com or 413-570-3170.

Protecting Your Business with Entity Redemption Buy-Sell Agreements

Businesses with only a few owners (or even just one) can often struggle to stay open when an owner becomes disabled or even dies. One way to prevent this is to set up a buy-sell agreement so the interest of the disabled or deceased owner can be purchased with little disruption. One type of buy-sell agreement is an entity redemption where the company itself agrees to buy, and each owner agrees to sell (or have his estate sell) the owner’s interest in the company. To guarantee the company will have the cash available to complete the agreement, the company can purchase life or disability insurance on the business owners.

Having the company agree to purchase the business interest (as opposed to having each owner agree to purchase the other owners’ interests) can simplify the number of, and relationship between, the insurance policies needed. It can also ensure the premium costs for the various insurance policies on all of the owners are shared equally, so that no one owner has to pay a disproportionate amount for the same coverage.

If you have any questions about buy-sell agreements, or other ways you can help protect your small business, contact me at mgove@govelawoffice.com or 413-570-3170.

New Rules for Flexible Spending Accounts Mean More Choices

Employers who provide Flexible Spending Accounts (FSA) under Section 125 Cafeteria Plans can now choose to modify their FSA plan to allow employees the ability to roll-over up to $500 in unused funds from year-to-year, thanks to new rules enacted by the U.S. Treasury Department.

To take advantage of this change, employers must amend their plans in writing, but an amendment may be made retroactively for the 2013 plan year. Some FSA plans include provisions for a grace period, where an employee can use prior year account balances to cover any expenses incurred in the first seventy-five days after the end of the year. If an employer chooses to amend their FSA plan to allow for the roll-over of funds, however, the plan must also be amended to remove any grace period.

Employees who choose to roll-over $500 in unused funds may still defer the full $2,500 allowed in the next plan year, but the employer may choose to apply the newly deferred funds from the current year before applying the rolled-over funds from the previous year.

To help employers and employees transition to health care plans newly available under the Affordable Care Act, the enacted rules also include provisions which allow employees who are part of non-calendar cafeteria plans to make retroactive decisions regarding their FSA plans.

If you have any questions about your FSA plans, or want to discuss any business issues, contact me at mgove@govelawoffice.com or 413-570-3170.

Solicitation Runs Both Ways (Update!)

Last month, we discussed a U.S. District Court case that found a non-solicitation provision signed by a former employee was enforceable even when contact between the former employee and the third party client was first initiated by the client. This finding (and the preliminary injunction issued against the former employee) was recently upheld by the First Circuit Court of Appeals, which has solidified the protections employers bargain for when they enter non-solicitation agreements.

The former employee asked the Appeals Court to adopt a per se rule that working with the clients of a former employer would be allowed if the clients were the first to contact the former employee. The Court declined to do so and, instead, found the facts of each situation would have to be analyzed to determine whether “solicitation” had taken place: “where the sales process is complex and the products are customized, initial contact is usually at a considerable remove from a closed sale. In such a situation, initial contact is likely to weigh far less heavily.” The Appeals Court held that “the amorphous nature of the term [initial contact] counsels persuasively against a per se rule.”

Ultimately, this decision will make it easier for employers to protect their goodwill and client relationships, even when a former employee is attempting to entice them away.

If you have any questions about this case, non-solicitation agreements in general, or want to discuss other business issues that commonly arise, contact me at mgove@govelawoffice.com or 413-570-3170.

Nonprofit Management: Duties and Liabilities of Officers and Directors

There are almost forty-thousand nonprofit organizations in Massachusetts, and many have volunteer officers and directors who help to manage, guide, and operate them. You may even find yourself volunteering to help lead an organization you support. If so, you should know the people who manage a nonprofit have duties and liabilities they must fulfill, and these responsibilities apply whether the person is a paid employee or a volunteer.

The most basic duties that an officer or director has are the duties of care and loyalty to the nonprofit. These encompass the responsibility to act in an honest manner; to work for the best interests of the nonprofit; to be diligent in preparing for, attending, and participating in meetings; to reasonably consider all relevant factors before making decisions regarding the nonprofit; to remain informed regarding statutory or regulatory compliance; and to carefully monitor delegated responsibilities. Officers and directors must act as fiduciaries and must manage the nonprofit and its property in the strictest good faith.

A nonprofit can limit or eliminate personal liability of its officers and directors in its articles of organization; however, this does not apply when the officer or director has breached their duties to the nonprofit, its members, or its beneficiaries. When a duty of care or loyalty has been breached by an officer or director, enforcement actions can be brought by many different parties, including the nonprofit itself, other directors, members of the nonprofit, beneficiaries of the nonprofit’s services, donors, members of the public, the attorney general, or governmental agencies that assert a violation of law or regulation.

If you serve as a director or officer of a nonprofit, and have any questions about your obligations or the actions of your nonprofit, contact me at mgove@govelawoffice.com or 413-570-3170.

Why Use Written Contracts?

When two parties have reached an agreement, and have exchanged something of value, they have a contract. Often, to ensure that everyone understands their obligations, the terms of the agreement are memorialized in a written contract. Contracts can capture the details of all types of business transactions and should spell out the entire arrangement between the parties. When drafting a written contract, some common elements should be addressed:

1. Parties – A written contract should clearly identify the parties to the agreement, including any person or entity who may be responsible for undertaking action ancillary to the contract.

2. Scope of Work – A written contract should describe the services or work that will be provided or performed. This section may cover the duration of the contract, the methods or materials to be used, or the amount of direction to be provided to the parties.

3. Payment or Consideration – A written contract should identify the payment to be provided in exchange for the work being performed.

4. Warranties and Representations – A written contract provides an opportunity for any of the parties to describe additional warranties or guarantees of its product or services, or to make or disclaim any representations.

5. Default, Termination, and Remedies – When using a written contract, the parties can identify specific actions or times that a party will be deemed in default of the contract, when the contract may otherwise be terminated, and each party’s remedies for these situations. These remedies can include the payment of liquidated or actual damages, consequential damages, and costs of collection including attorneys’ fees, filing fees, and other expenses.

Written contracts should aim to use clear language and to define terms that may be vague or subject to dispute. Sometimes, statutes or regulations that apply to an industry may require additional terms in a written contract. While written contracts can seem intimidating, their ability to define the terms of an agreement can provide all parties with more certainty.

Court Extends Prohibition Against Solicitation of Past Clients

A recent U.S. District Court case found that a non-solicitation provision signed by a former employee is enforceable even when the employee was first contacted by the employer’s client.  The defendant was a salesman for the plaintiff, and was prohibited from soliciting the plaintiff’s clients for one year after his employment ended.  The defendant left his position and went to work for a competitor.  The competitor announced that the defendant had changed jobs, and then the defendant was contacted by a client of the plaintiff.  The client and the defendant argued that, because the contact was first made by the client, it did not violate the non-solicitation clause in the defendant’s contract with the plaintiff.  Judge Woodlock disagreed when issuing a preliminary injunction, finding that it was the communication itself that determined whether solicitation had occurred.  The Court did note that the competitor could not be prohibited from “receiving” business from clients of the plaintiff, but that the competitor’s action in sending an announcement to those clients fell within the “plain meaning” of the defendant’s agreement to not “solicit, divert, or entice away” the plaintiff’s clients.

If you have any questions about this case, non-solicitation agreements in general, or want to discuss other business issues that commonly arise, contact me at mgove@govelawoffice.com or 413-570-3170.

Dealing With Negative Online Reviews

When running any company, positive online reviews by customers can be an important source of new business.  Conversely, negative online reviews can make potential customers wary to spend their money with you.  Managing your company’s online reputation should be a regular part of the day for any business owner, because that reputation can help drive people to, or away from, your door.  Some suggestions on how to avoid the results of an unhappy customer:

  1. Monitoring.  The first step to managing your online reputation is to be aware whenever someone is talking about you or your business online.  You should consider “claiming” your business listing for major listing services like Google Places, Yellow Pages, Yelp, or Angie’s List.  In addition, you should set up a Google Update with the names and addresses of your business and the names of your key employees.  This way, you’ll be notified whenever a review (positive or negative) is posted online. 
  2. Prevention.  Often a customer will write a negative online review only after they’ve contacted the company and felt their issue was not addressed effectively.  This first point of contact is crucial: you should train all of your staff to deal with negative feedback in a constructive manner, to quickly pass complaints to their supervisor, and for your supervisors to address those complaints in a way that keeps the customer engaged and accommodated.  Make sure you have a way to contact the unhappy customer, and do everything you can to reach a compromise that is satisfactory.  Online reviews live forever, and granting concessions to avoid one will likely prevent losing future sales exceeding the value of the concession. 
  3. Protection.  The best response to a negative online review is a long history of positive reviews and content from customers satisfied with your service or product.  Encourage customers to write positive reviews by offering them a discount coupon or promotion while directing them to a link to a listing website.  When you are notified of a positive review, share it on your website or other listing services if possible.  Start now, and the occasional negative review will be drowned out by the many positive comments potential customers will see.  (Do not write positive reviews yourself, or hire others to do it for you: these can be easily distinguished from actual reviews and just raise more questions about the company.)
  4. Respond, Privately.  As a business owner, it’s natural to take criticism of your service or product personally, and natural that your first instinct will be to respond with a long post explaining why the customer’s review does not have all the facts or is otherwise wrong.  DO NOT DO THIS – responding right away in a defensive and public manner will just lead to a back-and-forth debate, and potential customers are likely to side with the reviewer.  Instead, take some time to cool down, then evaluate the customer’s complaint with a dispassionate eye.  (If you’re having trouble doing this, bring in another person whose judgment you value.)  Then try to contact the customer with a private response that recognizes the complaint and suggests ideas for how the complaint can be addressed.  If you can reach a resolution with the customer, ask if they’ll be willing to retract their negative review, or willing to revise it to not their issue was resolved.
  5. Consider Responding Publicly, But Be Careful.  If you’ve been able to resolve the customer’s complaint, and they’ve refused (or failed) to revise or delete their initial negative review, then you can respond publicly to the review with a note that the company was happy to have addressed the complaint.  If you’ve been unable to resolve the complaint, but believe the negative review is wrong or omits important facts, you can consider adding a short response correcting the mistaken facts and stating that the company did try to address the issue.  If you’ve determined that the customer’s complaints were valid, but were not able to mollify the customer in any way, consider adding a short response offering a sincere apology and a promise that the situation won’t be repeated.

 No matter what, if you respond publicly to a negative online review, your ability to appear apologetic, reasonable, and conciliatory in the face of complaints will go a long way towards assuring potential customers that you will do the same for them.

If you have any questions about your business, or want to discuss other common issues that might arise, contact me at mgove@govelawoffice.com or 413-570-3170.