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Old 08-21-2008, 06:43 PM
boykinmama boykinmama is offline
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Originally Posted by bugsy112 View Post
We have a situation where one of three owners may be leaving the company. The company is an LLC and there is no mention of non-compete in the ownership agreement. In addition, no employment contracts were signed by any of the owners. When this member leaves can the remaining owners require him to sign a non-compete? Will this hold up in court since it is after the fact rather than at the beginning of the venture? Does timing even matter?
LLC's are somewhat different from corporate companies. Partners owe a fiduciary duty and a duty of loyalty that can be used in place of a non-compete agreement... until after the partner dissociates. Then he is free to do what he wants to do. That leaves it imperative for the partnership to know what documents are important to be kept secret, private, or not and to arrange protective procedures so that they will not be taken or misused. It is important to be able to point to an employment agreement... in the operating agreement or individually if each partner has a different territory or product line... that specifically denies him the ability to compete in a specific set of products or territory or client list.

And NOW to answer the first question: A non-compete agreement that has no remuneration except for continued employment is often considered unenforceable, especially since it is long after any employment contract would have been completed. The key element is that common law would be against the company getting something of value (continued loyalty) from the employee if the employee gets nothing of value for it. But members of an LLC CAN change the partnership agreement and it seems in this case they could gang up on the one member attempting to leave and make the agreement say what was necessary to protect the company. Just don't take it to extremes or the court will give you the downward thumb.

I'm sure it can be arranged to find something that would make it equitable not to compete to get it through the courts later... a good LLC lawyer with a background in non-competes should be there to assist you... but I'd be very careful that it was something that the member agreed was valuable. Some folks would like to stuff agreements down the member/employee's throat and then when they leave, the court says it was a coerced agreement. But here you have to know the propensity in THAT state for how they usually rule... the state could have laws that make it more probable that continued employment would be considered the only necessary remuneration... in a right to work state with poor employee support but for a partner, they might look at it as trying to tie him up... so go light on your expectations but heavy enough to protect the company profits.

For generalities, if you were to hire/bring on a partner with a non-compete clause in the employment agreement, it would have to be specific to his territory during his employment and limit the banned clients to current clients and have a limited duration relevant to the kind of business to get it past some courts. If you put it to a study to determine what would hurt you the most, I'm sure you could come up with some statistics that would impress a court quickly that you had done your homework and deserved to be protected in those areas --- and that often overlaps with every client out there.

Some businesses deal in products that must be updated/ replaced every four years or so. This might tend to limit the ban time. Other businesses depend on long term relationships. These might be banned permanently based on volume. But you can't stop a guy from working in a different product line working with those clients... unless the product lines are related and he works with his old clients and his new company has a relationship with them in the old company's product line. Then it could easily be a lockout for him to work for the competing company. Some courts if given adequate proof of the time required to develop clients that make up their business will protect the company for at least that long.

The point here is for the company officers to review the relevant issues of obtaining a client ... the cost, the time, the profit growth over time, etc... and formulate a document that informs managers what the requirements should be on the lines that are big profit centers or "drag along" centers. This work can be used if the company has to go to court.

It also helps to identify materials that are confidential and to keep them confidential with regular checks to be sure they are treated properly by the employees. This way it is documented that the company has attempted to secure its private and necessary documents from the outside world. So then if someone takes a client list or manual on product points, you can increase the protection required against his divulging the contents. You can literally request a Permanent Injunction against his using company documents he might have pilfered before he left by starting with an emergency hearing to obtain a Temporary Restraining Order upon finding that he potentially took said the numbered document. Then you have a hearing where you have to show that you have a protectible right where the former partner can do irreparable harm and that it is difficult to define the damages he could create to your viability as a company and that you are likely to succeed in showing he is attempting to do damage based on the claims in your suit. It need not be provable by a preponderance of the evidence or beyond a reasonable doubt at this point, but once you have the Preliminary Injunction, you can go for a Permanent Injunction against specific actions at the end of the Trial... if you do your homework before you get this far.

This procedure is expensive and makes it realistic to do the homework with an employment agreement at the outset of partnership that spells out reasonable limitations on what the partner can do after departure... just like you should make plans for what will happen at dissociation... which is the clause where you can put the non-compete clause if you don't have to be specific to a territory or product line. This can be changed by partnership agreement... or majority... or however your voting rules state.

Last edited by boykinmama : 08-21-2008 at 06:55 PM.
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