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Old 03-15-2007, 12:18 PM   #1 (permalink)
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Non-Compete timing

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?
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Old 03-15-2007, 12:33 PM   #2 (permalink)
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Non compete clauses are typically part of an employment contract. Just tell this person not to sign anything.

If he/she is already leaving what are they going to do?
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Old 03-15-2007, 12:58 PM   #3 (permalink)
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Start a competing company. This person is leaving because the partners can't get along.
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Old 08-20-2008, 07:35 PM   #4 (permalink)
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This is one where I've been around the horn. The original LLC partners can get a Temporary Restraining Order to prevent him from opening his doors or doing business for ten days or until some short period of time has passed so that they can go through a Preliminary Injunction Hearing. The kinds of things they can bring to this evidentiary hearing are ANY conversations with clients of the LLC where he mentioned the new company because those conversations can be held as opening a sales pitch to steal the clients of the original LLC. There can be NO retention of anything from the original company... no secrets, no manuals, no how-to notes, no cell phone, phone book, no address list, no client list, because these are perfect proof of the dissociating partner attempting to use company information against it... and even if there is no agreement, the company has a right to keep its client lists protected by fiduciary duty that partner owes his other partners. Also, if he is going to make a move and sign contracts or do anything REAL toward creating the new company, he should TELL his partners... because he still has that fiduciary duty/duty of loyalty to them until he is totally dissociated. The hard fact here is that the original LLC only has to show that they stand to lose business to this person... and while his rights to do business are inviolable in some states, his rights to compete with his former partners can be limited by a Preliminary Injunction just because he didn't go beyond following the rules.

The best place to read up on it is the Jenner & Block law firm's website. You can print it and read it or download it. In Illinois where they are, the plaintiff must establish four elements with either the TRO or the PI: 1) a protectible right; 2) irreparable harm; 3) an inadequate remedy at law; and 4) a likely success on the merits. They have the rights to the client lists, company secrets, phone lists, customer habits, etc, and any attempt to use the LLC's information will soon find the dissociated partner without the right to run his company if he doesn't apply scrupulous attention to maintaining his fiduciary duty to / with the LLC. His defense might try to suggest that the customer list was in his memory, but some judges (and you absolutely HAVE to check out the judge's history) automatically give the TRO and are extremely liberal about the PI too. That Likely Success on the Merits... has a very low threshold. And they can keep the partner on the hook by delaying discovery for at least two years... so be careful not to allow an open ended PI.

My advice is to take a month in between dissociation and starting the new company to get the work done... save up so you can afford it, but leave it all to AFTER dissociation. AND DON'T TELL YOUR CLIENTS ANYTHING.
http://www.jenner.com/files/tbl_s20P...tions_1.06.pdf

But this post seems to be coming from the original LLC. Seems you might need to have a heart-to-heart, hire a mediator to come in and help correct the damage being done by all the unfriendliness within the LLC. You need to address it before it kills the golden goose... because even if you get the TRO and PI, it will be limited to your current/recent customers and most businesses need the new clients to keep their doors open. It is often the new clients who spend the most money... and you really don't want to share them with the ex-partner 50-50 or worse. Having competition who is known in the community and in that kind of business will hamper your LLC greatly.

My advice to any partner dissociating is to work very hard to correct the dissention before you risk a PI. It is hard to stop a TRO, but a PI is where you need to do IMMEDIATE depositions and find out what they are bringing as a basis for their case. And don't let some dumb lawyer tell you it is NOT an evidentiary hearing... like happened to someone I know... because that will be your undoing. And if a PI is ordered, be ready to suggest an agreed list of untouchable clients for a certain time instead. Do NOT let yourself be blindsided by not reading a PI written by the LLC lawyers. IT MUST BE READ AND LIMITED TO WHAT WOULD BE FAIR. NO UNLIMITED TERM, NO UNLIMITED LISTS, ETC. No preventing you from working for someone who deals with those clients in another kind of business. THAT literally prevents you from accepting employment with ANY local firm.

Last edited by boykinmama; 08-20-2008 at 08:18 PM.
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Old 08-20-2008, 08:10 PM   #5 (permalink)
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I would also suggest that the departing partner make pictures of his office, his desk, & drawer contents, that he verify that his own personal computer has no company information on it before he departs with it. And it would be good to have it cleared of everything but the Microsoft software and have a single folder with personal files and then print a list of contents of the disk and of the personal folder (redacted where necessary) showing the file extensions and the size of the file. If anything looks to be a proper size to be a client list, delete it or print it and hand copies of all this to the partners as you leave.

Do NOT allow any testimony to go unchallenged if it is untrue. Come with proof that you were up front with the partners before you made a move.... or that you were dissociated before you acted on any plan.

My experience was to have one partner commit perjury in 12 different statements and to provide pictures of a trashed office that SHE trashed. She also set up two clients to call the partner and demand he come immediately and do work for them just as he was waiting on the lawyer to fax the dissociation documents to the LLC... so he could leave. They wouldn't get off the phone until he told them to call the other partner and then only when he said, "No, I won't be there, I'm dissociating." This was construed as trying to do business with a client. The truth was that this other silent partner had taken the operating funds of the company to another bank with permission from the CEO, got a new line of credit with his name on it, and then refused to put him on the account. He could not pay creditors nor could he pay himself for his full time job of operating the company. Then they demanded that he cut his salary by 23% and sign a document to that effect and also to make the other partner Chief Operating Officer.... ie. IT was a TAKEOVER by a silent partner by embezzlement followed by extortion. Later they sent the CPA, who had taken five times the normal accounting fees, cooked the books by charging partner's salary to his equity while their legal invoices for being the company attorneys were expensed, to offer to give him back his salary if he would sign over 1/3 of his ownership to each partner in the LLC that was his partner- in their individual names so that they would have voting rights to block him completely. Yes, these were his lawyers from a year before they offered him the LLC. They had the company appraised and found it worth a Million dollars after 14 months and wanted it all. They had already billed the LLC more than their $10K investment... for attending meetings they called and writing the LLC agreement that was never finished in two years.

So, if you think your partners might have even a small tinge of unethical behavior, BE VERY CAREFUL. Get a good LLC lawyer BEFORE you dissociate.

Last edited by boykinmama; 08-20-2008 at 08:22 PM.
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Old 08-21-2008, 06:43 PM   #6 (permalink)
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Quote:
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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