November 26, 2010

 

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Question

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Aloha Ken:

    Could you reiterate your position on the following comment as we had an ex-employee do the same.  Although we have a confidentially agreement in place.

    Let me know your thoughts.

Mahalo

Antoinette

Alert Alarm of Hawaii

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Ken -

 re the topic on "stealing accounts", I am in a situation whereby my company, a central station alarm monitoring business, recently purchased accounts from an alarm dealer that was doing business with me...the purchase allows me to bill these accounts at retail as opposed the dealer billing at wholesale.  Within the purchase agreement there is a clause regarding non-solicitation of the accounts.  Now, one of the owner's son-in-law, who was at one time an employee of their business, is soliciting the accounts and has managed to take some of the accounts.  What is your take on this situation? Do I pursue the owners that signed off on the agreement or can I go after the son-in-law directly with an injunction and possible suit for the amount of projected revenue now lost.

Thanks,

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Answer:

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    Competition from former owners, their employees and your own employees, present or former, is something you need to consider and avoid.  Legitimate competition from other companies is more than enough, especially in this crummy economy.

    There are several provisions that can help you prevent unfair competition from former owners and the others I have included in their class above.  The provisions and how they apply to the different categories of the class vary.  Let's consider a few.

    First let's deal with an acquisition scenario.  You purchase subscriber accounts and naturally expect the seller not to go after those very accounts that were sold.  You do this with a Restrictive Covenant.  It should prohibit solicitation and service of those accounts.  Your buy - sell agreement left that out, or was poorly written?  Not to worry.  The law will infer a prohibition for those accounts, but it will apply only to the seller, definitely not employees.  To lock up employees you need to get them to sign a Restrictive Covenant as well.  They might if asked by the seller who has to indemnify you if you lose any of those accounts.

    Your buy - sell agreement will also provide that you are buying confidential and proprietary information which the seller is not authorized to retain or use for his own benefit.      Keep in mind that restrictive covenants are not easy to enforce and must be fashioned in a way to protect the employer or buyer, but not unnecessarily restrict another from earning a living in a trade that is known to him.

    Employer's are entitled to loyalty from their employees and can ask that the employee sign an employment agreement acknowledging that all employer records are confidential and proprietary, and restrict the employee from unfair competition.  Unfair competition would include using employer records or soliciting or servicing the employer's subscribers.  Absent a written restrictive covenant the employee would usually be permitted to freely compete once his employment was over, not during that employment.  Only a few types of customers would be protected without a written contract, and alarm customers are not typically in that category because they are open and known without employer records to identify them.       

    Restrictive covenants are useful beyond their technical legal enforceability.  They also have a chilling effect on those who would otherwise freely compete against you.  Not many people are willing to risk a lawsuit.  You should be diligent to insist on restrictive covenants and then enforcing them.  And, yes, my Standard Form Employment Agreement has the appropriate provisions discussed above, and more.