Non Employee Compete Agreement

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					Covenants Not to Compete

 To Sue or Not to Sue, that is the
           Question.
   A NATIONAL LOOK AT
 INSURANCE AGENT AND
BROKER UNDERSTANDING
AND USE OF COVENANTS-
  NOT-TO-COMPETE AND
      TRADE SECRET
       AGREEMENTS.
       What are Non-Compete
         Agreements?
• A non-compete agreement is a written
  agreement between an employer and an
  employee that, during the employment
  period and for some “reasonable” period
  thereafter, normally ranging from 6 months
  to 5 years, the employee will refrain from
  competing with the employer for business.
     Non-Competes Can Include
• -Can be a geographic restriction
      “you will not compete within a 25 mile
  radius”
 -Can be a customer restriction
     “you will not solicit or make sales
  contact with any customer of the employer
  with which you had direct or indirect
  contact during employment”
• It might contain a “buy out” provision
      In this case the employee agrees to
  pay reasonable liquidated damages of
  $250,000 or some other agreed-upon
  amount.
  Who Might Use Non-Competes?


• Insurance Agencies with Producers

• Insurance Brokerages with Brokers

• Insurance Companies with their Agents
          What is at Stake?


– Expiration Lists and the proprietary
  information related to each policy sold are the
  valuable assets of an agency
                     vs
– The producer’s ability to make a living by
  making and keeping contacts with customers
        Public Policy Issues
• The rights of employers to protect the intangible
  property of the employer, often referred to as the
  “goodwill” between the employer and a customer

• Opposing this is the public policy that promotes
  free trade and abhors the notion that a former
  employee should be limited in his or her right to
  make a living in their specialized area of
  expertise or training
  Are Covenants-not-to-Compete
          Enforceable?

• Yes and No
• Depends on the State you are in
• Depends on the Agreement and how it
  was written.
• Depends on when the Agreement was put
  into effect
    An Enforceable Contract
• A valid and enforceable covenant-not-to-
  compete must be:
  – 1. In writing
  – 2. Part of a contract of employment
  – 3. Based on reasonable consideration
  – 4. Reasonable in duration and geographical
    limitation
  – 5. Not against public policy
• As a general practice restraints on trade
  and limitations on the right of an employee
  to change jobs are frowned on by the
  courts and they will do everything they can
  to find them unenforceable.
  Non-Piracy or Trade Secrets

- Tort of unfair competition

- Uniform Trade Secrets Act (UTSA)
   • Passed some version in 40 states Including
     California
   • Can include broad injunctive relief
      – Misappropriation of trade secrets
      – Threatened misappropriation “inevitable disclosure”
 Drawbacks to Enforcing Trade
     Secret Infringement

– In reality, courts are reluctant to issue
  immediate injunctive relief, so litigation may
  be necessary
– Plaintiffs bear the burden of proof
– Clients are frequently the main source for the
  facts in dispute
– The amount of commission lost is usually
  small in relation to cost of suit
     CPCU Research Project
• Methodology

  – Included an on-line questionnaire about
    attitudes and awareness of local laws
    governing the use of Non-competes

  – Secondary research consisted of research
    into the current status of CNTC and Trade
    Secret Agreements nationally
   Primary Research Findings
• CNTC are more frequently used by agents
  and brokers than are Trade Secret
  Agreements
• Reported suits within the past five years
  are few and are lost or abandoned about
  as often as they are won
• Agencies that were sued for breaking a
  CNTC lost as often as they won.
Use of Agreements
Enforceable in State
Relative Importance of Covenants-
          Not-to-Compete

• Relative importance indexed at 75.2 out of
  possible 100
• Importance increases as size of the
  agency increases
• In agencies with 5 or fewer producers, the
  index was 70.4 indicating a strong interest
  even for smaller agencies.
  Relative Importance to Agencies
Number of Producers in   Interest in Covenants
the Agency                   (Index)


Fewer than 5             70.4

From 5 to 15             79.6

From 15 to 25            81.4

More than 25             90.6
          California Results
• True state of these covenants is unclear
  among agents
• About one-half of the respondents appear
  to use CNTC
• Nearly four out of five agents in California
  believe CNTC are enforceable
• In general Trade Secret Agreements are
  thought to be enforceable
Reluctance to Use Agreements
• Some don’t choose to take action against
  employees

• Some consider these agreements to be
  unenforceable

• Some feel it is too expensive to enforce
  these agreements
     The Real Facts (at least in
            California)
• Covenants-not-to-compete are invalid in
  California
• BUT
• California law does allow non-competes as
  part of the sale of a business
• There are other circumstances where
  Non-Competes are enforceable:
• 1. The sale of goodwill

• 2. The sale of corporate shares.

• 3. The sale of a company’s operating
  assets.

• 4. The dissolution of a partnership.

• 5. The sale of an interest in or dissolution
  of a limited liability company.
          California Courts
• Even in the sale of a business, CNTC are
  interpreted narrowly
• Courts require reasonable time limits and
  specifically defined business and
  geographic areas
• Tend to allow confidentiality and
  nondisclosure agreements to protect
  proprietary information (client lists, e.g.)
 Research Project Conclusions
• There is significant confusion over the
  enforceability of non-competes
• Insurance Associations could play a more
  significant role in sorting out the laws of their
  state for their members
• Organizations cannot overlook the human
  component and should develop clearer policies
  within the agency
• Finally, we felt the research pointed to a need for
  educating employees as to proper conduct and
  what is proprietary.
Ten Tips for Protecting Your Assets
• 1. Don’t ask employees to sign post-
  termination “non-compete” agreements.
  Instead, ask them to sign non-solicitation,
  non-disclosure and confidentiality
  agreements.
• 2. Make very clear the consideration
  given to the employee in exchange for
  signing the agreement.
• 3. State the importance of the protective
  covenants to the agency.

• 4. Make sure the employee acknowledges
  that the agreement isn’t unreasonably
  restrictive and doesn’t prevent the
  employee from earning a living.

• 5. Be sure that the agreement is
  assignable in case you sell your agency
  assets
• 6. Include a “blue pencil” clause which
  states that if one provision is struck down,
  the rest of the contract is still enforceable

• 7. The agreement should expressly
  indicate that injunctive relief may be
  sought in addition to monetary damages
• 8. The agreement should clearly state that
  the agency owns all customer accounts,
  expirations lists, files, trade secrets and
  the employee has no vested interest in the
  accounts or commissions outside of any
  agreements made or negotiated in
  advance of employment.
  9. There should be some limitation
  expressed indicating that the employee
  should not compete while employed.

10. Be sure to state that this agreement in
  no way nullifies the “at will” nature of the
  employment.
            Conclusions


• We can’t lose sight of the fact that there
  are always two sides to these covenants
  and there is an aspect of fairness that
  should govern how they are written, used
  and enforced.
• Canon 1. CPCU’s should endeavor at all
  times to place the public interest above
  their own.

• Canon 2. CPCU’s should seek continually
  to maintain and improve their professional
  knowledge, skills and competence.

• Canon 3. CPCU’s should obey all laws
  and regulations and should avoid any
  conduct or activity which would cause
  unjust harm to others
• Canon 4. CPCU’s should be diligent in the
  performance of their occupational duties
  and should continually strive to imporve
  the functioning of the insurance
  mechanism.

• Canon 5. CPCU’s should assist in
  maintaining and raising professional
  standards in the insurance business.
• Canon 6. CPCU’s should strive to establish
  and maintain dignified and honorable
  relationships with those whom they serve,
  with fellow insurance practitioners and with
  members of other professions.

• Canon 7. CPCU’s should assist in
  improving the public understanding of
  insurance and risk management.
• Canon 8. CPCU’s should honor the integrity
  and respect the limitations placed upon the
  use of the CPCU designation.

• Canon 9. CPCU’s should assist in
  maintaining the integrity of the Code of
  Professional Ethics.
 As a Chartered Property Casualty
           Underwriter:
• I shall strive at all times to live by the
  highest standards of professional conduct;

• I shall strive to ascertain and understand
  the needs of others and place their
  interests above my own; and shall strive to
  maintain and uphold a standard of honor
  and integrity that will reflect credit on my
  profession and on the CPCU designation.

				
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Description: Non Employee Compete Agreement document sample