Business Transactions

Will Non-Competes Remain Enforceable in Massachusetts?

Non-Competes are not enforceable in California. Will Massachusetts soon join that club? Massachusetts Joint Committee on Labor and Workforce Development will hold a hearing on October 7, 2009 to discuss a bill that would limit the scope of non-competes.

Original Version of Non-Compete Bill

The Massachusetts bill started out very simply. In its original form, it prohibited non-competes by amending Chapter 149 of the General Laws of Massachusetts with the addition of the following language:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person's ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction.

Current Version Adds Complications

State representatives have backed off of eliminating non-competes in their entirety and now seek to limit their scope. The result is a much more complicated bill. Here are some of the provisions that struck me as most interesting as I skimmed through the bill:

• Effective Date. If passed, the law would apply to non-competes entered into after January 1, 2010
  
• Minimum Salary Required. Non-competes would not be enforceable against employees earning less than $75,000
  
• Notice Required. If a new employee is required to sign a non-compete as a condition of employment, the employer must give the employee a copy of the non-compete agreement at least seven business days before employment begins.
  
• Limit on Duration. Non-compete restrictions can last no longer than one year after cessation of employment. The exception is a garden leave clause that allows the non-compete restrictions to last up to two years. The garden leave clause requires the employer to pay the former employee at least $50,000 during each of the years the former employee is not competing with the employer.
  
• Collection of Legal Fees. If an employer sues an employee to enforce a non-compete agreement and the court ultimately finds that the non-compete is inconsistent with the law, the employer will have to pay the employee’s legal fees.
  
• No Impact on Covenants Not to Solicit. If passed, the new law would not apply to or alter covenants not to solicit employees or customers of the employer or to restrictive covenants made in connection with the sale of a business or the assets of a business

For More Information and Commentary

Massachusetts’ state representative Will Brownsberger, who co-introduced the bill, describes the history of the bill and provides a link to the current version of the bill on his blog.

Boston.com offers an article by Scott Skirsner entitled Dear Captains of Industry: Where Is the Data to Support Your Position on Non-Competes?  Skirsner advocates the demise of non-competes in Massachusetts and provides links to sources supporting the argument that non-competes hurt the state economy and make it less competitive.

Website Audits for Internet Companies

In my last posting, I talked about a Time Magazine article in which Josh Quittner discussed the new internet boom in which founders of low-cost internet start-ups can get rich slowly with nothing more than a good idea, a laptop, and hard work.

As the business transactions attorney that I am, I of course could not resist highlighting legal issues to which even a low-cost internet start-up should pay attention. I previously discussed the necessity of (i) an agreement among the co-founders, (ii) a web host development agreement, and (iii) securities law compliance. In this posting, I’ll finish my discussion of website audits.

Website Audits

You’ll want to verify that nothing offered through your website is going to get you in trouble. A website audit might include a review of the following issues:

• Website Terms of Service. Your Website Terms of Service or Website Terms and Conditions can form a binding contract with visitors to your website if properly formatted. If your website takes subscribers or licenses information, your TOS might take the form of an end user license agreement (EULA).
  
• General Privacy Policy. There are currently no federal requirements to post a privacy policy as long as your site does not take personal information from children under thirteen. However, some states are becoming more aggressive in demanding privacy policies and procedures of websites. Hence, it may be prudent to post a privacy policy if you will be collecting, using, and/or selling personal information about your online visitors.
  
• COPPA. Sites targeted to children under thirteen must comply with the Children’s Online Privacy Protection Act. Failure to comply has generated fines from the Federal Trade Commission of up to $1 Million.
  
• Copyright. Analysis of any copyright or other legal issues raised by images, written materials, and other content provided by third parties.
  
• User-Generated Content. If your website invites visitors to submit content, you will want to take steps to minimize the risks of user generated content (UGC) including taking advantage of the safe harbors offered by the Digital Millennium Copyright Act.
  
• Trademark. Analysis of whether your domain name raises any legal concerns (e.g., trademark infringement) and whether it can or should be registered as a trademark.
  

The Internet Booms for LILO Start-Ups; Some Legal Work Still Highly Recommended

Getting Rich Slowly in the New Internet Start-Up Boom

We’ve all heard that the current economic climate has motivated venture capitalist to scale down their investments in internet start-ups. In all this gloom, internet entrepreneur hopefuls can find encouragement in a recent Time Magazine article by Josh Quittner, "The New Internet Start-Up Boom: Get Rich Slow".

Quittner refers to our era as The New Internet Start-Up Boom in which savvy internet entrepreneurs with a great idea can get rich slowly. Quittner talks about internet start-up companies that cost little or nothing to start but can eventually yield substantial profits. He refers to these internet companies as LILOs which stands for a little in and a lot out.

The article cites the examples of MotorMouths.com, a car review site started with less than $10,000 that may grow into a $250,000 revenue company within 18 months of opening operations. The article also includes the case study of AirBnB.com, a website that matches visitors with accommodations in private homes. AirBnB.com currently produces enough revenue to support its three founders.

Even Low-Cost Internet Start-ups Shouldn’t Skimp on Certain Legal Issues

Since this is a legal blog about business transactions, I must highlight some legal issues which even a LILO internet start-up should not ignore:

• Agreement Among Co-Founders and Business Partners. I’m frequently consulted by people who find themselves in business relationships that no longer function. The situation is at its worst when the partners have not documented their relationship in a written agreement that hopefully includes steps for an amicable parting. I talked about how business people can protect themselves and their businesses from relationships that go south in an interview on “When Business Partnerships Go Bad” with Steve Mullen of Start-Up BizCast.
  
• Web Host Development Agreement. Don’t hire a web developer without a proper web development agreement. Important contractual provisions include intellectual property ownership rights, development schedule, and the developer’s maintenance obligations. See an example of the problems that can develop if you forego the written web development contract.
  
• Securities Law Compliance. If you take money from someone who will share in future company profits but will not actively participate in the operation of your company, you have sold a security and you must comply with state and federal securities laws. It doesn’t matter if the investment is $500 or $5,000,000. Non-compliance triggers potential criminal and civil penalties that you don’t want to encounter. For more information on securities compliance, see my postings about Financing a Business.
  
• Website Audit. You’ll want to verify that nothing offered through your website is going to get you in trouble. I’ll talk more about website audits in my next posting.

Don't Hire a Web Developer without a Proper Web Development Contract

You might outsource or hire a freelancer to develop your website. That’s fine. But you shouldn’t do so without a proper written agreement.

Important Provisions

Important factors to be addressed in your web development agreement include the following:

• A full and clear description of work to be performed
• Your ownership and intellectual property rights in the work
• A date for completion of the work and the consequences, if any, for the contractor missing the deadline
• Post-delivery maintenance obligations
• Your rights in any components of the product if you’re dissatisfied with the work and terminate the company or freelancer prior to completion of the project.

Not having the proper agreement can lead to problems down the line even if the development itself goes smoothly. Such problems frequently revolve around intellectual property rights.

More on Intellectual Property Rights

When a web designer or web developer does the work as a freelancer (versus as an employee), the copyright in the website is owned by the web designer/developer unless the web designer/developer signs a written document indicating otherwise. A written agreement with a freelance web designer might convey the entire copyright to you or the freelancer might retain the copyright and simply license to you certain uses.

When there is no written web development agreement or the agreement is silent on the issue of ownership, the web designer and company can easily get into a dispute regarding who owns the website and what rights the hiring company has to use it.

Chaos in Action

In one reported Pennsylvania case, a computer consultant hired to update and host two websites filed a copyright infringement action after the client moved the websites to another server. While the computer consultant and client had no formal written agreement, the consultant had confirmed the arrangement in a letter to the client. Although the letter did not address ownership or licensing issues, the court decided that the client had an implied, irrevocable, non-exclusive license in the website. Ultimately, a good result for the client - but note he had to go through a lawsuit to get it. The case is Attig v. DRG, Civ. Act. No. 04-CV-3740 (E.D. Pa., March 30, 2005).

The Importance of Force Majeure Provisions in Contracts

Force Majeure is a common provision found in contracts. Literally, force majeure means superior or irresistible force in French.

What Is a Force Majeure Contract Provision

A force majeure contractual provision provides for any unforeseen and extraordinary circumstances that prevent you from performing your obligations. The event must be beyond your control or incapable of having been anticipated. For example, a force majeure provision would likely not apply to something like a server crash or your inability to secure necessary rights from a third party.

Here’s A Force Majeure Definition You Might Find in A Contract:

An event of Force Majeure is any act of God, natural disaster, war, riot, civil war, blockade, insurrection, terrorism, sabotage, acts of public enemies, civil disturbance, boycott, third party strike, or similar event that prevents or delays [the party] from rendering the specified services.

Some Examples

For example, a force majeure provision might apply to your inability to complete your contract duties due to one of the following:

• Hurricane Katrina
• 9/11 and its aftermath
• the Hollywood Writers’ strike
• a computer virus that affects computers nationwide

It is especially important to consider a force majeure provision if the contract obligates you to perform a task by a critical deadline or if your failure to meet a deadline carries penalties.

Changing Jobs Impacted by Non-Competes and Confidentiality Agreements

As news reports continuously tell us, many people have recently lost their jobs and are now seeking replacement jobs.

Employees, consultants, and business partners of technology-related companies often sign non-disclosure and non-compete agreements. Hence, technology workers seeking new positions and technology employers seeking new hires should verify that the new position will not violate a non-compete or confidentiality agreement with a former employer.

The enforceability of non-competes and confidentiality agreements depends largely on state law. While some states such as California refuse to enforce most non-competes, other states do enforce non-compete agreements as long as the non-compete is reasonable in scope.

Non-disclosure and confidentiality agreements are more universally enforced. In an employer-employee non-disclosure agreement or confidentiality agreement, the employer agrees not to disclose nor use the trade secrets and confidential information of the employer. So for example, if you hire a software programmer who previously worked for a competitor, you need to be certain that your new programmer doesn’t use or incorporate any of your competitor’s trade secrets into your work environment and products.

California Supreme Court Confirms That Non-Compete Agreements Are Invalid

It’s nothing new to learn that California does not hold non-compete agreements in high regard. Previously, some advocated the view that non-compete agreements were valid in California as long as any prohibitions on practicing one’s profession, business or trade are reasonable.

For example, while it might be reasonable to prohibit a former employee from soliciting work within a radius of fifty miles of the office for a one-year period, it’s probably not reasonable to prohibit a former employee from soliciting work anywhere in the United States for a five-year period. This “reasonableness threshold” is the law in many other states.

The California Supreme Court slammed the door on that view by confirming that non-competition agreements are invalid in California even if their prohibitions are narrow. The only exceptions are non-competition agreements in the sale or dissolution of a corporation, partnership, or limited liability companies

Background to Court’s Decision
The opinion comes from the case of Edwards vs. Arthur Andersen. Raymond Edwards worked as a certified public accountant in the Los Angeles office of the accounting firm Arthur Andersen LLP. Andersen required Edwards to sign a non-competition agreement which restricted Edwards from doing any of the following after leaving the firm:

StartUp BizCast Interview: “When Business Partnerships Go Bad”

No one can do everything alone – thus the appeal of taking on a business partner or entering into a joint venture or strategic partnership with another company. In many ways, taking on a business partner is like taking on a spouse. Unfortunately, like some marriages, some business partnerships don’t work out and the parties eventually end up seeking a way out.

I recently talked with Steve Mullen of StartUp Bizcast about how business people can protect themselves and their businesses from relationships that go south. Our discussion included the three questions you should always ask before entering any business relationship.

Startup BizCast is targeted to busy professionals and prides itself on brevity.  Each episode is 15 minutes or less.  The weekly show offers small business advice, tips, and education ... all in less time than it takes to have a coffee break!

Listen to the 15-minute show here.

Steps in a Business Transaction. Part Six. Closing and Ancillary Documents.

This is Part Six in a series discussing steps in a business transaction.  In this part, I’ll discuss closing and ancillary documents.

For simple transactions, the “closing” simply consists of the parties signing the final version of the definitive agreement and making any payments due upon signing. For more complicated transactions, signing of a definitive agreement sets forth all the steps that are to occur prior to the closing. 

Steps in a Business Transaction. Part Five. Due Diligence Review.

This is Part Five in a series discussing steps in a business transaction. In this part, I’ll discuss the due diligence review. In short, a due diligence review is your chance to make sure that you are receiving in the transaction that for which you have bargained.

The scope of the review depends upon the transaction. If you are spending a few million dollars to purchase or invest in a company, you will do a more thorough due diligence review than if you are entering a licensing agreement that can be terminated with thirty days notice.