Monthly Archives: March 2013

Protecting Your Most Valuable Assets — Customers

I was recently asked to weigh in – on behalf of PPAI – on the topic of ‘not-to-compete’ clauses in employment agreements. PPAI is fortunate to have access to informed legal counsel to help the organization and our members navigate these often murky waters. I am sharing a column written by PPAI’s general counsel John Satagaj. I hope you find John’s column helpful.

Protecting Your Most Valuable Assets—Customers

Selling promotional products and services to a client is as much about relationships as it is the quality and value of products and services. Whether a distributor develops a relationship and hands it over to a salesperson, or whether it is the salesperson who turns a cold call into a relationship, over time, the relationship does rely on the continuing skills of the salesperson to nurture and cultivate it.

The relationship between salesperson and distributor takes two basic legal forms in our industry—either the salesperson is an employee or an independent contractor. Whatever form the relationship takes, there is generally one hot topic if the relationship sours over time—who gets the clients? A lot of heartache and headache can be avoided if this question is answered beforehand. Usually, this takes the form of a “not-to-compete” clause in a contract.

Now, before going any further, I must issue one of the standard items in any lawyer’s briefcase—the caveat. For the most part, the issue of restrictive agreements is a matter of state law, and state law on this subject varies widely. For example, it is my understanding that in California it is almost impossible to impose a standard not-to compete restriction on employees. Other states have different tests for judging the validity of restrictive clauses. You need to know the law in your state.

Generally speaking, courts do not warmly embrace not-to-compete agreements. They will look upon them with some suspicion. Agreements between two independent parties will probably pass muster before an agreement between an employee and employer. The notion is the employee does not have the same leverage as an independent contractor to walk away from a relationship or negotiate the terms of the relationship.

Is It Reasonable?
As a general rule, the first question a court is going to ask is, “Is it reasonable?” The three basic factors of reasonableness are time, scope and geography.

As to time, I doubt you would find a court that would uphold a lifetime ban. On the other hand, there is no set time limit that is guaranteed to be acceptable in all cases. A court is likely to ask how long it would take for you to find and train a new salesperson and for that salesperson to develop a relationship with the client.

Scope of services should be narrowly drawn to include a limitation that relates to what the person did for you, which is usually to call on customers. Limitations on “working in the promotional products industry” or “becoming a distributor” are likely to be too broad to be reasonable. Non-compete clauses for sales that do survive challenges usually define the scope of services either in terms of actual clients of the salesperson or clients or potential clients with whom the salesperson came in contact.

Some not-to-compete clauses prohibit the solicitation of clients or potential clients with whom the salesperson came in contact. While this latter condition frequently is found to be reasonable,” it creates its own set of problems as the parties argue whether the client sought out the salesperson or the other way around.

The notion of reasonableness of territory has changed the most in recent times. It was a lot easier in a different era to define the territory of a salesperson based on physical geographic boundaries. If your salesperson is using the Internet and other tools to cultivate and nurture clients, then the market should be defined in those terms. On the other hand, if a salesperson did have a clear territory, attempting to prohibit sales competition on national accounts will not work.

Several states actually have a set of questions the court will ask. For example, the court might ask whether:

• There are limitations as to time and space
• The employee is the employer’s sole contact with the customer
• The employee possesses confidential information or the employer’s trade secret
• The covenant seeks to restrict competition that would be unfair to the employer or
• whether the employer is merely seeking to eliminate ordinary competition
• The covenant seeks to stifle the employee’s inherent skill and experience
• The benefit to the employer is disproportional to the detriment to the employee
• The covenant bars the employee’s only means of support
• The employee’s talent that the covenant suppresses was developed during the time of
• The employee’s talent that the covenant suppresses was developed during the time of
• employment
• The forbidden employment is merely tangential to the primary employment.

In addition to the basic terms of the scope of non-competition, the agreement can cover such items as termination of the prohibition, enforcement procedures and remedies.

There are plenty of places one can find “standard” not-to-compete clauses. Let me caution you again that the law on this subject does vary greatly from state to state, so I advise you to seek the advice of someone who is familiar with local law before you just do it yourself.

Finally, whatever you do, remember, be reasonable.

John Satagaj is PPAI’s legal counsel.

The Washington Report- Marketplace Fairness Act

Marketplace Fairness Act Targets Out-Of-State Sellers

Through our legislative contacts and lobbyists, PPAI has access to up-to-the-minute information, insight and analysis that you won’t see published anywhere else. The information in this month’s special Washington Report focuses on the Marketplace Fairness Act and the debate over the collection of sales and use taxes from consumers by out of state sellers. It is timely information that will help you become more aware and better prepared to advocate for your business, profession and industry.

I hope you find this information beneficial to your business.

Legislation has been introduced that addresses a long-standing debate over the collection of sales and use taxes from consumers by out-of-state sellers for the states in which those consumers reside.

The Marketplace Fairness Act, introduced in the Senate as S. 336 and in the House as HR 684, reflects several states’ acceptance of the Streamlined Sales and Use Tax Agreement (SSUTA) in 2002. The SSUTA is essentially a multi-state agreement to simplify national sales tax laws by establishing a uniform system of administering and collecting sales tax on out-of-state retail transactions—these transactions alone add up to several trillion dollars.

The SSUTA was approved in 2002 by a vote of representatives of 33 states and the District of Columbia. That number currently stands at 44 states.

The effort as it is being implemented by participating states is known as the Streamlined Sales Tax Project (SSTP). Twenty-four states representing more than 33 percent of the nation’s population have adopted the simplification measures set forth in the SSUTA by passing legislation that conforms to the agreement.

Under the SSUTA, member states are allowed to require remote sellers to collect and remit sales-and-use taxes after 90 days. The legislation exempts sellers who make less than $1 million in total remote sales in the year preceding the sale; they qualify for an exemption and would not be required to collect the tax.

States that do not want to become SSUTA members would only be allowed to collect sales and use taxes on out-of-state transactions if they adopted certain minimum simplification requirements and if they provided sellers with additional notices on the collection requirements, which are similar to but less comprehensive than SSUTA member conditions.

Sales And Use Tax History

The legislation’s history dates back more than four decades. Under the structure of state taxation, sales and use taxes are imposed on the consumer. The obligation on the seller, if any, is to collect and remit the tax. While the sales tax is the component collected by a seller on a transaction occurring within the state, the use tax is essentially a fictional component created to capture the tax made on out-of-state sales.

The purchaser is obligated to pay the use tax on any goods or services bought out of state and used in the state. Theoretically, the purchaser is always obligated to pay either the sales tax or the use tax. But few purchasers voluntarily pay the use tax and it is impossible to enforce compliance on a purchaser-by-purchaser basis.

A state can force a seller to collect sales tax since it has jurisdiction over the seller and can use leverage—such as the seizure of assets—to force compliance. If the seller has a facility in the state, the question of jurisdiction is easily resolved. In the case of an out-of-state seller, determining whether the seller has sufficient contact with a state to warrant collecting use tax from an in-state purchaser has been disputed long before the Internet became a marketplace.

In-State Presence

In National Bellas Hess v. Illinois Department of Revenue (1967), the Supreme Court ruled that states could not collect a sales or use tax from a firm that did not maintain a retail outlet within the state’s boundaries. In legal parlance, the company had to have “nexus,” or a connection with the state, upon which the state could claim jurisdiction.

In 1992, the Supreme Court decided the Quill Corp. v. North Dakota case involving a North Dakota statute drafted to specifically circumvent National Bellas Hess case. The North Dakota statute was drafted to define nexus to include “regular or systematic solicitation of a consumer market.” Regulations further defined this as three or more advertisements within a 12-month period.

Justice Stevens, speaking for the Supreme Court, said: “We do not share [North Dakota’s] conclusion that the ruling of Bellas Hess is no longer good law.” The Supreme Court, however, did make an observation that is essential to understanding the significance of the Streamlined Sales Tax Project agreement and possible federal legislation on nexus: “Our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.”

The Marketplace Fairness Act is the proponents’ answer to this suggestion.
The following states have passed legislation to conform to the SSUTA:
Arkansas; Georgia; Indiana; Iowa; Kansas; Kentucky; Michigan; Minnesota; Nebraska;
Nevada; New Jersey; North Carolina; North Dakota; Ohio; Oklahoma; Rhode Island;
South Dakota; Tennessee; Utah; Vermont; Washington; West Virginia; Wisconsin; Wyoming

The lead sponsors of the Marketplace Fairness Act are:
Sens. Mike Enzi (R-WY); Dick Durbin (D-IL), Lamar Alexander (R-TN); Heidi Heitkamp (D-SD)
Reps. Steve Womack (R-AR); Jackie Speier (D-CA); Peter Welch (D-VT); John Conyers (D-MI)

Additional co-sponsors of the legislation:
House of Representatives
Aaron Schock (R-IL); Dennis Ross (R-PA); Chris Gibson (R-NY); Steve Cohen (D-TN);
Mario Diaz-Balart (R-FL); Judy Chu (D-CA); Ander Crenshaw (R-FL); Chellie Pingree (D-ME);
Renee Ellmers (R-NC); Allyson Schwartz (D-PA); Don Young (R-AK); Keith Ellison (D-MN);
Ted Poe (R-TX); Ted Deutch (D-FL); Rick Crawford (R-AR); Linda Sanchez (D-CA);
Michael Grimm (R-NY); Niki Tsongas (D-MA); Charlie Dent (R-PA); Hank Johnson (D-GA);
Mark Amodei (R-NV); Michael Capuano (D-MA); Mike Conaway (R-TX); Betty McCollum (D-MN);
Kristi Noem (R-SD); John Larson (D-CT); Lou Barletta (R-PA); James Langevin (D-RI);
Tim Griffin (R-AR); Eleanor Norton (D-DC); Suzan DelBene (D-WA).

U.S. Senate
Tim Johnson (D-SD); John Boozman (R-AR); Jack Reed (D-RI); Roy Blunt (R-MO);
Sheldon Whitehouse (D-RI); Bob Corker (R-TN); Mark Pryor (D-AR); Jay Rockefeller (D-WV);
Amy Klobuchar (D-MN); Al Franken (D-MN); Ben Cardin (D-MD); Dianne Feinstein (D-CA);
Mary Landrieu (D-LA); Joe Manchin (D-WV)