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.

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