What I’ve Been Reading Today

Critical Skills You Should Learn That Pay Dividends Forever

How to Get a Busy Person to Respond to Your Email

Venture Deals: Be Smarter Than Your Lawyer and a Venture Capitalist To be honest, I just started reading this one today.

Utah HB 251: What a Difference a Day Makes

scales-of-justice-glossy-mdWell, last we talked, Utah House Bill 251 had passed the House of Representatives and had just been assigned to the Senate Business and Labor Committee. It’s purpose was protect employees from overly onerous non-compete agreements. To that end, it allowed such agreements if (1) they protected only “trade secrets,” “proprietary information or processe[s],” or the employer’s “business relations” with customers and employees, and if (2) the agreements were only for a “reasonable time period or scope” or “within a reasonable market.” Courts have already kind of settled on two years as a reasonable time under current law.

The purpose of the proposed law was to allow ex-employees to immediately go out into the workforce and continue plying their trade, so long as they didn’t disclose trade secrets and proprietary information or steal existing clients from their former employers.

But don’t trouble yourself just yet over the wording just stated above. Apparently the Senate Business and Labor Committee has red pens and pencils in its chambers because the language of the bill has changed substantially. First the good news:

  1. “Post-employment restrictive covenants,” that is, non-compete agreements, can’t run longer than one year–so long “reasonable time period”; hello a concrete time limit–and
  2. The employer must provide adequate consideration for the agreement “aside from continued employment.”

I like those provisions, though I’d rather the one year be reduced even further, six months, for example.

Now the not-as-good news:

  1. The bill attempts to allow employers to prevent ex-employees from only directly competing with or working for a direct competitor of the employer. I like the sentiment, and it appears to be a good-faith effort to draw a line in the sand; however, that language and the language of the definition of “direct competitor” still places a lot of power in the hands of the old employer, who probably thinks anything that moves is a direct competitor. As I wrote in my previous post on this subject, the language of this bill and the language in a non-compete agreement means what the employer says it means until a court says otherwise. In other words, the threat of suit is always there, which is one reason I’m not a fan of non-competes.
  2. The bill attempts to define what “proprietary or confidential information” and dismisses employees in “common callings” from the class of employees who might have knowledge of such information. Again, the effort is there, but the language of the bill lets the worried employee down.

I’d have to say that on the whole, I like this bill better than the first, but that I’m still worried about the basic idea of giving essentially a complete stranger power over the life of another complete stranger for one year or two years or a reasonable time period. What do I mean by that? Well, these agreements often come into being at the time a person becomes an employee.  At that moment, the new employee doesn’t know much about the employer–they’re virtual strangers in other words. I find that disturbing.

My View: Utah House Bill 251 – Post-Employment Restrictions Amendments

Scales of JusticeYesterday, I clicked on the Deseret News and discovered a story of intense interest to me, a story about the Utah business community’s reaction to House Bill 251. I’m a businessperson. I work with businesses in my law practice. I’m about as pro-business as they come. And yet, I support this bill.

A little background–a disclosure, if you will: I have some clients who are currently burdened by non-compete agreements, clients who are very talented in their own right and who would like to start their own businesses. And they’re struggling with how to proceed because those non-compete agreements are worded vaguely enough and their former employer is feisty enough, that if they decide to do anything even close to what their former bosses’s company does, they are confident they’ll be sued for breach of contract.

Here’s the problem. They want to do kind of what they did at their previous employer, but using different tools and working with different clients. In other words, they don’t want to violate the non-competes.  Problem is the tool they want to use is a “hammer,” and one of the tools their former employer sells is, you guessed it, a “hammer,” albeit a different type of hammer that does different things than my clients’ “hammer.” (By now, you’ve probably guessed that I’ve changed the name of the tool for confidentiality reasons.) Nevertheless, per their non-competes, their former boss could come after them under a contract provision that says the following:

“Competitive Products” means any products or services [the former employer] sells or sold or that are competitive with products or services that [the former employer] sells or sold while [my clients] worked for [the former employer].

Do you see the problem? The employer could call virtually any product/hammer my clients use a “Competitive Product” under this definition. The contract then states:

 . . . for a period of two years after my employment with [the former employer] terminates, I will not (a) design, sell, develop, license, or solicit orders for or sales of Competitive Products, nor will I (b) affiliate with any business, whether as an employee, owner, officer, director, or agent, that performs any of the actions described in (a) for Competitive Products. (emphasis supplied)

You know that they say, or at least should say, “if the vagueness doesn’t kill you, the overbreadth will.” The Deseret News and others apparently think such language is fair. What’s good for business and all that. To wit:

[These agreements] keep employees from taking trade secrets or information about company strategies to competitors. They allow companies to invest in training employees without the worry that a competing company can take advantage of such largesse by luring a trained employee away.

Generally, these agreements include reasonable time limits, after which employees are free to work for whomever they wish. (emphasis supplied) (“In our opinion: Response to bill regulating business contracts suggests House leadership is at odds with business community,” Tuesday, March 1, 2016)

The law firm Michael Best agrees, saying

Non-compete agreements protect the goodwill of a company, which is something that a nonsolicitation and confidentiality agreement cannot entirely do. A company’s protectable interests do not just include its trade secrets and confidential information, but also its goodwill. Goodwill is often associated with the people who work for the company, and customers associate certain names and faces with a particular company. The purpose of non-compete agreements is to allow employers to invest in highly-trained employees and to have them work directly with the community and customers, serving as the face of the employer. Employers invest significant time, money and resources in doing so. Employers should be entitled to protect these investments by not allowing the employees who are associated with a company’s goodwill to leave and immediately work for a direct competitor. (What Utah Employers Should Know about House Bill 251, February 22, 2016)

As one who has, with his clients, looked down the barrel of a 2-year prohibition on future employment in the same industry, I suggest the Deseret News reconsider the term “reasonable time limits.” Hardly. Not when you’re prevented from working an an industry you love, an industry you’ve trained for most of your adult life–and not just at your immediate past employer’s. Riddle me this Batman: After that two-year hiatus, how sharp will that employee’s saw be?

What is a direct competitor by the way? Inquiring minds would like to know before they venture out, only to get swatted down by a rolled-up copy of their non-compete agreement. Until a judge says otherwise, a direct competitor is what the former employer says it is. And if the former employer is a bully? (What’s the saying? “Power corrupts; absolute power coupled with a non-compete corrupts absolutely.”)

As for the attorneys at Michael Best, employers are not the only ones investing significant time, money, and resources in training. So do the employees. Do employers think their employees came to them as blank slates? Heck no. By the time they arrive on an employer’s doorstep, employees have likely done years of schooling, including post-graduate work in many cases. They’ve probably worked for myriad other employers, gaining valuable skills, skills they’ve brought to their new employer’s table. And because they signed a non-compete–probably in a rush, possibly in glee at finally having a new job, likely without understanding fully the contract’s meaning, and surely not comprehending its consequences–an employer, generally a person they barely know, gets to control them for another two years–after they’ve left his or her employ.

You can bet the employer has thought this all through.

The problem, folks, is the playing field is uneven: The employer has the job, the salary, and the benefits. The potential employee needs a job, the money, and health insurance. The employer has thought the non-compete issue through many times. For the potential employee, it’s probably a problem of first impression. It’s car salesperson vs. car buyer. Price negotiation, finance terms, do you want the 2- or 5- year warranty on that doohickey vs. huh? In other words, unfair.

Hey, I get the impulse. I even understand that in some circumstances such agreements make a ton of sense. But not in all. In fact, I’d guess they make sense in very few cases. That said, I’ve just thought of a couple of potential compromises, so the Senate can vote yes on this puppy:

  • If an employer feels strongly enough about requiring employees to sign such agreements, then require the employer to split the cost with the potential employee of one hour with an attorney versed in such agreements.
  • In the alternative: Utah maintains offices throughout the state to deal with workforce issues. Require employers to send potential employees to consult with someone at the Department of Workforce Services about the consequences of signing such a contract–before they sign.
  • Finally, my least favorite, but better-than-nothing option: Require the employer thoroughly disclose the possible consequences of signing a non-compete–again, before the potential employee signs.

In short, if we’re going to allow these agreements in Utah, if we’re going to allow a virtual stranger to have control over an employee for two years after they’ve left a job, let’s give some protection to that employee. Do that so that if and when the employee actually does sign the non-compete, there truly has been a meeting of the minds.

Quote for the Day

Plans to continue the [farming] firm may be frustrated by the lack of a competent management team. This situation may be avoided by taking steps, such as the following, to prepare for the future:

  • Stressing the idea of a team approach to making decisions.
  • Focusing on developing management skills.
  • Emphasizing cross-training.
  • Developing a system of routine communications.
  • Implementing routine, nonthreatening evaluations.
  • Agreeing to share in the general work load of running a farm or ranch.

In one instance, a highly promising plan for the three sons and a son-in-law of a generous father, who was able to pass 160 acres of land to each one debt-free, fell apart in less than a year because none of the four anticipated having to do the laborious work in producing crops, feeding and caring for livestock, and doing the marketing and record keeping involved in a sizeable operation.

Neil E. Harl, attorney, “Farm and RanchEstate (and Business) Planning—Part 1,” Farms and Ranches, (March 2015)

What’s on Your Family’s Wish List?

I listened to an interesting seminar yesterday titled “Estate Planning in Agriculture: Protecting a Way of Life” sponsored by WealthCounsel.com. Stan Miller and Robert Serio were the presenters. Serio covered the Farm Service Agency (FSA) Subsidy Programs and the Natural Resource Conservation Service (NRCS) Programs. He cautioned attorneys to be careful to not to do anything in an estate plan that would cause their farmer and rancher clients to lose benefits under those programs. Quite interesting. I briefly reported on the take-a-way yesterday. 

Then Miller took over beginning with what he called “The Farm Family Wish List”:

  • Don’t disqualify for USDA subsidy payments and other government benefits,
  • Keep the court system of of the family business,
  • Keep the farm in the family forever,
  • Treat non-farming family members fairly,
  • Avoid the need to liquidate the farm in order to pay for the cost of long-term care, and
  • Avoid estate tax.

To that list, I would add “Avoid capital gains tax on appreciated property.”

Does Stan’s list mirror yours? What would you add to it or subtract from it?

More importantly, what have you done to make sure your wish list becomes a reality?

Quote for the Day

“It’s easy to come up with new ideas; the hard part is letting go of what worked for you two years ago, but will soon be out of date.”  

Roger von Oech

Quote for the Day

“A good plan today is better than a perfect plan tomorrow.” 

George S. Patton

Water Rights and Water Wrongs

IMGP3444
A very interesting article about water at ProPublica.org
. Essentially, the pieces asks whether Wall Street–the good guys on Wall Street, of course–will help us achieve this:

 

[Hedge Fund manager] Disque Deane . . . supports the idea of setting aside what policy makers call “lifeline supplies” to guarantee households some minimal amount of water. But he says if markets jack up prices on higher levels of consumption, that may not be a bad thing. Anyone who wants to fill a swimming pool, water a golf course, or use billions of gallons of Colorado River water to grow cotton in the Sonoran Desert, he says, should have to pay for that privilege.

without our farmers and ranchers and small town America ending up like this:

Eventually, though, Crowley County passed a point of no return. With so much water gone [because farmers had sold their rights for the high prices offered], the empty irrigation ditches didn’t work; one lonely farmer at the end of the run would see all his water soaked up by the soil long before it ever reached his farm. And with fewer and fewer farmers around to share the expense of maintaining the ditch systems, the cost kept rising. Farmers had little choice but to sell, and all but 11 in the county did. The place literally dried up.

Kneeling in his driveway changing a truck tire last summer, Tomky’s son-in-law Matt Heimerich recalled what the town had lost. Though tens of millions of dollars in water rights were sold, few of the proceeds were reinvested in the community, he said. One by one, families moved away. The tomato and sugar factories shut down, and without goods to ship, the railroad stopped sending trains through town. Ordway’s car dealerships closed, and the tractor store went bankrupt. As though someone had pulled a bottom block out from a Jenga tower, Crowley County fell into an inexorable collapse.

“I couldn’t have eaten enough Prozac,” Heimerich said.

We don’t take water as seriously as we should. I think that’s self-evident. And pricing water differently and more sanely is, in theory, a good idea, so that we begin allocating it better than we do. But. There is always a but. And right now, I don’t know what comes after the but.

SAMSUNG

I know I don’t want farmers, ranchers, and small town America to disappear. Oh, and water rights are assets, assets that, as this story makes clear, are becoming more and more valuable as I write this. Assets that warrant good estate planning to preserve them for future generations. So there’s that.

On a related note, if you’re interested in water and water issues, may I recommend the always interesting podcast, Water Values hosted by attorney Dave McGimpsey? I discovered about a year and a half ago and listened to it regularly as I ran. As I ramped up my estate and business planning practice, I stopped listening, intending to return after I had things moving along in estate planning. I’m thinking it’s time to begin listening again, especially since farmers and ranchers make up such an important part of the two, dry, Western states that I serve.

Employee Background Checks: Be Careful Out There

Here’s an interesting podcast about the do’s and don’ts of employee background checks under the Fair Credit Reporting Act or FCRA. Enjoy now and avoid problems later.

A Suggestion or Two on Going into Business with a Friend

You and a friend think you want to go into business together. Maybe you’ve even decided as much–or are at least pretty comfortable with the idea. You feel compatible with one another. He has talents you don’t have. You have talents he doesn’t have. Together you would make a great team. Or would you?

May I make a few suggestions about what you should do before you ink a deal that puts your time, money, and reputation on the line with this would-be partner? And can I say that what I’m about to tell you applies whether or not the potential partner is your brother or sister, your best friend or recent acquaintance, a man or a woman?

1. Act like a banker. If you were going to take out a loan with your local bank, your loan officer would want a loan application, a balance sheet and income statement. She’ll want your last two or three years of tax filings. In some cases, she’ll want a cash flow statement. She’ll pull a credit report. If she’s good, she’ll check you out four ways from Sunday, and finally–if you’re lucky–she’ll have you sign on the dotted line–on the line at the end of a loan agreement and probably on a line at the end of a collateral assignment. And she’ll have some confidence that you’ll pay the loan back because she’s checked you out so thoroughly. IMGP1526

Should you or can you be so thorough with your potential partner? Yes. And he should be with you as well. I know of someone who was about a year into a partnership when he first learned that his partner hadn’t filed his personal income taxes for five years. A couple of years later the tax man (actually woman) descended on the delinquent partner and the firm’s business. The result was ruinous for him and very damaging for the partnership. So, act like a banker and know who you’re dealing with.

2. Go trippin’. Want to know your partner even better? Go on an extended trip with him or her. Doesn’t have to be far, but it should be for at least a week and require you to spend much time together in all sorts of situations, situations that will expose his and your irritating habits. By the time you return, you’ll know how he handles money, whether he’s a penny pincher or a spendthrift. You’ll have a better idea of his character, whether you can trust him to tell the truth or count on him to lie, even about the little things. And you’ll be in a better position to decide if that partnership is such a good idea.

3. Be clear and realistic about profit sharing. Before you go too far, make sure you both are clear about how profits will be distributed. I was partners with my brothers in an insurance agency years ago, an agency where the income flowed completely from commissions. Before we joined forces, we settled on a compensation scheme that we all thought was fair and which we hoped would avoid hard feelings. Basically, we decided to split all commissions three ways. We did this for reasons I won’t go into here. What we didn’t think hard about enough was whether that split would incentivize good work habits, whether it would get us all out the door and seeing the people. I know we all assumed that we would all work equally hard. To put it mildly, that was unrealistic of us.

We were three almost completely different persons. One of us was a great life insurance salesman, an area of relatively high commission per sale. Another was more interested in selling investments, an area where commissions per sale tended to be smaller. And me, I fancied myself a salesman, but I was more of the technician, the behind-the-scenes guy who designed the cases and made sure the details were taken care of. In other words, though are commission split was good in theory–the theory that said we were all going to sell a similar amount of insurance and investments–in practice it was very unrealistic. Problem was that once we started down that road, it was hard to change our arrangement. As a consequence, our partnership was not as profitable as it might have been. So, think about compensation and profit sharing really hard–and be realistic.

5. Vacations and other benefits that can bite you in the rear. As with profit sharing, be very realistic here. Take it as a given that you and your potential partner(s) will come to the table with different expectations about work and play, health insurance and 401(k)s, etc. etc. You all need to be up front and clear about your expectations. If you’re not, trouble will ensue. Count on it.

6. Family matters matter–to some more than others. You have promised your daughter that you’d never miss a single one of her volley ball games while she is high school. Your potential partner hasn’t attended a single baseball game his son has played in. See the problem? If your approaches to family differ significantly, you may want to think twice about going into business together. That should be obvious, but to some it is not.

I could go on and maybe will in another post, but you get the idea: Those planning to go into business with one another need to have multiple intimate conversations about some very important issues. All cards must be on the table before you commit time, money, and reputation to the proposed business venture. All of them. No secrets. None.

You’ll be happier and more successful in the end if that’s the case. Trust me.

 

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