Non-Compete Agreements: Preventative Medicine for Your Business

Transcription:

Tom Foster: Hello, everybody. I’m here, Tom Foster, for one of our new Tom Talks to Smart People series. Today, on the video, I have a very old and dear friend — well, he’s not old; he’s seasoned. I got my buddy here, Jonathan Cooper, from up in New York. He’s an attorney.

How long have you been practicing law, Jonathan?

Jonathan Cooper: A little over 20 years.

Tom Foster: So tell me a little bit about the kind of law you practice and about your experience?

Jonathan Cooper: The biggest challenge that I deal with these days has to do with non-compete agreements, litigation of non-compete agreements, and increasingly by virtue of litigating those cases and seeing what tends to stand up in court as opposed to getting knocked out. I started to draft more and revise a lot of non-compete agreements—particularly for small business and in the last couple of years for medical practices and dental practices.

Tom Foster: Okay. So you’ve been doing this for a while, and you have seen a lot of business guys like me and other businesses like lawyers, doctors, and specifically dentists who make this mistake over and over again. Right? And they come to you with their tales of woe, and you got to basically fix something that’s already happened. And the point of this conversation is to kind of plan ahead.

Jonathan Cooper: Preventative medicine, for lack of a better term.

Tom Foster: That’s good. So tell me: what is a non-compete? Give me your legal definition. Why should any of us care? Motivate me to do it.

Jonathan Cooper: A non-compete is an agreement where you say this employee works for you is not going to work in that same niche industry for a certain amount of time and within a certain distance from of where your primary offices are located. Now, as a jumping off point, I should also mention that there is something else to consider. As opposed to a non-compete, there is a thing called a non-solicit. A non-solicit means that you may be able to work in that same industry, but you cannot touch my client base, and you cannot touch my employees. And that may not be limited in geographic scope or an amount of time.

Tom Foster: I can choose an example that just happened to me about this. I have a bank representative at PNC bank who has been our representative for years—a very nice lady—and set us all up with our accounts, and then she just disappeared. She was gone; didn’t hear from her.  A couple of years later here she has taken off her PNC hat, and now she has her Capital One hat on, and she is going through her Rolodex of everybody she had signed up. Now she is coming to me, and I have no particular allegiance with PNC (it’s a big dumb bank), so is Capital One, but I have a lot of considerations. With her bank, it might be more attractive to me. The point is that is, that’s what we are trying to protect. Right? And that’s all negotiable terms.

Jonathan Cooper: Exactly. With certain limitations, we are going to get to, yes. You mentioned a question earlier, “Why should you care?” And the reason why you should care—particularly if you are a medical practice or in the intellectual property sector or tech sector—is because you will typically have invested 20 or 30 years of blood, sweat, and tears and capital. You have built up this client roster. That is usually the goodwill of a business—the most valuable asset you have. And if you are smart and you have built the business with your own two hands, that is the thing that will theoretically keep you up at night. “Oh my god, what happens when someone starts to leave? I had this employee for a long duration, I paid them all this money, and I taught them everything they know. Now they can pick up and take that with them?” No. They didn’t invest their money and built this from the ground up with their two hands. If that doesn’t keep you up at night, then I don’t know what will.

Tom Foster: Nothing is perfect. Human beings are human beings. They can still take what they learned and go across the country and compete over there. It’s a tricky thing because obviously, you want to teach your people. Everybody thinks your people are loyal to you, and you are loyal to them and all that kind of stuff, but ultimately everyone has their own self-interests that they are looking at.

Jonathan Cooper: Everyone has their own family and their own thing. Just so we understand, contracts are not for when things go right; they are for when things go wrong. You can have someone who loves you for 20 years and all of a sudden you have a falling out. This happens all the time. That’s why you have the contract. That’s there to give you some measure of protection. Is anything perfect? No.

Tom Foster: I like that. I’m going to use that again. Did you make that up?

Jonathan Cooper: Actually, no. One of my best friends coined that phrase. I love it.

Tom Foster: Very good. Well, I’m giving it to you in my world. Okay, we care because we are trying to protect our business and you got to create some strong language there. Right?

Jonathan Cooper: Right. It goes back to that whole adage (I might be getting this wrong), I think the phrase is “Pigs get fed, and hogs get slaughtered.”

Tom Foster: You know who tells me that all of the time? My CPA.

Jonathan Cooper: But it’s true—particularly in this realm if you try to bite off too much (I’ve seen this a lot) when they put these overboard agreements in there—where they cannot tie their shoelaces without asking you. But if you are a reasonable guy who says, “You want a better job and a better pay, I’m not standing in your way, but don’t take my client base and don’t take my employees.” A judge will be far more inclined to say, “I’m going to let that one stand.”

Tom Foster: Very good. That’s right. It’s all negotiable. Usually, you want to do this when you are hiring them—sign here—and they are excited to come on board. It’s like a business prenup.

Jonathan Cooper: Yes. In fact, I’m glad you mentioned that. There are jurisdictions like in Illinois. If you don’t do it when you first hire them, unless you give them some additional compensation, you cannot then give it to them two years in. A lot of that is jurisdiction dependent. In New York, for example, you would be able to give this to them and say, “If you don’t sign this, your job is over.” But in a lot of other jurisdictions, without adding some additional money or some other benefit, you will not be allowed to do it. You want to do that at the get-go.

Tom Foster: For those of you listening in that might be mildly interested, but like most of us, we don’t think about the parachute until the plane is going down. This is one of those parachutes; this is insurance. It is one of those things that you got to do in advance. Share with me a horror story about when somebody did not have a non-compete in place.

Jonathan Cooper: I’ll give you a great example. There is a case in one of New York appellate courts that come down in 2011, called “Go Smile Against Levine.” Now the Levines are a husband and wife team. They developed this proprietary thing to sell teeth whitening and oral hygiene products, and it was very successful. They turn around and sell the company, and as part of that deal (which typically happens), they stay on because they are the ones with all the know-how and they are getting paid a nice six-figure salary to stay on as a consulting contract. The nutshell version is, they had a falling out with the new owners. What they were doing is, they were taking the clients—which goodwill is what they sold the business for — and then all of a sudden they are taking all of these clients across the street to a competing business that they formed while still working for the company. And there were a lot of hoops the court had to jump through to allow the claim against them to survive because procedurally there were a lot of problems with the claim. But it could have turned out a lot worse for them. One thing is for certain, Go Smile spent a lot more money than they really should have had to because they didn’t have some of the protections that they would have liked to have in place.

Tom Foster: That’s a great point. No matter what, you will have to spend legal fees. You will have to hire a lawyer if you get in a fight.

Jonathan Cooper: We’re not cheap.

Tom Foster: You are not cheap. I’m going to tell you. I love you guys, and we all need you when we need you, but nobody likes to pay that bill. You got to think about it. Even lawyers have to hire lawyers, and they don’t want to pay that bill. But it’s because you guys are fighting the fight, going in there, and doing your thing. The point you are making with all this is that you don’t have to pay as much as all these other people if you have better protection.

Jonathan Cooper: To be clear, you still have to pay money, but you are probably talking about a fraction of what you otherwise have to spend. And it’s recognizably valued. I just had a conversation with a guy last week about a non-compete I did for him, and he’s hawking me about the bill, “Oh my gosh, how long does this really take you to do?” Then I asked him, “Year one, how much will it cost you if this guy violates the non-compete?” And he said, “probably about $300,000 to $600,000.” I said okay, “And you are bothering me about a bill about $2,000. Think about that.”

Tom Foster: I just went through that with an attorney—$600 an hour. To me, what she saved me from, it was well worth it. I got a $5,000 bill instead of I was going to have to pay $20,000. I would rather pay her, and it was less. It’s math. It’s loss of business.

Jonathan Cooper:  You’re right. The time that you are doing that, you are not working on your business or in your business.  It’s a straight loss.

Tom Foster: So why don’t you tell me about the three best ways to protect the patient roster.

Jonathan Cooper:  This is true across many different disciplines. Obviously, we mentioned that a contract isn’t for when things go right; it is for when things go wrong. You still have to have policies and procedures and structures in place to try and make sure when people part ways—and they do—that it’s done as painlessly as possible. But, obviously, preventative medicine is the best thing. Number one is, if you have a friendly work environment, no one is really going to want to look to hurt you. And these are obvious things. Number two would be if something is legitimately proprietary (legitimately confidential), it’s not good enough for you to take a stamp that says confidential on it. No. If it’s really confidential, have password protections, have limited access, and have limited administrators. So that way later, if you have to slug it out, you can point out to the court that no one could have gotten into the database or what have you unless they were actively looking to do something wrong. And the third thing is to have a structured off-boarding process. What this means, for example, is you have a sit down with the HR manager or the office manager, and they turn in their keys, their pass keys, and their email access would get turned off. It has to be done in a logical, professional, nice way. Again, don’t kick anybody on the way out. If you treat them disrespectfully, they are going to look to hurt you. Again, be logical, be smart, and be nice.

Tom Foster: So the big thing is onboarding process, getting these processes in place to protect you, and off-boarding if they leave. You’re right. Be pleasant, even if you have to let people go. It’s not a personal thing; it’s time to go, whatever. Do what you can (as a business owner it’s not always easy) to make sure that you aren’t pissing people off—although sometimes they deserve it.

So there are different rules for different states that they would want to talk to you about, and you can give them advice no matter what state they are in. Correct?

Jonathan Cooper:  Right.

Tom Foster: Very good. So, in order to reach you, Jonathan, because I think they can just call you and get a quick little consultation, and you give them some information and you guys can figure out if you want to play together or not. Right?

Jonathan Cooper:  That’s right.

Tom Foster: Your number—we’ll put it on the screen here—is (516) 791-5700. Right?

Jonathan Cooper:  That’s correct, yes.

Tom Foster: I know because it took us a long time to schedule this call how busy you are. You have a lot of these cases going on and a lot of this work going on. So they should call you sooner than later. If they want to check out your book or get more information, we got this fancy URL here: www.Coopersnoncompete.com. I like that. You go to that URL to download his book, or you can sign up for Jonathan’s newsletter. He’s a very smart guy, a very pleasant man. He’s singlehandedly trying to populate the country. How many are we at?

Jonathan Cooper:  Last time I was told, it was nine.

Tom Foster: Nine kids. So that’s like Ben Glass. But that’s all you on nine. Right, Jonathan?

Jonathan Cooper: That’s what my wife is insisting on. It’s her story and she’s sticking with it.

Tom Foster: Alright, buddy. Any last words for our group?

Jonathan Cooper:  If they want to email me, they can also email me. That’s a great way to get me because as you mention, I am in court typically a few days a week. So my email is [email protected]. That is a fantastic way to reach me. Typically given that the daytime is very busy, and I assume that doctors listening to this call are busy with patients, I try to return their calls at the end of the business day—typically a little bit after 5 o’clock when it’s a little bit quieter.

Tom Foster: I’m just reading some of these notes that we did, and this is a good thing guys to make you at least talk to Jonathan. It doesn’t cost you anything to ask him, “What’s up?” If you don’t do this, or if you don’t have this in place, what you can expect as a result is to get the recovery of your legal fees. So if you got a good one written up, he’s free. Look at it like that. Right? So if this happens to you, you’re covered. So it’s like insurance. Liquidated damages and injunction relief. Those are some legal words that have meaning to me, but as long as you can make them go away, Jonathan, I’d be a happy guy.

Jonathan Cooper:  The other thing is that people who either download the book or email me in response to this webinar, they do get a $500 discount off of my normal price for doing one of these things.

Tom Foster: Wow. I didn’t know you were going to do that. It’s very generous of you. So guys take advantage of that because I’m not going to let it be that much longer. We’re going to stop that. So get it before I edit this out. Anyways, Jonathan, great talking to you; great seeing you.

Everybody, Jonathan Cooper did this from his conference room with his iPad. I have all this technology around, and there he is. So if you’re looking for some help, he’s the guy. Thanks, buddy. Talk to you soon.

Jonathan Cooper: Thanks, Tom.

Tom Foster: Take care everybody. We’ll see you next time.    

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