AMM Blog

Welcome to the AMM Law Blog, a tool to help you keep up to date on current legal developments over the broad spectrum of our practice areas.  We welcome your comments and suggestions to create a dynamic forum that will be of interest to readers and participants.

Part 2 of our Noncompete Series will focus on employers.  Noncompetes, when well drafted, are a powerful tool to protect customer relationships, confidential information, trade and training secrets, and key employee relationships.  But, the law does not favor these agreements, so drafting requires care, and, as a practical matter, timing is everything.  

While noncompetes are disfavored and maligned, they do serve useful purposes for certain employers.  There are two types of restrictions that such agreements can impose:  general prohibits on certain kinds of competition; or, prohibitions on soliciting customers, vendors, employees, contractors, or other valuable relationships.  For the most part, restrictions on soliciting customers, employees and other key relationships are easier to enforce.  They allow the employee to continue to work, and protect those relationships for the employer.  For some employers, these restrictions, tailored to their business and in place for a sufficient period of time, are enough.  Generally, these restrictions tend to last a year or perhaps two.  Employers will need to weigh the dangers of making the restriction too long, and thus unenforceable, as against the time it takes for those relationships to go stale.  

Restrictions on competition generally are another matter.  The general principle applied by the court is this:  a court will not enforce the restriction if it is not designed to protect a legally recognized protectable interest, renders an employee unable to pursue his chosen profession, or appears designed to eliminate fair competition.   The court will only act to protect the following interests:  trade secrets or confidential information, specialized training the employee received from the employer, or customer good will developed using the employer’s resources.  Given these competing factors, it is best to narrowly tailor the restriction to the employer’s business.  An employee is more likely to comply with such a restriction (thus avoiding court), and a court is more likely to enforce it as written.

Employers next must consider when to ask employees to sign noncompetes.   These agreements are enforceable when signed at the beginning of the employment relationship.  A noncompete executed by an employee after the employee has worked for the employer for a period of time is not enforceable unless accompanied by a raise or promotion, or some other benefit.  This creates a practice problem for employers.  Often, a noncompete is not required at the beginning of employment, but circumstances change:  employees are promoted, the nature of the business changes, the employer becomes more sophisticated about its internal procedures, for example.  A skilled employee with options in the marketplace may very well refuse to sign such a restriction where the new consideration offered is simply not worth it.  So, for example, while a bonus of $500 is enough to make the agreement legally enforceable, it may also not be enough to cause the employee to sign.  This creates a difficult situation for the employer – should the employer terminate and lose the key employee, or allow the employee to stay without a noncompete?  

Creating a noncompete program for employees is complex, and many of the issue are interrelated.  In addition to the legal concerns, employers must consider what concerns and relationships truly require protection, as well as retention and morale issues. We have helped many employers sort through these issues and are uniquely equipped to help businesses navigate difficult noncompete issues.  

  


In the corporate setting, it has long been the case that a shareholder can assert a claim on behalf of the corporation when management of the entity refuses to do so – a so called derivative action. Under Pennsylvania’s limited partner statute, a partner (general or limited) can now do the same. A derivative action is one brought by a partner to assert a claim on behalf of the partnership where the general partner refuses to do so.
To bring a derivative action, unless the requirement to do so is excused, the limited partner must first make a demand that the general partner take steps to assert the partnership’s right. The demand must be in “record form” and “give notice with reasonable specificity of the essential facts relied upon to support each of the claims made in the demand.” As will be seen, it is important to carefully craft the demand, since the scope of the derivative claims that can be asserted is limited to those claims identified in the demand and because making the demand also temporarily tolls the statute of limitations on such claims.
After receipt of the demand, the general partner may choose to appoint a special litigation committee (SLC) to investigate the claims asserted in the demand and determine whether pursuing any of them is in the best interests of the partnership. The statute gives the general partner wide discretion to appoint members of the committee, so long as they are not interested in the claims and can exercise objective judgment. Indeed, other limited or general partners may be committee members.
The SLC is then charged with conducting an investigation. The scope of that investigation is limited by the claims set forth in the demand letter and is subject to the good faith requirements of the statute. Within these limitations, the investigation conducted is left to the committee.
Upon conclusion of the investigation, the SLC can make one of several recommendations authorized by the statute. These range from recommending that the claims not be brought (and if brought, discontinued) to recommending that the limited partnership itself assert them. The SLC has ultimate power over the claims as Court is bound to enforce its decision with judicial review limited to whether the members of the committee met the qualifications required under the statute  and whether the committee “conducted its investigation and made its recommendation in good faith, independently and with reasonable care.”
I recently used the SLC procedure in a case involving a limited partner who owed a large sum of money to the limited partnership. The general partner authorized a claim against the limited partner to collect the balance due.  The limited partner defended the case by asserting that the general partner was improperly appointed and therefore did not have authority to commence the collection action. The limited partner issued a demand for removal of the general partner under the act. I suggested that a special litigation committee be appointed. In this instance, I suggested that one committee member be a retired judge from the county in which the action was pending to defuse any argument that the SLC was not qualified or that it did not act in good faith and independently. As I represented the limited partnership, separate counsel was engaged to represent the general partner before the SLC.
In proceedings before the SLC, the limited partner’s counsel sought to expand the claims to include mismanagement and breaches of fiduciary duty alleged to have been committed by the general partner. Illustrating the importance of properly crafting the demand, the SLC refused to consider any of these expanded claims, holding that its review was limited to the issue raised in the demand – whether the general partner was validly appointed. .
Ultimately the SLC found that the general partner was validly appointed and directed that no claim be brought on this issue. As this claim had already been asserted, the limited partnership was preparing a motion to be filed with the Court to enforce the SLC’s determination when settlement negotiations, which had stalled over a year before, resumed, leading to a prompt settlement. The entire SLC process, from demand letter to decision, took four and one half months – a much quicker resolution, and at less cost, than fully litigating the issue.
The SLC procedure allows an independent review of the merits of derivative claims. If appropriate, such claims can be asserted on the partnership’s behalf or by the partnership itself. However, where such claims are found to be without merit, they can be summarily dismissed. The SLC is a powerful tool to address the merits of derivative claims on an expedited and reduced cost basis.

Blogger Bios

  • Alan Wandalowski Alan Wandalowski
    Alan concentrates his practice in Estate Planning, Estate Administration, Elder Law, Estate…
  • Bill MacMinn Bill MacMinn
    Bill concentrates his practice in the area of litigation, including Commercial Litigation,…
  • Elaine T. Yandrisevits Elaine T. Yandrisevits
    As an estate planning attorney, Elaine Yandrisevits is committed to guiding individuals…
  • Elizabeth J. Fineman Elizabeth J. Fineman
    Elizabeth Fineman concentrates her practice on domestic relations matters and handles a…
  • Gabriel Montemuro Gabriel Montemuro
    Gabe’s practice focuses on litigation, including commercial litigation, personal injury, estate and…
  • Jamie M. Jamison Jamie M. Jamison
    Jamie Jamison is a supportive, knowledgeable advocate to clients experiencing the challenges…
  • Jessica A. Pritchard Jessica A. Pritchard
    Jessica A. Pritchard, focuses her practice exclusively in the area of family…
  • Joanne Murray Joanne Murray
    Joanne concentrates her practice in the areas of Business Law, Business Transactions,…
  • John Trainer John Trainer
    John’s concentrates his legal practice in estate planning, estate administration and elder…
  • Mariam Ibrahim Mariam Ibrahim
    Mariam Ibrahim is dedicated to helping clients and their families navigate the…
  • Michael Klimpl Michael Klimpl
    Michael’s practice areas include Real Estate, Municipal Law, Zoning and Land Use, Employment…
  • Michael W. Mills Michael W. Mills
    Mike is devoted to helping businesses build value and improve working capital,…
  • Patricia Collins Patricia Collins
    Patty has been practicing law since 1996 in the areas of Employment…
  • Stephanie M. Shortall Stephanie M. Shortall
    Throughout her career, Stephanie has developed a practice focused on advising closely…
  • Susan Maslow Susan Maslow
    Sue concentrates her practice primarily in general corporate transactional work and finance…
  • Thomas P. Donnelly Thomas P. Donnelly
    Tom’s practice focuses on commercial litigation and transactions. In litigation, Tom represents…