by Chris SwiecickiWhat to Do Now that the FTC Has Outlawed Noncompete Agreements
The Federal Trade Commission (FTC) recently issued a “final rule” that bans noncompete agreements for employees, making them largely unenforceable. This new regulation significantly impacts how businesses can protect their interests, as noncompetes have traditionally been a common tool to prevent employees from joining competitors or starting rival businesses.
However, companies still have effective strategies to safeguard their trade secrets, client lists, and other confidential information. Here is some practical advice on maintaining a competitive edge while complying with the new legal landscape.
Understanding the FTC’s New Rule on Noncompetes
The FTC’s new rule banning noncompetes marks a significant shift in employment law by banning noncompete agreements for most employees. Noncompetes are clauses in employment contracts that restrict employees from joining a competitor or starting a similar business within a specific timeframe and geographic area after leaving their job. Companies traditionally used these agreements to protect sensitive information, prevent talent poaching, and safeguard their market position. Noncompetes aimed to reduce the risk of intellectual property theft and loss of clients to competitors by limiting an employee’s ability to work in similar roles.
However, critics argue that these agreements stifle competition, limit employee mobility, and suppress wages. The new FTC non-compete ban, therefore, seeks to enhance economic mobility and job market competitiveness by rendering most noncompete agreements unenforceable, particularly for non-executive employees. This change requires businesses to explore alternative methods for protecting their interests without relying on noncompetes.
Protecting Trade Secrets and Intellectual Property
With noncompete agreements no longer enforceable, businesses must turn to other legal protections to safeguard their sensitive information. Trade secrets—confidential business information that provides a competitive edge—remain protected under the law, even after an employee leaves the company. Companies can still take legal action if a former employee misuses or discloses these secrets. To reinforce these protections, businesses should ensure they have strong internal policies and employee training programs on confidentiality and data security.
Implementing robust nondisclosure agreements (NDAs) can also help protect valuable information, as NDAs expressly prohibit employees from sharing confidential information with competitors or using it to their advantage. Additionally, careful management of digital access to proprietary information, including client lists, can further prevent unauthorized use or dissemination. By focusing on these safeguards, businesses can continue to protect their assets in a post-noncompete landscape.
Alternatives to a Noncompete Agreement
With the new rule banning noncompetes, businesses need to have a strategy for protecting key trade secrets and client lists.
One of the best alternatives to a noncompete agreement for businesses is the nonsolicitation agreement. Nonsolicitation agreements prevent former employees from enticing clients or other employees to leave the company and join a competing business. Unlike noncompetes, which broadly restrict where an employee can work, nonsolicitation agreements are more focused, explicitly prohibiting actions that could harm a company’s relationships and revenue.
These agreements are often easier to enforce in court, as they target specific competitive behaviors rather than general employment. To maximize their effectiveness, businesses should clearly define the scope and duration of nonsolicitation agreements, specifying which clients and employees are off-limits and for how long. By implementing well-crafted nonsolicitation agreements, companies can protect their client base and talent pool, ensuring that former employees do not undermine a company’s hard work by stealing away clients and employees.
In the absence of noncompete agreements, fostering a positive workplace culture and enhancing employee retention has become even more critical for businesses. Companies can reduce turnover and minimize the risk of losing valuable talent to competitors by focusing on employee satisfaction and engagement. Strategies to boost retention include offering competitive salaries, robust benefits packages, and career development and advancement opportunities.
Creating a supportive work environment that values open communication, recognition, and work-life balance can also significantly enhance employee loyalty. Investing in these areas helps retain top talent and builds a more committed and motivated workforce. Companies prioritizing employee well-being are more likely to foster a sense of loyalty and commitment, reducing the need for alternatives to a noncompete agreement. In a market where talent mobility is increasing, focusing on retention and workplace culture can be a powerful supplement to traditional noncompete strategies.
Legal Compliance with the FTC Noncompete Ban
With the FTC noncompete ban businesses must stay informed about the evolving legal landscape to ensure compliance and avoid potential pitfalls. Regularly reviewing and updating employment contracts and policies to align with the latest regulations is essential.
Companies should seek guidance from legal professionals to navigate these changes effectively and develop new strategies for protecting their interests without relying on noncompete clauses. Additionally, staying informed about state-specific regulations, which may have different requirements and interpretations of employment law, is critical.
Leveraging legal resources, such as workshops, webinars, and legal counsel, can help businesses stay ahead of regulatory shifts. Noncompliance can lead to costly legal battles and damage a company’s reputation, so proactive legal management is key. By remaining vigilant and adaptable, businesses can protect their proprietary information and maintain their competitive edge even as regulations change in unforeseen ways.
How Swiecicki & Muskett Helps with Noncompete Agreements
Finding the best alternatives to a noncompete agreement depends on context—specifically, a company’s needs, the relevant laws based on location, and the industry in which you operate. Failing to account for that context can lead to your hard-earned clients and trade secrets going unprotected.
At a large law firm, you might get passed between junior attorneys trying to minimize the time they spend on your case, and they may never fully understand the full context needed to keep you safe. At Swiecicki & Muskett, we assign you a single attorney who is with you every step of the way, and who will take the time to get to know your company and industry. With a specialty in contract law, we have ample experience helping companies ranging from small to Fortune 500 protect their interests. For a free, no-obligation consultation on your post-noncompete needs, contact us today!
* Cover photo by RDNE Stock project via Pexels
by Chris SwiecickiWhen is the Right Time to Bring in an Attorney for a Business Contract?
Every business, no matter how small, will eventually need to enter into some type of transaction that requires a formal contract. Small business owners may be tempted to draft a contract themselves or choose from online sources that promise easy-to-use contract templates. They may not feel the need to involve an attorney unless something goes wrong.
While we understand the desire to save time and money with a DIY approach, a one-size-fits-all solution can not possibly capture the nuances of every unique business transaction. There are very good reasons for contacting an attorney early in the process rather than waiting until there is a dispute, even if only for a quick review. Understanding when it’s best to involve a professional will help prevent errors, misunderstandings, or omissions that can lead to costly outcomes.
Four Key Times to Involve an Attorney
Unless a business is big enough to have its own legal department or a corporate attorney on retainer, the question of when to bring in an attorney for a business contract is bound to come up eventually. Even in-house counsel sometimes brings in an outside specialist. Some contracts might need the expertise of a patent lawyer or tax attorney, for example.
While having a lawyer draft or review every single contract might mitigate the majority of risk for a company, it isn’t always feasible—or necessary. Executing simple contracts like a bill of sale or a standard lease agreement may not require a professional’s help.
In general, a more realistic answer of when to call an attorney is whenever a contract involves complex ideas or when the terms of the agreement have high stakes. For example, ironing out the complicated details of a merger or acquisition is something that definitely needs an attorney’s expertise. So does something like negotiating the terms of a licensing agreement for an invention. In both examples, a mistake in the contract could cost millions of dollars, lock one or both parties into an unfavorable situation, or put the company’s future at risk.
We have identified four times when it is in a business owner’s best interest to get professional contract help.
1. When Asked to Sign a Contract
When presented with a contract, the need to have a lawyer review it increases along with the stakes or dollar amounts involved. For example, a multi-year service level agreement with a retailer for your company’s product merits an experienced lawyer’s opinion. On the other hand, an agreement with an independent contractor for a single project in exchange for a set fee is fairly cut and dried.
Still, there is value in having an attorney review a contract to make sure there are no surprises. They can explain the terms so their client completely understands their rights and obligations as well as what will happen if one party does not meet their part of the bargain. If a business owner foregoes the help of a professional, there could be unanswered questions. For example, can the independent contractor in the above example be compelled to complete the work? When is payment due and what type of penalty or interest will be charged if it is not paid on time?
2. When You Want to Formalize an Agreement
An oral agreement can be legally binding. But you’ve probably heard the saying “A verbal contract is not worth the paper it’s written on.” Written contracts lay out the details of an agreement to avoid confusion and safeguard the interests of both parties in a court of law. As soon as it is evident that an agreement with another party needs more than a handshake and a promise, it is time to draft a formal contract.
As with #1 above, the need for an attorney will depend on the importance and complexity of the transaction. Hiring an attorney to draft the document will ensure that nothing is missed and that the terms have the intended results for both parties. As an alternative, a business owner could ask a lawyer to review and recommend changes to a document the business owner drafted.
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3. When a Business Changes
The two previous examples involve new contracts. Existing contracts should be reviewed periodically, especially when either party undergoes a major change. For example, a company expanding its services to include delivery might consider tweaking the terms spelled out in its client contracts. Will they promise delivery in a certain time frame? Will there be an additional fee? What recourse does a customer have if they do not receive their items? A contract attorney can make sure the wording still represents the company’s best interests while covering all new considerations.
4. When a Market or Industry Changes
Just as with company changes, similar adjustments should be made to contracts when a business owner anticipates industry changes. Consider 2023’s labor dispute between the Writers Guild of America and Hollywood studios. The increased use of Artificial Intelligence in the industry triggered the WGA to demand changes in how their work was represented and compensated.
Similarly, any company might see changes ahead for the type of work it does. An experienced contract attorney can structure a contract and adjust its language to accommodate changes when necessary.
Pitfalls of a Poorly Drafted Contract
A good contract safeguards the rights and clarifies the obligations of both parties. A poorly drafted one, however, could result in a number of unpleasant outcomes. There could be few options in the case of a breach. A business might not get paid, may be forced to provide unanticipated products or services, or could end up in litigation.
All of these situations could end up more expensive and disruptive than hiring an attorney to draft or review the contract in question. By bringing in an attorney for a business contract—and bringing them in early in the process, business owners can rest assured that their contracts won’t have the following issues:
- Ambiguity. Every contract can be subject to interpretation, but clear, concise professional language will eliminate confusion.
- Not enforceable. Contracts must follow the laws of the jurisdiction to which they apply. For example, requiring a non-disclosure agreement from an employee in a state where NDAs are not legal, would not hold up in court.
- Omitting key points. Attorneys know how to close loopholes and will think of issues their clients might not anticipate. For example, adding an arbitration clause to a contract allows disputes to be handled out of court. And a termination clause gives parties a way out in certain situations.
- Unforeseen risks. Not considering a variety of eventualities can increase risk exposure. That said, a written contract naturally includes an Implied Covenant of Good Faith and Fair Dealing for both parties’ protection.
While any contract can suffer from issues that could lead to litigation, a professional contract attorney is less likely to make a mistake than a layman. Lawyers understand the meaning and implications of contract language and how the document should be structured.
What a Contract Lawyer Brings to the Table
Hiring a contract attorney puts business owners at an advantage over those trying to draft a document themselves. An experienced lawyer will take the time to understand their client’s goals and the purpose of the contract. They can prevent a business owner from entering into an agreement that does not serve the interests of the company, or worse, harms it.
It is important to find an attorney familiar with the local jurisdiction and who has participated in litigation when contracts are breached. This experience gives them the ability to craft a strong document that provides the assurances and protections the company needs.
A Contract Attorney Can Safeguard Your Business Interests
Whether a business contract is an occasional necessity or part of day-to-day operations, these documents and their contents should not be taken lightly. Errors, vagueness, or the exclusion of important points can lead to costly mistakes and even litigation. Often the expense and inconvenience are much greater for a company than hiring a lawyer from the start.
For all but the simplest agreements, contact an attorney who specializes in contract law like Swiecicki & Muskett. The higher the stakes of a transaction, the more important it is to get professional advice. The future of your business could depend on it.
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by Chris SwiecickiUnderstanding Sandbagging in M&A Transactions
In the context of buying a business, a “sandbagging” Buyer is one who is (or becomes) aware that a specific representation or warranty made by the Seller is false—but instead of telling the Seller this fact, the Buyer completes the transaction. The Buyer then seeks post-closing damages against the Seller for the breach.
Sandbagging is a frequent occurrence in acquisitions. It happens so often that transactional planners have made a “sandbagging playbook” that tells people how to handle the issue, depending on which side of the deal they’re on and whether the state law governing the agreement is “pro-sandbagging” or “anti-sandbagging.”
Competing Interests When it Comes to Sandbagging Clauses
More importantly, the Buyer and Seller in a deal have different competing interests, and so each has their ideas on handling the sandbagging clause.
So, while there are many different ways to prepare for sandbagging, most strategies boil down to three essential elements:
- Including a clause in the acquisition agreement that says the Buyer can seek a claim even if the Buyer knew ahead of time that the Seller’s representations and warranties were false (i.e., sandbagging is permitted)..
- Including a clause in the acquisition agreement that says the Buyer can’t seek compensation for a breach of the Seller’s representations and warranties if the Buyer knew the representations and warranties were false ahead of time (i.e., sandbagging is explicitly forbidden).
- Saying nothing about the issue. In this case, the contract defaults to whatever state law says.
When the Buyer wants a sandbagging clause, and the Seller wants an anti-sanding clause, a typical compromise is to leave both clauses out of the purchase agreement. However, in certain states, if the agreement makes no mention of a sandbagging clause, sandbagging is permitted. So from the Seller’s perspective, mentioning the clause is only sometimes considered an equal compromise.
As seen in Arwood v. AW Site Services, LLC In the Court of Chancery of Delaware, the state respects contracting parties’ right to enter into good and bad contracts. The Delaware Supreme Court has yet to decide if a party can win a settlement for a broken promise if both parties knew some of the promises weren’t true at the time of signing.
Sandbagging in the Context of Due Diligence
Due diligence is expensive, so parties to contracts in mergers and acquisitions often try to ensure a Buyer doesn’t have to check every detail of a Seller’s business.
Pro-Sandbagging
A pro-sandbagging clause enables a buyer to pursue compensation for a violation of a representation or warranty even if the Buyer had previous knowledge that the statement was untrue. The right to a remedy, for instance, is not affected by any knowledge acquired (or capable of being acquired) before or after the execution and delivery of the agreement or the closing date with respect to the accuracy or inaccuracy of such representation [or] warranty.
In the Buyer’s eyes, a pro-sandbagging clause helps assure that it will benefit from its bargain. Based on the Seller’s promises and warranties, the Buyer assumed that its target had a particular worth. Buyers claim that if the statements are untrue, they overpaid and should receive compensation. Additionally, buyers contend that pro-sandbagging agreements give the parties more assurance. They eliminate obstacles to recovery, for instance, a protracted and expensive argument over the Buyer’s prior knowledge during the indemnification process.
Anti-Sandbagging
An anti-sandbagging clause would prevent a buyer from pursuing reimbursement in cases where the Buyer knew (or, depending on the clause’s scope, had cause to know) that a representation was untrue before closing. The contract can provide, for instance, that the Seller is not responsible for “any Losses originating from or attributable to any inaccuracy in or warranty in this agreement if the party claiming indemnification for such Losses had Knowledge of such breach before Closing.”
The parties may restrict the scope of the agreement to knowledge received by a particular group of people or to knowledge obtained before a particular date.
These days, anti-sandbagging clauses are rare. However, sellers contend that these clauses may encourage collaboration between the sale parties in specific situations. If, for instance, an executive or owner plans to stay with the acquiring company after the acquisition, the persistent danger that the Buyer may sandbag the Seller may result in conflict and distraction. Sellers might also contend that they should be allowed to fix any problems the Buyer learns about before closing.
Key Takeaways
By getting the Seller’s promises, the Buyer puts some risks on the Seller. As a practical matter of business, a Buyer doesn’t have to check and make a provision for every aspect of the company’s finances because it knows it can take legal action against the Seller if the claims turn out to be false. For example, false or misleading statements about the company’s financial health or expectations of future performance.
A Seller can’t go back on the promises it made because the Buyer’s due diligence didn’t find out they were false. Since the Seller promised in the contract that the Buyer could depend on certain statements, the Seller can’t say that the Buyer was wrong to trust the Seller’s own binding words.
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Two General Rules Governing Sandbagging
In general, courts have established two separate rules—the so-called “Modern Rule” and the “Traditional Rule”— In the absence of a sandbagging clause in the M&A agreement, parties to M&A transactions and their counsel should be aware of how various states handle a buyer’s indemnity rights.
The Modern Rule
The modern rule refers to a legal principle that guides the interpretation and application of law in contemporary society. It is based on the principle that laws should evolve and adapt to changing circumstances and new situations. In other words, the modern rule emphasizes the need for a flexible and dynamic approach to law rather than a strict and rigid interpretation of outdated legal principles.
According to “Modern Rule” courts, the Buyer had the right to rely on the representations and warranties because they were negotiated contractual duties. Delaware and, generally speaking, New York are two states that adhere to the Modern Rule (as well as Illinois, Florida, Connecticut, and Indiana).
The Modern Rule is a “pro-sandbagging” rule and is thus in the best interest of the Buyer. Because purchasers are typically not required to demonstrate reliance in those jurisdictions to pursue an indemnity claim for a seller’s breach of a representation or warranty, buyers are likely to prefer the controlling law of an M&A agreement to be a state that adheres to the Modern Rule.
The Traditional Rule
According to the Traditional Rule, a buyer’s indemnification claim requires that it be proven that they relied on the representation or warranty in some way.
Most states have adopted this approach, which calls on purchasers to demonstrate that they relied on the representation or warranty that the Seller broke.
The Traditional Rule is seller-friendly since it prohibits “sandbagging.” Because a buyer would have to demonstrate that they relied on the Seller’s false representation or warranty to succeed in a claim for breach of representation or warranty against the Seller, a seller will likely prefer that a state that adheres to the Traditional Rule serve as the governing law of an M&A agreement.
The Bottom Line
Some people who disagree with modern rules think sandbagging is bad economics because it makes bargaining more like a punishment. Others believe that sandbagging is unfair or questionable from an ethical point of view. Even though it might be unsettling to let a Buyer wait until after closing to bring a breach claim against the Seller that it knew about before closing, the risk of this kind of litigation can be managed just like any other risk in the deal that the parties make.
A rule that supports sandbagging backs up the idea that representations and warranties are an essential way to share risks.
When the parties to a contract choose not to (or don’t) divide the risk of sandbagging, the Buyer can rest assured that, as part of the deal, the Seller has implicitly promised to be honest in what it says. This view of “reliance”—that is, it requires nothing more than relying on the express warranty as part of the deal between the parties—reflects the common belief that an action for breach of an express warranty is no longer based on tort but mainly on the contract.
In other words, the fact that the Buyer questioned whether the Seller would honor their promises should not free the Seller from his obligations when it agrees to do what it said it would do. Reliance, whether a good idea or not, is not a part of breaking a contract.
Practice Pointer
During the due diligence, you should keep in mind the Seller’s promises and any facts you find that goes against the promises. It is best to seek legal advice before entering into any contract.
Contact Swiecicki & Muskett, LLC for practical solutions to your business and legal issues.
by Chris SwiecickiUnderstanding Contract Law: The Implied Covenant of Good Faith and Fair Dealing
A legal contract’s basic function is to state the rights and obligations of each party. In addition, the document typically covers what will happen under a variety of possible scenarios. This list of stipulations can be quite lengthy, especially in contracts between corporate entities.