Non-Compete Agreement Tips for Partners, Executives, and Employees

In this post, I continue the discussion about non-compete agreements in Connecticut.  This time, I focus on the employee side.  Here are 5 things to think about when leaving employment if you have a non-compete agreement.

  1. Do not believe water cooler experts.  Many employees come to believe what they hear at the water cooler about non-compete agreements.  The typical comments include: “Those things are thrown out of court,”  “John Smith had one of those, and he beat it in court.”  The reality is, some non-competes will be upheld in court in Connecticut, and others will not.  There is no bright line test.  Every case is unique and there are too many factors to cover in one blog post. 
  2. Get help sooner rather than later.  The biggest mistake employees make is failing to get an experienced attorney’s review of an employment contact BEFORE planning to leave.  Examples of these agreements include non-competition agreement, non-solicitation agreement, or confidentiality agreement.  I emphasize “experienced” because the law surrounding non-compete agreements and unfair competition is constantly changing.
  3. Develop an exit strategy.  Leaving without a plan is not a good idea. Employees need a plan that includes understanding the parameters of the agreement and mitigating the risks of breaching it.  I have seen clients lose sleep, jobs, and thousands of dollars because there was no plan in place.  I will offer more on exit strategies in a later post, but some ideas include negotiation with your existing employer, finding holes in the contract, modifying employment decisions to mitigate risks, and taking a wait and see approach.   
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What To Do If You Suspect Your Business Partner Is Stealing - Some Basics

In any case involving theft by a business partner or business dispute, it is very important to have an understanding of the basic issues and legal framework. Although these cases often involve complex problems, you cannot determine a good course of action without starting with the basics.

Here are 5 of the basic issues and what to do if you anticipate a business dispute with a partner or small business in Connecticut.

1. Figure out the type of entity you formed for your business

Principals of small or closely held companies or partnerships typically start off their businesses by choosing an entity such as a Limited Liability Company (LLC), Limited Liability Partnership (LLP), or Corporation (C Corp. or S Corp.). This may seem like a "no brainer" but you might be surprised that many partial business owners (typically minority owners) do not know the exact type of business entity they own.  

To determine what type of entity you formed look for documents such as Articles of Organization, Articles of Amendment, Certificate of Incorporation, Organization and First Report, Certificate of Amendment, Certificate of Limited Liability Partnership, or Statement of Partnership Authority. These are the so called "incorporating" documents or "originating" documents filed with the Secretary of State. These documents clarify the type of entity chosen and the original incorporators or members of the entity. These documents are available to the public and are available for searching at the Secretary of State website www.concord-sots.ct.gov . If you cannot find your documents, try searching the Connecticut Commercial Recording Division website.

2. Figure out the structure and control of your entity.

The structure and operations of an entity often are governed by formal documents in most cases, or by default rules in others. Formal documents may include bylaws, resolutions, shareholder agreements, stockholder agreements, voting agreements, or operating agreements. These documents likely detail your ownership and management rights.

Of course, we see many cases where these agreements do not exist or were never finalized. It remains important to find what you have to show any agreement, even if informal. Maybe you exchanged some emails or you drafted a memorandum of understanding or informal partnership agreement. However, if you do not have a formal or informal agreement, Connecticut General Statutes can operate as a fall back or default to govern the operation and management of corporate entities. You can review the basic statutory laws of Corporations on the Connecticut General Assembly Website www.cga.ct.gov/current/pub/titles.htm . For example, Connecticut statutory laws for Corporations are found in Title 33.

3. Get access to the books and records of the business.

Many times, clients come to us after the business partnership has fallen apart, become insolvent, or dissolved. In many of these instances, one of the partners has access to all the records, and the other partner does not. Your rights to obtain company records may be spelled out in the agreements or documents mentioned in # 2 above. Alternatively, inspection rights for books and records are provided by statutory law. For example, Connecticut General Statutes § 33-946 - 950 permits inspections of books and records by shareholders and directors. However, many times feuding business owners end up having to file a so called "books and records" lawsuit in Connecticut state court to get access to the corporate books and records.

Getting access to the company financials is important. At minimum, you should seek to obtain summary financials, such as income statements, profit and loss statements, or trial balances. However, the ideal is to have access to the actual raw data. This means getting access to bank account(s) (including web access), loan accounts, credit accounts, and the company accounting journals. Getting access to this data may depend on whether the accounting software is server based, such as Peachtree, or cloud based such as QuickBooks online.

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"I Don't Want To Be Your Partner Anymore" .... Can That Statement End A Partnership?

After 5 years of litigation, two appeals, and one trial, the answer is.......Yes, that statement can constitute a valid offer to end a Connecticut partnership between two feuding sisters who had agreed in writing to split lottery winnings.  The story of the feuding sisters has been covered by Alaine Griffin at the Hartford Courant and the local news stations (NBC CT;   CBS NEWS).

According to yesterday's ruling by Connecticut Superior Court Judge Cynthia Swienton, when one sister said "I don't want to be your partner anymore" and the other said "okay," the partnership was over and the contract rescinded. 

The case involved a dispute between two sisters, Terry and Rose,  over a written contract that dated back to 1995.  Terry split some poker winnings ($165,000) with her sister Rose and decided they needed a contract to make sure there would be a split for any future winnings.  You might call the contract a  paper napkin partnership agreement, but it was notarized and drafted by an accountant.  It was simple and straightforward.  The relevant part of the contract read:

We are partners in any winning we shall receive, to be shared equally.

Fast forward to 2004 and a fight over $250.  The Court found that Terry said during the fight "I don't want to be your partner anymore."  Rose replied "okay."  Rose then went and became partners with her brother, Joe.  Of course, Joe then went out and bought a $500,000 winning Powerball ticket.  Terry found out, Rose refused to pay Terry, and finally a lawsuit was filed for breach of contract.   

After going through the history of the relationship and finding credibility in favor of Rose, the Court found that Terry and Rose mutually agreed to rescind or cancel the contract on the basis of that exchange of words and the conduct of the sisters after the exchange.  Case closed, at least for now.  It is unclear if there will be any appeal.   

In reading the decision, I found it interesting that there was no mention of Connecticut's partnership statute.  It is not clear if either party raised the statute in the case.  The case was decided on pure contractual grounds based on an agreement to rescind the contract.  Nevertheless, it also appears to me that the Court was swayed by more than just the exchange of words, but the actual conduct of the parties after the exchange.  In other words, you could say that they stopped acting like partners, they agreed not to be partners, and therefore, no partnership continued to exist.  

Interesting case, but also sad to see.  In the end, Terry's frustration over $250 might have cost her not only a share of the $500,000 winning ticket, but the good relationship she had with her sister. 

Dispute Between Business Partners Ends In Dissolution and Double Damages Under Connecticut Wage Act

In Saunders v. Firtel, a decision to be officially released on September 22, 2009, the Connecticut Supreme Court upheld an award of double damages under Connecticut's wage and hour laws in what amounted to a dispute between two business partners, Barry Saunders and Burton Firtel.  The supreme court also upheld judicial dissolution of a company owned by the partners.  The case highlights the complications that can arise between partners when one partner is also an employee in the business.  

In this case, Saunders became part owner of a company that Firtel previously formed by himself.  Saunders also became an employee of the company as part of a larger business relationship.  This is not an uncommon arrangement in business, especially when a small business is purchased by a larger company.    Saunders and Firtel also formed another limited liability company together as equal owners. The business relationship was documented with an operational agreement. 

Although the partners successfully operated the business for years, a dispute arose out of unpaid wages after Saunders unsuccessfully tried to change the compensation structure of the business relationship.  In response, Firtel fired Saunders.  Saunders brought a lawsuit in Connecticut state court for unpaid wages claiming he was an employee.  He also sought to dissolve the limited liability company formed with Firtel. 

A few months ago, Connecticut's wage and hour laws were in the national spotlight because of the scandal with AIG's bonus plan for its employees in Wilton, Connecticut.    AIG claimed that it had to pay the bonuses because it feared double damages under Connecticut's wage and hour laws.  In this instance, Saunders brought his case in court relying on the same provisions that AIG feared. 

Connecticut's unpaid wage law, General Statutes section 31-72 ,provides that:

When any employer fails to pay an employee wages . . . the employee may recover, in a civil action, twice the full amount of such wages, with costs and such reasonable attorney's fees as may be allowed by the court . . 

To recover double damages, although not mentioned in the statute, courts require a finding of bad faith, arbitrariness, and unreasonableness by the employer.  In Saunders' case, he won because the trial court found that the failure to pay was willful.  What might seem strange about the case is that Saunders was not only an employee, but he was also a 49% stockholder and an officer in the company he sued to obtain double damages.  Firtel was a 51% owner, and the President. 

Dan Schwartz's Employment Law Blog has a nice summary of the supreme court's treatment of how Saunders qualified as an employee as well as the implication of the decision on employers.  I tend to agree with Dan that there is no significant impact on employers because if wages are earned, the wages should be paid regardless of the business relationship.

I think the case does highlight important considerations for business partners.  The case demonstrates how a breakdown in the relationship between two business partners can turn into a dispute where one partner effectively ends up in the shoes of the employer subject to wage and hour laws.  This was probably not intended and it is unlikely that Saunders and Firtel viewed themselves as employee and employer.  In fact, they appeared to be nearly equal partners.

The case is also another example of a once successful business partnership ending in arguments over compensation and written agreements.  It further shows that dissolution of a company is another judicial remedy, along with disassociation and expulsion in partnerships, for a company that can no longer operate in a practical manner. 

 

Connecticut Supreme Court Confirms Expulsion Is Available Remedy In Partnership Dispute

In an issue of first impression, the Connecticut Supreme Court confirmed that partnerships can expel a partner rather than dissolve when there is a breakdown of the business of the partnership.  The case is Brennan v. Brennan Associates, et al.  The official opinion will be released on August 18, 2009, but the advanced opinion already was released online. 

The case involves a complicated set of facts and circumstances surrounding the deterioration of a once successful partnership that operated a shopping center in Trumbull.  The breakdown of the partnership began after the death of a partner.

The decedent partner essentially ran the partnership and kept all the books until his death.  The decedent's will directed that his interest go to his two cousins.  Following the will reading, the partnership broke down over disputes on check writing authority, access to records, the transfer of interest, and an old tax conviction of a surviving partner who was the plaintiff in the case. 

The plaintiff  offered to buy out the decedent's interest, which as rejected by the estate.  The plaintiff subsequently filed a lawsuit seeking, among other things, to accomplish a buy out of the decedent's partnership interest and to gain access to the books and records.  The surviving partners wanted to continue the partnership's business rather than dissolving it.  As such, in addition to other claims by the defendant administrators, they filed a counterclaim application seeking to expel the plaintiff from the partnership under section 34-355 of Connecticut's Uniform Partnership Act.

The statutory scheme at issue permits a trial court to grant an application for expulsion if a partner engages in conduct that "makes it not reasonably practicable to carry on the business in the partnership with the partner." In this case, after a bench trial, the court issued a ruling granting the application filed by the surviving partners to expel or dissociate the plaintiff partner.  The plaintiff appealed claiming that acrimony and distrust between partners may be proper for a dissolution, but it was not a proper basis for dissociation.

On appeal, the Connecticut Supreme Court  disagreed with the plaintiff and ruled that dissociation was an available remedy given the facts present as an alternative to dissolution.  The supreme court noted that under Connecticut's Partnership Act,

a partnership now has a choice, either to dissolve the partnership or to seek the dissociation of a partner who has made it not reasonably practicable to carry on the partnership with him.  The new remedy of dissociation permits a financially viable partnership to remain intact without dissolving the partnership and reconstituting it.

In this case, the conduct at issue for the dissociated partner was a past felony tax conviction, a pattern of adversarial conduct toward other partners, and a false accusation of fraud against the others partners.  With these facts present, the supreme court found that a trial court had enough to grant an application for expulsion and dissociation of the partner.  The court stated:  

irreparable deterioration of a relationship between partners is a valid basis to order dissolution, and, therefore, is a valid basis for the alternative remedy of dissociation.

It is worth noting that the court indicated that an old felony conviction standing alone likely would not meet the required standard.   In any event, the case essentially provides that there is no basis for a higher burden for dissociation as opposed to dissolution.

My takeaway from the decision is that it promotes the policy of cooperation amongst partners by confirming expulsion as an option for getting rid of a "problem" partner.  As noted in the decision, prior to the statutory scheme permitting dissociation, partnerships faced with similar problems had to dissolve.  This process could perhaps create too much leverage for a "problem" partner forcing dissolution.  Instead, this decision confirms the statutory availability of dissociation under no higher of a standard than dissolution.  This may be a more preferable remedy for many Connecticut partnership disputes.

The decision also serves as a reminder of how a partnership or  closely held company can breakdown following the death or disability of a partner or key member of the business.  These circumstances highlight the need for specificity in partnership and operating agreements including buy out provisions for death and disability, transfer or assignment of interests, and continuation of operations.   

It is also important to note that the supreme court left open the dissociated partner's rights to bring a proceeding to compel valuation and purchase of his interest after dissociation.  The court also indicated that the partnership agreement could have included a provision allowing the remaining partners to initiate a valuation proceeding, but it did not in this case.