Thursday, August 20, 2015

Non-Competes and Non-Disclosures

Once again, the whole topic of non-competes, non-disclosures have raised their ugly legal heads. A well-known electrical distributor recently appealed a lower court decision and the case is being revisited. Based on estimates from legal experts, the attorney costs alone are most likely pushing $25-30,000 for both sides; and this doesn’t account lost time and wasted energy.

I would like to go on record as stating I believe every distributor needs to have and enforce their non-disclosure agreement. In distribution, we don’t have patents, top secret ingredients or other trade secrets. Instead, we have customer contacts, supplier relationships, market price data, a keen understanding of the competitive lay of the land and emerging employees. Some of us invest massively in product training, sales and other job related skills. And, when an employee leaves, we must make absolutely certain that minimal information goes out the door with that former employee.

Most think of key employees leaving with their briefcases and home computers stuffed with our information; and it happens. A decade’s worth of key pricing data can easily be loaded onto a memory stick. The sales history of our top customers can be pushed up to a “cloud-based” storage site. And, it often happens.

We know of a couple of distributors who ran computer forensics on the computers of team members leaving the organization. Guess what? They discovered records
mysteriously shifted around a couple of weeks before the announced departure/termination. Clearly, this is an unethical action and potentially an illegal move. When notified, the new boss of the ex-employee had a “stern” discussion with his new guy. But, in the case of salespeople, how does one tell the difference between lucky guesses and illegal use of ill-gotten information?

Catching an ex-employee with (what one distributor calls) “stolen” information is tricky. It often requires dragging a customer into the mix. And, most distributors worry efforts invested in speaking to customers reflects poorly on the company. Further, many customers don’t understand the business ramifications of this information leaving the company. Instead, they see it as a guy trying to better is life and make his family more comfortable.

Undoubtedly, something more may be required. I see more non-compete agreements being added to distributor HR packages; and with a few caveats, I recommend the process. I see the need to protect company trade secrets. Since the distribution industry operates on razor thin margins (typically 2-4 percent,) protection is needed.

At the same time, I believe in opportunity for growth and personal financial improvement. Not every boss is a wonderful guy. As a matter of fact, I have run into some who are downright tyrants. So employees need protection built into the non-compete agreements as well.

Here are the caveats I talked about earlier. A non-compete should be null and void if any of the following come to pass:

The company sells to another person or organization
If the company gets sold, employees are not furniture thrown in as part of the deal. The new organization might ask for employees to sign a fresh new non-compete. Employees might sign it, but for a split second, everybody is a free agent. The owner of the company negotiated his/her deal, now the employees can negotiate one of their own.

The company terminates the employee
It is only fair to assume, if the employee isn’t good enough to work for the company, going to work for a competitor should be a blessing.

If the employee’s average compensation (based on a couple of years) drops by over 25 percent
This protects the employee against a boss who tries to starve them out by rearranging compensation structure, reassigning important accounts or withholding bonus participation. It is common for some year-to-year fluctuation, especially with sales and branch managers, but 25 percent covers a lot of space.

If a non-sales employee’s job is relocated further than 50 miles from their current office facility
This protects the employee if for some reason the company the company changes their location to the point the employee must relocate to maintain their position. At the same time, the company is protected if they make a move across town.

Recommendations to the distributor
If you are a distributor, I recommend a review of your current on-boarding process:
1. Do you require employees to sign a non-disclosure agreement which states what information you believe to be covered as a trade secret?

2. Do you require that company business be conducted only on company approved equipment, so you can track the flow of information?

3. Do you regularly review the agreement with existing employees? Experience dictates that many falsely believe “their contacts” are their contacts and belong to them.

4. Can you locate the original signed documents (or a digital image of the agreement) from all employees?

If you use a non-compete…5. Have you updated the agreement or had an attorney review to insure it is enforceable? Many jurisdictions (typically state-by-state) have changed their approach to non-compete agreements.

6. Are you including a discussion of the non-compete in the annual reviews of employees? Strangely, many employees “forget” the agreement or hear they are unenforceable from friend and co-workers who are not legally competent on the matter.

7. Do you have a copy of the signed agreement?

8. Are you willing to enforce the agreement? Every exiting employee must be briefed on your policy to enforce the agreement.

If you are hiring someone…
9. Ask if they have a non-compete in place? If they do, ask for a copy of the agreement and seek legal counsel to determine the scope of the agreement. It can be both expensive and distracting to hire someone and find out later their work must be limited by the agreement.

Recommendations for employees:
1. Make sure any agreement contains the provisions mentioned above. Any reasonable company will accept them as reasonable protection for you, your future career and family.

2. If and when you sign an agreement, get a copy for your own records and store in a safe place. This document is every bit as important as your home mortgage, birth certificate and passport. Don’t just stash it in your bottom drawer.

3. Remember, the contacts you make during your employment belong to your company. Many of us consider customers as our friends. If you are doing things right, they are friends. However, their business information belongs to your employer. If you leave, you must reestablish connection without the aid of all your notes from previous calls, meetings and other contacts.

Still not convinced all of this is worth your time?
For those of you who are like reading the details, this link will take you to an article in TED magazine

And if you crave legal jargon, this link will take you to the official court documents


Fred M said...

I disagree with the author on a couple of his viewpoints. First and foremost never ever sign a non-compete. Speaking as a non managerial employee (salesperson) who has worked for three of the five largest electrical distributors and four of the top eight. A non compete only helps the company and will put the employees family in a game of financial jeopardy. The biggest companies did not become that way being nice and giving away their assets.

Secondly, an employer does not own the customer's business. The customer has the right (in most cases) to take their business wherever and with whoever they wish. The authors theory that the employer owns the account is like saying a person can only eat at one restaurant.

I have given and taken millions of dollars worth of accounts to and from my employers. Speaking from experience save yourself the hassle and DO NOT sign a non compete. It saves the employer/employee the headache of a prolonged "divorce"

Fred Mariscal

The Distributor Specialist said...

Many thanks for sharing your point of view. From purely a salesperson's view, you are correct. It is best to never sign a non-compete agreement. No agreement places all of the power into the salesperson's hands. In many ways, this puts the salesperson into the role of independent contractor delivering business from his or her customers. This model often does not create the best of results for the distributor and often creates issues with trust.
On the topic of non-disclosure, I would like to clarify some of your assumptions. First, it could be illegal to approach a customer with this comment, "I have moved to a new company and know your price levels and will offer the same great deals at my new company." Further, it could be illegal to say, "I know what you purchase and will be getting all of the products you have purchased in the past into stock."

Finally, I see the world of distribution selling changing. I see more team selling, more special price agreements being developed and a greater use of process in the sales approach. And... I see experienced salespeople as being more solidly respected as professionals. I appreciate your views....

Fred M said...


SPA's have been a necessary evil since the advent of the box store on every corner in America. If you have a good relationship with the rep/vendor you spa every account including Miscellaneous cash and CC accounts. This gives you the flexibility to go after new business as well as increase margin percentages. Vendors scoff a bit but rarely deny the requests.

Team selling is essential. When I have been part of good team I have excelled, when I wasn't I failed. I always take more credit and blame then I deserved. With that being said, only one person has a leadership role on an account. Much of the time its the salesperson, other times its the company, or a dedicated inside person and sometimes a quirky driver. The customers favorite is usually the one he stays with.

As you know selling on price with regularity is a way to disaster. When I have to quote, I know my competitors preferences and tendencies better than I know myself. Working for the company previously has little to do with it.

LinkedIn AHTD Board said...

Excellent read. Non-compete agreements are a must in order to invest in a manufacturer or employee

The Distributor Specialist said...

Thanks. I personally believe they need to be fair and enforced. With all due respect to the US court system, many judges don't understand our business model well enough to make informed decisions. I recently saw a well written non-compete set aside because the arbitrator thought of selling in our industry the same as selling in the waterbed, cell phone and car business. The good news is most non-competes stand up in court.