June, 2009

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What are the differences between a “non-compete agreement,” “non-disclosure agreement,” and “non-solicitation agreement”?

Thursday, June 18th, 2009

Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

Business clients often confuse the above terms, each of which protect business owners from a different type of harm. I will summarize the three types of agreements below.

Non-compete agreement

A covenant not-to-compete is an agreement whereby a party agrees not to compete against another party: 1) in a specific line of business; 2) for a definite period of time; 3) in a limited geographic area.

A non-compete agreement is usually found as part of a broader contract, such as an employment agreement or franchise agreement, and will take effect upon termination of the contract.

Maryland courts allow a covenant not-to-compete to be enforced provided it is “reasonable” in the activity it restricts, as well as in its geographic scope and duration. A typical non-compete looks something like the following:

Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from acting, directly or indirectly, as an owner, manager, operator, consultant or employee of any business or business activity that is in the business of providing services similar to or competitive with Company.

Non-disclosure agreement

A non-disclosure, or confidentiality, agreement (“NDA”), is an agreement whereby a party pledges not to disclose the confidential and proprietary information of another party. NDA’s are commonly used to protect confidential information not generally made available to the public such as trade secrets, customer lists, business and marketing plans and strategy, and financial information, so that such information does not fall into the hands of competitors or even the public at large. NDA’s can be found in many employment and independent contractor agreements, as well as agreements where businesses are performing due diligence on one another prior to some type of relationship commencing.

Unlike the situation where covenants not-to-compete must be reasonable in all areas, non-disclosure agreements will be enforced by Maryland courts unless the person or company that is alleged to have violated the NDA is able to show that it learned of the confidential information from an independent, outside source. Whatsmore, an NDA need not contain any geographic or time restrictions in order to be valid and enforceable.

A typical NDA will look like this:

Employee acknowledges that Company may, in the course of Employee’s employment, provide Employee access to Company’s trade secrets, customer lists, business and marketing plans, financial information, and other confidential information related to the business of Company, including access to Company’s Employment Manual (the “Manual”). Employee agrees to retain all such information as confidential and may not use such confidential information on his or her own behalf or disclose such confidential information to any third party during or at any time after the term of Employee’s employment.

Non-solicitation agreement

A non-solicitation agreement is an agreement whereby a party pledges not to solicit the clients and customers of another party. Non-solicitation agreements are generally found in employment and independent contractor agreements, as well as vendor arrangements where one party is granted access to the clients list of another party.

Like an NDA, a non-solicitation agreement need not contain any geographic or time restrictions in order to be valid and enforceable in Maryland. A common form of non-solicitation agreement follows:

Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from soliciting business from, or performing services for, or inducing or attempting to induce, any customer or client of Company, its subsidiaries or affiliates, to cease doing business with Company, or in any way interfering with the relationship between Company and any customer or client of Company.

Many business contracts will contain one or more of the above agreements. It is therefore important to be able to distinguish among them, and draft contracts that are specific to your business needs.

Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

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What is the definition of a franchise?

Thursday, June 4th, 2009

Need a Franchise Attorney? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

I am often asked by prospective franchise clients what exactly is the definition of a franchise? The issue is an important one, since franchising is a regulated industry. It is regulated on a federal level by the Federal Trade Commission (FTC), and on a state level by some, but not all, state regulatory agencies. Compliance with existing federal and state regulation makes the business of franchising more complicated, and therefore more expensive to be involved in.

The Federal Trade Commission Franchise Rule, 16 CFR 436, defines a franchise as:

any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;

(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and

(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.”

So the three criteria of a franchise, simply stated, are: 1) party A operates a business using the trademark of party B; 2) party B has significant control over how party A operates the business, or party B provides significant assistance to party A in the operation of the business; and 3) party A pays a fee to party B. All three of these conditions must be present in order for the business to be considered a franchise.

While the FTC’s definition of a franchise seems straightforward, the complexity surrounding what is a franchise can be found mainly in the second prong of the definition, through the FTC’s use of the terms “significant degree of control” and “significant assistance”.

Often times where party B provides party A with training, operational support, and/or manuals, the assistance/control will be deemed to be significant enough so as to meet the definition of a franchise. The problem arises when party B exerts “some” assistance or control, but does not go so far as to offer training, operational support or manuals.

The FTC has issued several advisory opinions on this subject, which opinions can be found at http://www.ftc.gov/bcp/franchise/netadopin.shtm. Specifically on this issue, the FTC stated in 1998 that:

“In your letter, you contend that the Licensor does not require any operational standards, nor does it impose controls over the licensees’ entire method of operation. For example, the Licensor will not approve sites, control hours of operation or production techniques, or dictate accounting practices. Rather, you contend that the limited controls are designed to protect the franchisor’s rights and value in its proprietary information and to verify that license fees are properly calculated. We disagree.

You correctly state that the Commission will not consider as significant those controls designed solely to protect the franchisor’s trademark rights under federal and state trademark law, such as display of the mark requirements or right of inspection. 44 Fed. Reg. at 49968. We also note that reasonable covenants not to compete, which are common in franchise systems, are frequently used to protect proprietary information. However, the exclusive sales territories imposed by the Licensor appear to go beyond mere trademark protection and pertain to the licensee’s entire method of conducting its business. Such restrictions have the potential to cause serious economic harm by limiting the licensees’ market and ultimately limiting the licensee’s profitability. See 44 Fed. Reg. at 59660-62. Indeed, the Final Interpretive Guides specifically list “restrictions on customers” and “location or sales area restrictions” among the types of controls over a franchisee’s method of operation that will be deemed significant.” Id. at 49967.”

The FTC, as well as any state regulatory agency, focuses solely on the substance of the relationship, not terminology, when examining the issue of what is a franchise. It is irrelevant how the parties characterize one another, whether as a license, independent contractor, subcontractor, joint venture, or distributorship relationship.

Please also be advised that certain states define a franchise slightly differently than the FTC definition cited above. Therefore, when facing the question of whether your business meets the definition of a franchise, proceed with extreme caution, and consult a knowledgeable franchise attorney.

Need a Franchise Attorney? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

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5 Tips Regarding Your Maryland or District of Columbia Estate

Tuesday, June 2nd, 2009

Need an Attorney to help you plan your Maryland or DC Estate? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

In its simplest terms, a Will allows you do things like dispose of your property in the manner you deem fit, name a guardian for your minor children, and name a personal representative to administer your estate. For a person that does not have a Will, I ask why not? For those that do, the following tips and questions may prove helpful.

  1. Review your Will every few years to make sure it is current. Does your Will say exactly what you want it to say? Sometimes the Will you had drafted 10, 15, 20 years ago needs to be amended. Have you obtained new assets not mentioned in your Will? Have children, grandchildren, nieces and nephews been born since the last time you reviewed your Will? When the time comes to amend your Will, you can execute a Codicil which amends your original Will, or you may execute a new Will entirely.
  2. Who is the Personal Representative of your Estate as named in your Will? That person should at minimum be someone that you trust, who has organizational and administration skills, and who will have the time and energy to devote to the administration of your Estate when that time comes.
  3. Who did you name in your Will as guardian(s) responsible for the rearing of your children until they reach the age of majority? Are those person(s) still alive and person(s) that you wish to have such responsibility?
  4. Do you know where your Will is? Is it kept in a fire proof place like a safety deposit box? Is it easily accessible by a close family member? You do not want to leave your family in a position where the Will cannot be found and therefore your wishes are undetermined.
  5. Along with your Will, do you have a living will, otherwise known as an advance medical directive, which expresses your medical wishes in case you should be rendered in a vegetative state? Failing to have a living will could have severe emotional and financial consequences on your family. Also, do you have a power of attorney that would allow a person close to you (your attorney-in-fact) to act on your behalf if you were incapacitated, regarding your bank accounts, bills, and other monetary and non-monetary issues that arise while you are unable to act?

Need an Attorney to help you plan your Maryland or DC Estate? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

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