If your business has been injured by another party, your first reaction may be to sue for damages. But by first taking reasonable actions to limit your losses, you can increase your odds of recovering those damages. In most situations in which a business has been injured — whether by theft of trade secrets, a contract breach, etc. — it can take steps to prevent damages from worsening.
For example, say that a supplier is unable to deliver a crucial part to produce your products.
“Rather than halt production and lose all profits that your business likely would receive from selling its products, you could try to find another supplier,” says Courtney D. Tedrowe, a partner with Novack and Macey LLP. “You might pay a higher price, thus reducing your overall profit margin, but you would not be out all of your profits.”
That mitigation of damages, sometimes referred to as the doctrine of avoidable consequences, can be crucial in the event of a lawsuit.
Smart Business spoke with Tedrowe about a plaintiff’s obligations and what courts deem reasonable mitigation efforts.
What obligations does a business have in the event it has been injured?
Frequently, courts and attorneys say that a plaintiff has a duty to mitigate damages, but that characterization is inaccurate. Strictly speaking, a plaintiff does not have an obligation to take steps to limit losses after it has been injured, and will generally not incur liability for failing to do so.
However, if some or all of a plaintiff’s damages could have been avoided had it taken reasonable steps to mitigate them, it might not be able to recover that portion of damages from the defendant. Thus, it is in the plaintiff’s best interest to determine what steps it can reasonably take to avoid unnecessarily increasing damages after injury, and then take those steps. In many cases, the plaintiff can recover from the defendant the cost of making reasonable attempts to mitigate damages.
How does a court decide which actions are reasonable?
First, the defendant must prove that the plaintiff could have taken certain reasonable steps to avoid unnecessarily increasing its damages. What constitutes a reasonable step is determined on a case-by-case basis. However, a plaintiff is not required to take extraordinary measures, and a defense of failure to mitigate is not a basis for a hypercritical examination of the plaintiff’s conduct.
The plaintiff need not assume any undue risks or burdens in an attempt to mitigate its damages. Further, the law does not require the mitigation efforts to be successful; all that matters is that the plaintiff made the attempt.
Second, the defendant generally must prove the amount by which the damages increased because of the plaintiff’s failure to take reasonable steps. The defendant should have evidence not only showing that the plaintiff failed to take reasonable steps to avoid increasing damages but also evidence showing by how much that failure inflated damages.
Under what circumstances is this legal concept most commonly seen?
Mitigation is a defense in almost every case in which the award of monetary damages is claimed. It is usually raised as an affirmative defense in litigation, in which the defendant claims the plaintiff’s damages should be reduced because either the plaintiff actually did mitigate its damages, or, had the plaintiff taken certain actions, its damages would have been less.
In most states, there is an exception to mitigation, sometimes referred to as the lost volume doctrine. In cases in which the plaintiff does a volume business — handles or could handle multiple contracts of the same kind simultaneously — and has lost sales as a result of another’s wrongdoing, the plaintiff might not be able to mitigate its damages by finding a replacement contract. Because the seller is capable of handling multiple contracts simultaneously for little additional marginal cost, it could have had the benefit of both the repudiated contract and the subsequent contract at the same time. Therefore, even if the plaintiff could have obtained another contract after the first was breached, it would not replace the lost contract.
For example, say a fencing company contracts to build a fence for $10,000. The buyer breaches that contract. Shortly thereafter, the company contracts with someone else to build a fence for $10,000. If the company can prove it could have taken both jobs, its damages are based on the net profit it would have made on the breached contract, without regard to its ability to get a subsequent contract. However, although this has been adopted in most states, it hasn’t been in all, and the burden is on the plaintiff, not the defendant, to prove the doctrine applies.
How can a business be affected by the responsibility to mitigate damages?
If a business has been injured and is contemplating litigation, it should be aware of the possibility that the defendant might assert a mitigation defense which, if proven, would reduce the awarded. Thus, as soon as the business learns of an injury, it should take all reasonable steps to prevent damages from unnecessarily increasing. Employees should be asked to analyze all of the possible harms to the business including losses due to business interruption, lost business opportunities and harm to reputation. Once specific potential damages are identified, consider whether there are reasonable means of minimizing or stopping these harms from occurring.
It does not usually matter whether your efforts are successful, only that you took reasonable steps to try to mitigate. Moreover, the law generally does not require you to take undue risks or burdens to try to mitigate damages. If you follow these basic principles, you likely will stand an excellent chance of defeating a mitigation defense.
Of course, you should consult an attorney as to whether mitigation applies, as it will depend on the particular facts in your case and the law of your particular jurisdiction.
Courtney D. Tedrowe is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or firstname.lastname@example.org.
Mobile cloud computing, where applications are driven from the “cloud” and not from the handheld device itself, is becoming a vital part of the business landscape. Is your company positioned to take advantage of this emerging and potent technology? Mobile apps powered by the cloud will include productivity applications that accentuate collaboration, data sharing and multitasking. Now is the time to adopt cloud computing strategies as there will be a seismic change in how information is distributed and applied.
“A lot of companies are dipping their toes into this new environment to see how their customers react,” says Toni Paoletta, Corporate College’s IT Program Manager. “Eventually mobile devices will replace desktops.”
Smart Business spoke with Paoletta about the shift to mobile and how business owners can take advantage of the new frontier.
What are some of the driving forces behind the shift to mobile devices?
Mobility is the key word. Mobile devices allow companies to take their products and services and place them directly at their customers’ fingertips. We have seen Internet-based tools and services reformulated to work on smaller devices. For example, customer relationship management and inventory control can now be managed remotely through the use of a mobile application on a smart phone. In the past, you had to log on to an Internet browser, connect to a Web site and log in credentials to access a company’s services. Now you can have a mobile application on your smart phone that is able to access the same software, services and data instantaneously.
How big will the shift be?
The shift will be huge. Being able to control everything from the road is the wave of the future. The convenience factor of smart devices — they’re small, portable and have excellent battery life — will drive the need for customized mobile app development. The emergence of new smart phones and tablets has created a huge explosion in the mobile device market and a need for new, innovative apps that can function on these various platforms.
How does the mobility and prominence of the cloud impact the IT industry?
All IT industries will need to know how to deploy, support and maintain their company’s intellectual property that is made available through these mobile apps. Not only will companies have to support their current physical infrastructure, but they will also have to support and secure their cloud infrastructure. This will mean investing in increased storage and additional servers.
Besides infrastructure considerations, companies need to consider the deployment and sustainability of mobile devices and the applications that reside on these mobile devices. If a company develops a mobile application for its customers, it must consider platform issues, interoperability, updates and security.
How does the shift towards mobile devices affect a company’s IT personnel?
IT personnel will need to become familiar with mobile devices and understand the capabilities of those devices, how to keep these devices updated and identify how they are going to fit within the company’s current IT environment. For example, an Apple iPad utilizes wireless Internet. If you have employees accessing data with an iPad from within the office you need a wireless infrastructure within your corporation that will support that access. Other considerations are software and operating system updates. How will your company manage these operating system updates on mobile devices? Are you providing a public cloud to your customers; meaning your software and services are available through a mobile app? If so, your security infrastructure will be critical to protect other applications, data or services available within the cloud. If you use a private cloud, how will you maintain access when there is a change in human capital within your organization and the app to connect to that private cloud resides on the employees’ personal smart phones? All of these questions need to be considered.
In order to address these issues, IT professionals need to expand their current skill set and become familiar with smart devices and how to access information in new ways.
What opportunities are available for application developers?
The sky is the limit for application developers as it relates to mobile app development. I think everyone who has a smart phone today has thought of an application they would love to write, whether it is a game they think would be cool, or a business app that would provide a solution to fix a problem. For instance, our college recently launched a mobile app called ‘Tri-C Mobile’ that provides students with information about courses, events, campus news, sports schedules and even the campus directory all through their smart phone. It is vital for people to start thinking about how they can transfer their business knowledge to a mobile device so people can access that information from anywhere.
How can business owners take advantage of and plan for these developments?
They need to think about what work they wish they could do if they were stuck at home, in traffic, or waiting in a line at the airport. They need to ask themselves how they can take advantage of these smart devices — these mini-handheld computers. They need to find software developers with business knowledge that can translate into innovative mobile apps. Every day you hear about companies launching their new ‘app.’ Whether it’s American Greetings’ ‘Ecard’ app, or Benesch, Friedlander, Coplan & Aronoff and its ‘Benesch Apportunity’ app to recruit new attorneys, mobile apps are going to change the way we do business. Businesses across the globe are leveraging the cloud to bring their business to their customers via mobile apps. It’s time to say goodbye to being tethered to a box; and say ‘Hi’ to mobile computing.
Toni Paoletta is Corporate College’s IT Program Manager. Reach her at email@example.com or (216) 987-2962.
At some point, nearly all small business owners will need to borrow money, whether it’s to purchase, expand or renovate commercial real estate, finance the purchase of an existing business or grow organically. One viable option for small businesses in need of financing is to apply for a loan backed by the Small Business Administration.
While the SBA doesn’t provide direct loans, it does provide guarantees on loans that originate from the agency’s partnering lending institutions, says Angela Freeman, second vice president at First State Bank.
“If you partner with the right bank, preferably an SBA Preferred Lender, the bank will complete the application for you and make the process as painless as possible,” says Freeman.
There are several common misconceptions about SBA loans. The first is the belief that they require a lengthy application process and that it takes too long for funding to be secured. In reality, because loans are handled through lending institutions, the process isn’t much different than applying for a conventional loan and, in some cases, can be even easier.
Smart Business spoke with Freeman about SBA loans, the common misperceptions associated with the program and the benefits of working with a preferred partner.
What are some of the most common myths associated with SBA loans?
There are many misconceptions about SBA loans that might prevent business owners from inquiring or applying. Some mistakenly believe that SBA loans are only for the smallest of small businesses. However, the maximum amount of a loan has increased from $2 million to $5 million.
While it is true that the SBA used to have a very structured definition of what a small business is, it has now expanded the definition and opened the parameters so that more businesses can apply. Government data show that 98 percent of all businesses in America would qualify for an SBA loan under the current definition.
Another common misconception is that because the SBA is a government program, all SBA lenders are the same. In reality, each lender has its own credit philosophy. For example, credit criteria such as historic cash flow, collateral loan-to-value percentages and management experience vary from lender to lender.As a result, it is important to build a strong relationship with a top SBA lender, again preferably an SBA Preferred Lender, in your market to learn about its credit parameters.
Another myth is that SBA loans take forever to be credit approved and funded. Over the last several years, the SBA has worked hard to speed up processing times, reduce paperwork requirements and, in general, make it easier for banks to provide small business customers the capital they need. Many of the myths and rumors about the SBA are rooted in previous bad experiences that simply don’t hold true today.
While in the past, the agency has struggled with slow processes and arduous requirements, a great deal has changed. The SBA is now investing in people and technology to create an agency that is more efficient and responsive.
How can working with a preferred SBA lender help expedite the loan process?
A preferred lender is an institution that the SBA has designated as its agent. Most of these lenders have dedicated staff who specialize in SBA loans and can process these loans as efficiently as conventional loans. There are a number of rules involved with SBA loans, which cover who is eligible for financing, what can be financed and what interest rate can be charged.
A lender who is not intimately familiar with SBA loans might not know all of the stipulations, or not have necessary processes and procedures in place to comply. You can go to www.sba.gov to find information on your local SBA district office and the top lenders in your market.
How would you address the myth that an SBA loan is a last resort for financing?
The SBA program is designed for credit-worthy borrowers who have difficulty getting access to financing at reasonable terms. It is true that there is a requirement that stipulates you are unable to get a conventional loan. However, it is also true that many times a bank can’t consider a request for a conventional loan but may be able to look at an SBA loan differently.
Take, for example, a company that needs a $200,000 loan, but the equipment is only valued at $150,000. In this instance of a collateral shortfall, a business won’t be eligible for a conventional loan, but through the SBA 7(a) program, 75 percent of the loan is guaranteed by the government, and the bank only has to rely on the 25 percent on the collateral remaining.
What are the fees and up-front costs associated with SBA loans?
The SBA program is resolute in the fact that small businesses are not to be charged an application fee, or a bank management fee. Guarantee fees — typically 2 to 3.5 percent of the guaranteed portion of an SBA loan — allow the program to operate at an efficient cost for taxpayers. Fees are not usually a barrier to borrowers because they can be financed over the term of the loan, which may be longer than a conventional loan.
In addition, SBA loans have flexible interest rate policies and can be made at fixed or floating rates, and pegged to a prime, LIBOR or SBA peg rate. SBA rates are competitive with other forms of financing and are a much better value than credit cards and other alternative financing mechanisms that many small businesses use when they are unable to access conventional credit.
Angela Freeman is second vice president at First State Bank. Reach her at (586) 498-7465 or AFreeman@thefsb.com.
A competitive compensation package is essential to attracting and retaining high-performing executives. In addition to base salary, such a package ties performance to bonus and incentive awards as well as supplemental retirement packages, and includes provisions for severance pay.
Understanding the principles of compensation packages is critical when competing for top-level talent, says John Klevorn, a partner with The Stolar Partnership.
“From the company standpoint, hiring the right executive is incredibly important for the lifeblood of an organization,” says Klevorn. “You want to make sure that you have the right leader in place.”
Smart Business spoke with Klevorn about executive compensation, how to benchmark benefits and how recent reform has impacted executive compensation policies.
Where should a company start when negotiating executive compensation?
Executives come with hefty demands in terms of salary, benefits and other perks. Before you initiate a talent search or begin compensation negotiations, it’s important to establish a benchmark so that when you do begin to negotiate, you have a point of reference. Next, determine the level of proficiency and performance you’re seeking. With this information and the compensation benchmarks, it will be easier to search the marketplace, look at databases and understand the market value for the position.
There will be ranges with regard to market value so you will want to land somewhere inside those market value ranges. In some instances, a company will want the right person to grow into the job, so it might pay at a lower salary level within that range. In other cases, a company might want a star, and that star may only commit if he or she receives compensation at the high end of the market range.
How should a company benchmark benefits?
Make sure you’re compensating your executive fairly relative to the market. At the same time, make sure compensation is not so far askew internally that the incoming executive’s compensation compared to the next level below is out of whack. You don’t want to create such disparities within the company to cause employees to say, ‘Not fair, not fair.’
There is also an external aspect. Take financial services, for example. If you look at the compensation of CEOs of major financial institutions, you’re going to see symmetry. Company X does not want to pay its executive three times the amount that Company Y across the street is paying.
There is no collusion, but they do look at external matrices and metrics to remain competitive. Executive benefit companies monitor this information and keep their eyes on the latest figures.
You also want to make sure that the package you’re offering is not so diverse compared to other companies that the shareholders become concerned that the value of the company is being diminished.
What types of compensation programs are most effective at attracting and retaining executives?
First, the base salary has to be competitive. Second, executives want to know about bonuses. Are bonuses performance based? What standards will apply? Will bonuses increase over time? Stock options are also a key consideration.
Also, executives are often interested in longer-term plans. For example, add-on 401(k) plans allow those at the top to contribute more into the plan than other employees. Additionally, supplemental executive retirement plans (SERP) are designed to provide enhanced benefits to corporate executives and some are insured through life insurance programs and policies.
Are there laws to be considered when setting an executive’s salary?
You have to follow the standard array of laws. You can’t discriminate on the basis of race, age or gender. You can’t retaliate. Tax rules tell you that any compensation must be consistent with the ordinary and necessary business needs of the company. For example, if you manufacture widgets and employ 15 people, it would be difficult to justify paying your CEO $5 million per year because it would not be deemed ordinary or necessary by the IRS. Also, you need to make sure you’re not diluting the value of the shareholders’ interests, as they have a say in making sure their rights are protected.
Other than these basic rules, however, executive compensation is fairly unregulated.
How has the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affected executive compensation policies?
Dodd-Frank imposes new executive compensation rules and appropriate governing requirements on publicly held companies in the United States. The government is taking the stance that, for the protection of companies, employees and shareholders, it is necessary to monitor executive compensation.
Executives have negotiated multimillion-dollar compensation deals both during their tenure and after they leave their companies. Dodd-Frank is designed to provide better disclosure regarding these. There are now nonbinding shareholder votes at least every six years with respect to regular compensation and golden parachute arrangements.
Because the votes are nonbinding, there has been discussion about the possible impact. If shareholders overwhelmingly state that they do not believe the compensation paid to their CEO is the correct amount, boards of directors will be inclined to listen. The Dodd-Frank Act also includes rules that deal with the independence of compensation committees and their ability to hire legal counsel and consultants. The independence clauses are a result of what happened with Enron, Tyco and others. Nobody was independent; they were all part of the company, and their subjectivity was high and their objectivity low. The result: no one was able to blow the whistle.
The Dodd-Frank Act was designed to provide better information about what’s going on inside companies.
John Klevorn is a partner with The Stolar Partnership. Reach him at (314) 641-5179 or firstname.lastname@example.org.
In order to prosper in an increasingly competitive marketplace, it is essential to have a dedicated banking partner who is intimately familiar with your business needs and who can provide customized financial resources to grow your company.
A bank that doesn’t pay attention to your company’s needs and instead takes a one-size-fits-all approach may not be a bank that you want to build a relationship with.
“If clients have concerns about their banking relationship, that may be a good indication that they should look for a new banking partner,” says Alfred DeFlaviis, chief lending officer and senior vice president of First State Bank.
Smart Business spoke with DeFlaviis about how to identify a suitable bank and the importance of being prepared when seeking a loan.
What should a business look for in a bank when it is seeking a loan?
A business should look for a bank that takes the time to work with it and is interested in creating a partnership to help move the company forward toward achieving its financial goals. Find a bank that is familiar with the industry and geographic area in which the company operates and has other clients in similar industries. This allows it not only to tailor a package of financial products and services to the business but to share trends it has seen in similar companies.
How does the size of a bank influence how it does business?
National banks usually have a broad range of products and services and try to fit customers into their existing offerings rather than tailor products and services to fit the customer’s individual needs. Community banks have a lot more flexibility to offer customized solutions.
Take, for example, a company in need of many products and services that was doing business with a larger regional bank. The company was working with four individuals within the bank because regional banks tend to pigeonhole bankers into specialized categories, such as C&I loans, commercial real estate, small business loans, etc. The company’s leaders became confused as to whom they needed to deal with. Consequently, the package of financial products and services that was given to the customer by four internal bankers didn’t work. Individuals were selling their particular products and didn’t understand how all of them would work together to help the company achieve its goals.
Community banks, on the other hand, usually have one person, a commercial relationship manager, who coordinates products and services. That person will understand what a customer needs and create a package of products and services that meets the customer’s needs.
Because these institutions are smaller, the business owner may be able to talk directly with higher-level decision-makers to present his or her case. Larger banks have more rigid rules and processes associated with small business loans, and even if the person you’re talking to believes in you, he or she may not be able to help.
How can a business identify a suitable bank to partner with?
First, evaluate your existing relationship. Has your bank been responsive, acting not just as a lender but as a partner? If not, it may be time to find a bank that can work with you to grow your business. When making this decision, remember a community bank is knowledgeable about the community in which you operate and can make decisions based on that information at the local level instead of relying on decision-makers in another city.
After identifying a bank, how can you improve your chances of obtaining a loan?
Be prepared. Have a very clear goal of what you are trying to achieve. Existing companies should provide two to three years of historical financial statements/tax returns, for the business, related entities and owners. And all businesses should have a two-year business plan with a sales goal, profit goal and summary of business activities. Also have the assumptions used to derive those goals; if you are going to increase sales by 20 percent, specify how you are going to do that. If you don’t have a business plan, your banker should be able to help you develop one.
When obtaining a loan, what should a business expect from its banking partner?
Businesses should expect a high level of attention, both pre- and post-closing. Oftentimes, once the loan is closed, a bank and its client won’t communicate again until a problem arises on either side. Bankers and their clients should keep the lines of communication open, conveying information and building a partnership. A good lender sees customers regularly to make sure everything is progressing as planned based on discussions they had prior to the loan closing. In addition, the lender should be a consultant, helping the business expand and providing guidance.
A bank with good customer service should communicate with the borrower, at a minimum, on a quarterly basis. During these conversations, the business owner should convey to the bank how the company performed during that time period, whether it is on track with its business plan, how the bank’s products and services are working and whether there is anything the bank can provide to keep the company on track.
How has the downturn in the economy affected bank loans?
When the economy takes a turn for the worse, you must have confidence that you can get through the rough patch with the aid of your bank. Too many times, customers wait until there is a problem before they go to their bank for assistance, making it difficult for the bank to help. However, if the banker and the business owner have maintained a good relationship with open communication, the there will be no surprises on either side.
Alfred DeFlaviis is chief lending officer and senior vice president of First State Bank. Reach him at (586) 775-5000 or email@example.com.
Leases are rarely conducted on an entirely level playing field, as the landlord is in the business of real estate and the tenant is not. However, with planning and professional guidance, tenants can wrest away the advantage from the landlord and negotiate more attractive terms for occupancy.
“In today’s market, it is imperative that you identify hidden or unanticipated expenses in a lease,” says Richard Mersman, a partner with The Stolar Partnership. “Having a qualified attorney review the lease can save you tremendous headaches in the future.”
Smart Business spoke with Mersman about lease negotiations, what type of provisions and stipulations should be considered, and when to start the lease renewal process.
Why is it important for an attorney to participate in lease negotiations?
For most companies, lease expenses are one of the highest fixed costs on their balance sheet, second only to payroll. Certainly lease expenses — which include rent, common area maintenance costs, taxes and insurance — can have a substantial economic effect on a company’s overall financial performance.
There are a number of financial and legal issues that a tenant will face when negotiating a lease. You want to put yourself in the most advantageous economic and legal position in order to protect your income stream and your business.
What is the role of the letter of intent in the process?
A letter of intent is a tool that the tenant, and later, the tenant’s attorney, can use to streamline the lease negotiation process. The letter of intent defines the basic business terms between the landlord and the tenant.
Generally, the business terms will include key financial terms such as how much rent you are going to pay, what type of tenant improvement allowance the landlord will provide and whether or not there will be a free rent period. The letter of intent will also outline provisions with regard to expansion space, as well as relocation obligations and requirements.
When the attorney — who generally should not be negotiating the business terms — receives the letter of intent, it enables the attorney to concentrate on the legal issues at hand and not the business terms.
What type of provisions should a tenant fight for in a lease?
There are a number of provisions that a tenant should fight for. Commercial leases in today’s market are complicated, sophisticated documents. Generally, in Class A and Class B office buildings, landlords will have a specific lease form that they will provide to the tenant. Naturally, these lease forms are weighted in favor of the landlord.
The responsibility of the tenant’s attorney is to make sure that the tenant is not subject to additional expenses and/or legal obligations that were not originally contemplated in the letter of intent yet may be customary in the marketplace. Involving the tenant’s attorney early in the letter of intent negotiations can be very beneficial and can help eliminate obvious issues.
What stipulations should tenants avoid in a lease?
Make sure that there is no limitation on the use of the space; if the tenant wants to downsize, it may want to sublease space to a different type of business. Additionally, you will not want to be subject to a relocation provision without providing your prior approval. For example, you don’t want the landlord to move you from prime space in a building to space that is less attractive or desirable.
You also want to confirm the parking allocation for your company and identify where that parking will be, thereby ensuring that you have sufficient parking for your employees at a reasonable cost. Signage may also be a concern. Make sure that you have appropriate signage to identify your company within the building as well as outside the building so your customers and clients can easily find you.
Finally, be very careful about common area maintenance costs. The pro rata percentage charge should be accurate and based upon a formula of no less than 95 percent occupancy. This will protect your company’s share of the common area costs so, in the event that a large tenant moves out of the building, your proportionate share of the building costs does not increase.
How should a business go about negotiating a favorable lease renewal?
Start early. The sooner you find out where the market is and what comparable space might cost, the better off you will be. Most leases provide for anywhere between 60 days’ to one year’s notice of renewal, and 180 days is a common threshold. It is incumbent upon each tenant to determine the market rate prior to the 180-day period.
Currently, we are in a very favorable market for tenants. Landlords don’t want to lose a creditworthy, rent-paying tenant. As a result, tenants are able to negotiate a much higher tenant improvement allowance to refurbish space, as well as garner additional rent concessions.
How can a business find a qualified attorney to represent it in lease negotiations?
Referrals are generally the best method for identifying a qualified attorney, as you will likely have someone whom you respect making the recommendation. You can also turn to the local bar association and other legal directories for assistance in finding counsel.
While conducting your search for an attorney, it is important to look for specific experience in commercial leasing as it is a unique area of law that has become much more sophisticated over the last few decades.
Richard Mersman is a partner with The Stolar Partnership. Reach him at (314) 641-5125 or firstname.lastname@example.org.
If an employee leaves your company, is there anything you can do to stop that employee from taking your customers to his new employer?
Many business managers already know that a noncompete agreement can help stop that from happening because it can preclude the employee from competing for a period of time after he or she leaves. But new developments in the way courts apply noncompete agreements could change how much protection they afford employers, says Steven Ciszewski, a partner with Novack and Macey LLP.
“In Illinois, courts have typically enforced noncompete agreements only if the employer could establish that it has a legitimate business need for the noncompete agreement,” says Ciszewski. “However, one of our appellate courts recently broke ranks and held that the employer does not have to establish a legitimate business need in order to enforce its noncompete agreement.”
The issue is currently being reviewed by the Illinois Supreme Court, and the analysis provided by that court could dramatically change how noncompete agreements are enforced in Illinois.
Smart Business spoke with Ciszewski about these new developments and the effect that the Illinois Supreme Court’s ruling could have on employers in the future.
What new developments in the law governing noncompete agreements should employers be aware of?
The general rule in Illinois has been that noncompete agreements are enforceable only if there is a legitimate business need to preclude employees from competing freely after they leave the company. To satisfy this requirement, the employer typically had to show that the noncompete agreement was necessary to protect either its near permanent customer relationships or its confidential information or trade secrets.
One of the state’s appellate courts recently ruled that an employer no longer needs to make this showing to enforce its noncompete agreement. This has created a conflict among Illinois courts that the Illinois Supreme Court should resolve in the coming months.
What effect will the Supreme Court’s upcoming ruling have on employers?
There are a number of things that could happen and a number of possible effects. One possibility is that the Supreme Court affirms the general rule that has been in place and requires the employer to continue to show a legitimate business reason for its noncompete agreement.
That outcome would essentially leave the law in Illinois the same as it has been in the past.
A second possibility is that the court will agree with the appellate court’s new way of thinking and determine that the employer does not have to show that its noncompete agreement is necessary to protect near-permanent customer relationships or confidential information/trade secrets. If that happens, noncompete agreements could be more broadly enforceable in Illinois.
Another possibility, although less likely, is that the Supreme Court announces an entirely new way of interpreting noncompete agreements that is more strict or more lenient than anything adopted by our appellate courts in the past.
Will there be restrictions on the enforceability of noncompete agreements if the Supreme Court does adopt the appellate court’s new way of thinking?
In all likelihood, yes. Illinois courts still seem to unanimously hold that, in order to be enforceable, the noncompete agreement has to be reasonable in duration and geographic scope. Generally speaking, noncompete agreements that last up to a couple of years and cover a reasonable geographic territory are enforceable. There is no reason to think that these limitations will change, regardless of how the Supreme Court rules on the case currently before it. But the Supreme Court can make new law if it wants to, so this could change if the court decides to go in an entirely new direction.
How would employers be affected if noncompete agreements are enforceable in more situations?
The knee-jerk reaction is to think that all employers will be happy because they want their noncompete agreements to be broadly enforced in order to protect their business when their employees leave. In many cases, that might be the right reaction, but it can cut both ways because employers often find themselves on both sides of this issue over the long run.
One year, the employer might want its own noncompete agreement to be enforced because it needs to protect its business when its employee leaves. The next year, the same employer might want to hire an employee from a competitor. In that situation, the employer would want its competitor’s noncompete agreement to not be enforced so that it can improve its business by hiring talent away from that competitor.
A business might have the best legal arguments in the world to win the case it has today, but how might that win impact the situation it faces in a year? From the employer’s standpoint, this tension is present in almost every noncompete case and needs to be thoroughly considered before any type of legal action is initiated.
Steve Ciszewski is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or email@example.com.
Do you know what, exactly, your employees do? Believe it or not, many executives haven’t taken the necessary steps to truly understand each position in their organization.
In today’s chaotic employment landscape, a job analysis should be the first step in every major human resources effort. A job analysis provides the objective criteria needed for executives to make informed decisions regarding staffing, selection, performance, succession planning and compensation.
While some people use the term job description interchangeably with job analysis, the processes are actually quite different, says Jody Wheaton, director of Organizational Effectiveness for Corporate College. “A job description is a written statement about the job,” she says. “A job analysis is a systematic process that captures the entire job in compliance with professional and legal guidelines. Ultimately, this helps you develop a selection system that is valid and legally defensible.”
Smart Business spoke with Wheaton about the benefits of a job analysis, what approaches are available and who should be involved.
How can an organization benefit from conducting a job analysis?
Conducting a job analysis is important because organizations are being asked to work leaner and more efficiently while developing growth and innovation. It’s important to be aware of the critical responsibilities for each position, especially those that are considered strategic in nature, and those that impact the customer and the bottom line. In addition to determining the critical tasks associated with each job, it’s crucial to identify the desired knowledge, abilities, skill sets and other preferred characteristics.
Job analysis serves as the foundation for helping select the right people into an organization, in terms of job fit as well as cultural fit. A job analysis allows companies to not only create better selection systems, but also create effective training development programs, compensation and talent management systems. Often organizations hire for technical ability and fire for personality flaws. Organizations should consider hiring for both experience and cultural fit. Job analysis provides the needed data. In the event an organization is challenged legally, the court will look to see if a job analysis was done properly and if the selection system was considered to be job-relevant. Organizations should take a proactive approach to minimize legal challenges.
What job analysis approaches are available?
Many companies begin with reviewing the Occupational Informational Network (O*NET), which provides comprehensive occupational descriptions and data under the sponsorship of the U.S. Department of Labor/Employment and Training Administration.
To build on the O*NET data, the first approach is conducting interviews and focus groups. Typically these are conducted with job incumbents and supervisors. The drawbacks to this approach include the time required, scheduling and large number of people that need to be included if there are a large number of incumbents serving in the role.
Surveys are another option. This method allows you to gather data quickly and summarize the data statistically. Drawbacks include the inability to ask clarifying questions and gain needed buy in.
Off-the-shelf job analysis systems don’t allow for flexibility and are often too generic. We believe a blended tailored approach is the best choice, gathering and leveraging multiple perspectives and methods. We also believe leveraging technology in the process is critical.
What kind of components should be included?
Knowledge, skills, abilities, work behaviors, tasks associated with the job, competencies and cultural aspects of the organization should all be part of the data collection process. Be sure to distinguish between essential and non-essential characteristics for Americans with Disability Act (ADA) purposes.
Who should be included?
You want to make sure you have a good sample of high performers who understand the job and do it well. You should include senior-level management, direct supervisors and anyone who has critical knowledge about the job. Finally, include those who understand the training and development function, because they can often best articulate where people go wrong after attending training.
How much time will it take?
It depends on your approach. It can take anywhere from a few weeks to three months. You don’t have to take a manual- or labor-intensive approach. Often, a manual approach involves time, resources, creation of job analysis questions, summarizing the data, availability of employees, travel, schedules, etc.
Having a systematic process and leveraging technology-based tools allow job analysis participants to go through the process in a more efficient manner. Such tools provide standardized questions that can be edited to ensure they are customized to that job, as opposed to off-the-shelf tools, which use generic statements that can’t be customized.
How can businesses ensure standardization and legal compliance?
The best practice is educating and training all employees on the process, the importance behind it, and why you do it. In some organizations, stakeholders get involved in the process, even becoming engaged in the selection measures that are chosen. With other organizations, the HR department bears the entire burden. For legal compliance, it’s important to follow professional guidelines regarding sampling — who you include, the type of information you include, etc. The Equal Employment Opportunity Commission’s (EEOC) Uniform Guidelines and the Society for Industrial and Organizational Psychology’s (SIOC) Principles for the Validation and Use of Personnel Selection Procedures are a couple of good resources to help with compliance.
Jody Wheaton is director of Organizational Effectiveness for Corporate College. Reach her at firstname.lastname@example.org or (216) 987-5867.
Has your company found it more difficult to compete in today’s marketplace? With the increased economic pressures and a more informed customer base, many organizations find it increasingly difficult to meet or maintain business objectives.
Six Sigma is a business management strategy initially developed by Motorola in 1986. Lean manufacturing is the result of years of practical operational efficiency tools developed by Toyota, often referred to as the Toyota Production System (TPS). Business practitioners have melded Six Sigma ideas with lean manufacturing to yield a methodology termed Lean Six Sigma. Put simply, it seeks to eliminate process variation and defects while optimizing the process by eliminating or reducing waste and increasing efficiency.
“Lean Six Sigma is a systematic approach using analytical tools to identify and remove problems within a process,” says Ed Siurek, director of Quality for Corporate College. “It creates efficiencies, drives productivity and reduces costs — all things companies are looking to achieve in a struggling economy.”
Smart Business spoke with Siurek about Lean Six Sigma, who should be involved within an organization and how the model should be evaluated.
Why is it important for companies to be aware of Lean Six Sigma?
In today’s global economy, consumers have become better informed and increased demands for higher quality, more consistent products at a lower price. Companies have been forced to perform at higher levels with the same or limited staff. Reduction of waste in the form of defects, operational inefficiencies and nonvalue-added activities is one place companies have turned. An additional benefit to reducing variation and defects is higher customer satisfaction. Having happy customers typically results in repeat business.
Why is Lean Six Sigma effective when compared to other management programs?
Plain and simple, it uses data. Lean Six Sigma uses a defined methodology when looking at process optimization. Part of this methodology involves collecting process data and using tools to pinpoint problems using statistical analysis. The approach takes into account variables that occur and may not necessarily be obvious. These process influencers are often not even considered when using other continuous improvement methods because they are not seen as directly involved in a process. Often management thinks they know what’s wrong with a process. But until they analyze the problem, it’s hard to identify the true root cause.
Is there an optimal time for an organization to implement a Lean Six Sigma program?
Any organization can see the benefits of Lean Six Sigma tools, but until an organization makes the conscious decision to deploy the program, the benefits will only be minimal and may not be sustainable. Organizations seeing the biggest benefits from Lean Six Sigma are those that implement the program before they ‘need’ to do it. Being proactive can allow companies to develop efficiencies and, more important, the culture necessary for continuous improvement. Implementing when it becomes a necessity is still very effective. Organizations must be diligent in the commitment and planning of their implementation to obtain the maximum benefits.
Who should be involved within the organization?
Lean Six Sigma is intended to be an enterprisewide program. Management must champion the different projects so they can help with major decisions and clear roadblocks. But the reality is that the people who are really analyzing and fixing the process are those who are doing the work — they are the closest to it. You also want to have individuals involved who are adept at identifying collateral damage. If the process you’re working on negatively impacts another process, you can create a bigger problem for yourself. This doesn’t mean every employee needs to be a Lean Six Sigma Black Belt, but every employee should be introduced to the basic concepts and principles. Individuals will then need to be selected to be trained to various levels within Lean Six Sigma, depending on their role in continuous improvement projects.
How should an organization get started with Lean Six Sigma?
First, make a commitment. Management needs to make sure they understand the program and commit to continuous improvement. Initially, many employees are afraid Lean Six Sigma will become the ‘program of the month.’ When implemented that way, it will fail. As management gets involved and employees see the personal benefits to their daily work, the program begins to take hold. Employees start to look for ways to optimize their work and others want to learn how they can benefit. At that point, the program has started to truly take hold and the benefits will quickly increase.
How should the effectiveness of Lean Six Sigma be evaluated?
Every project should have clearly defined measurables. Spending the time in the first phase of a project allows an organization to understand the process, the project scope and potential influencing factors. When evaluating a process, it is common for a Lean Six Sigma Black Belt to ask the process owner, ‘What’s your biggest pain?’ or ‘If you could fix one issue with the process, what would it be?’ Taking initial measurement of the process ‘as is’ is critical to understanding the impact of any continuous improvement project.
Effectiveness should be measured in defect reduction, time savings, monetary measures or anything else that can show direct benefit to the increased efficiency of the process.
Using Lean Six Sigma as an organizational tool for continuous improvement allows companies to constantly seek to minimize problems, increase efficiencies and maintain the highest levels of productivity, even during tough economic times.
Ed Siurek is director of Quality for Corporate College. Reach him at (216) 987-2828 or Edward.email@example.com.
In today’s competitive environment, noncompete and confidentiality agreements can be critical to maintaining an edge over your rivals.
And failing to have them could put your company out of business should your employees leave and take your secrets with them, says Susan Rowe, a partner with The Stolar Partnership.
“One of the primary assets that most businesses have — which they’ve often spent significant funds to develop — is their confidential information,” says Rowe. “This includes, for example, formulas, proprietary research, customer databases, pricing strategies and other trade secrets.”
Smart Business spoke with Rowe about noncompete and confidentiality agreements, what type of information to include in employee contracts and, if things go awry, what type of evidence is needed to pursue legal action.
Why is it important for employers to address noncompete and confidentiality agreements?
Missouri statutes protect confidential information that is a trade secret. It’s important to have a confidentiality agreement because you can use it to talk to the employee about the importance of protecting confidential information. You can also identify trade secrets and confidential information. If you fully describe what is confidential, the employee can’t later say, ‘I didn’t understand that this was or wasn’t confidential.’ Furthermore, you can include certain protections in addition to the protections that statutes might provide for the employer.
It’s also important to have a noncompete agreement. Absent a noncompete, former employees can leave to join a competitor, with nothing to prevent them from doing so. Even without confidential information, there are circumstances in which an employer doesn’t want someone it has trained — and spent significant resources doing so — to go out and compete against it.
What information should be included in a noncompete agreement?
It’s important for employers to realize that the enforcement of a noncompete agreement is a legal matter. Noncompetes can be expensive to enforce in the courts. Noncompetes undergo a lot of scrutiny in the courts because the law says such agreements are anti-competitive and can only be used to protect certain interests of the employer — such as the customer base or trade secrets.
If you’re protecting client relationships, describe the scope of the relationships and identify which are considered confidential and subject to the noncompete.
Also, be careful about the scope of the agreement in terms of its length and geographic restrictions. The courts typically do not allow for a very broad geographic scope or permit a noncompete to go on for a long period of time.
Finally, include remedies for yourself, such as attorney fees and other provisions, which will protect your business if you have to enforce the agreement.
If an employee signs a noncompete agreement but takes a job with a competitor, what steps can an employer take?
To prevent disputes, give the employee who is leaving or who has been terminated copies of the agreement upon his or her departure.
Employers who employ someone with an existing noncompete with a former employer — and are aware of the noncompete but continue to employ that person nonetheless — run the risk of being sued by the former employer on a tortious interference with contract claim. If you become aware of a former employee, bound by your noncompete agreement, working for a competitor, have your attorney send the new employer a copy of the agreement, thereby putting the new employer on notice that you believe there is a noncompete agreement in effect. Often, this will dissuade the new employer from continuing to employ the person. You can also send a letter to the former employee, reminding him or her of the noncompete agreement and stating that you intend to enforce the provisions. Sometimes that’s enough. Other times, employees will proceed in the face of a noncompete and you will have to go to court to enforce the agreement.
What evidence does a business need to pursue legal action against a former employee whom it suspects has leaked confidential information?
As with any lawsuit, before it is filed, make sure that you have good-faith basis for the lawsuit and see that much of your evidence already in place. If one of your former customers says, ‘Oh, your former employee is calling on me,’ ask that person to send a note or letter identifying the person who has called on the business.
If you think the former employee is talking about your confidential information, ask your customer to write down the substance of the conversation. This allows you to have a statement ahead of time that you can use to support what you will be alleging in the lawsuit.
In addition to noncompetes, what other methods can a business use to protect its intellectual property?
Employers should be mindful of what’s out on the Web. Commentators have talked about employers who have found their former employees disclosing confidential information or engaging in developing relationships with former customers on such sites as Facebook and LinkedIn. When employers find this type of information, they should demand that the former employee stop this conduct or remove confidential materials, or face legal action for failing to do so.
Employees change jobs because they’re dissatisfied — they feel like they don’t have opportunities or that they’ve been treated badly. To prevent people from leaving with confidential information, it’s important to build loyalty with your employees, listen to them when they’re upset and treat them fairly.
Susan Rowe is a partner with The Stolar Partnership. Reach her at (314) 641-5119 or firstname.lastname@example.org.