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An Alternative to Noncompetes: Forfeiture for Competition Agreements

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By Hank Jackson

Enforcing covenants not to compete against former employees or sellers of businesses always has been somewhat problematic. In particular, noncompete agreements are governed by state laws that differ considerably state by state, depending on public policy. For instance, California is well-known for its public policy against noncompetes while Florida more strictly enforces them.

The lack of uniformity in noncompete laws is most troubling for companies that operate throughout numerous state jurisdictions. Also, as a practical matter, many judges are simply reluctant to enter orders prohibiting people from working in their chosen fields. Litigating noncompete disputes are routinely expensive and the results uncertain.

 As a consequence, employers and purchasers of businesses are more frequently turning to “forfeiture for competition agreements.” Such agreements basically provide that if the employee or seller of a business competes, then such competing party forfeits certain benefits such as severance pay, stock incentives, deferred payments and earnouts. A major advantage of this type of arrangement is that it can be enforced by an employer or a purchaser of a business without filing a lawsuit and obtaining a court order. The benefits are simply withheld requiring the competing party to initiate a lawsuit for damages if there is a disagreement. Equally important, the court is never faced with making the hard decision of whether or not to enter an order prohibiting a person from certain employment or a scope of business. Instead, the court will consider only whether the competing party must forfeit the monetary benefits that were previously agreed to between the parties. The courts, in general, are significantly more likely to uphold a forfeiture of agreed upon monetary benefits than to enter an order enjoining a person from employment or a scope of business.

As forfeiture for competition agreements become more common, there are precautions to consider.

Most apparent, such agreements create a ceiling on the recovery against the competing party. A scenario can develop where the agreed-upon forfeiture amount turns out to be too small compared to the potential reward to the competing party—thus creating an incentive to compete. Also, from the prospective of an employer or purchaser of a business, the actual losses incurred from the competition might end up far exceeding the agreed upon forfeiture amount. As a result, such agreements are best used when the losses from the competition can be reasonably quantified at the time such agreements are entered.

Another precaution is that the forfeiture of Employee Retirement Income Security Act-qualified benefits, which typically vest, might not be permitted under ERISA. Before including a forfeiture provision relating to an ERISA-qualified benefit plan, one should first seek professional advice regarding the plan.

In sum, forfeiture for competition agreements can be a more effective and efficient method to assure compliance with noncompete restrictions when used in the proper circumstances.

Hank Jackson of Shutts & Bowen is board-certified in business litigation by the Florida Bar. He represents individual and companies in a variety of business disputes, including noncompete claims, trade secret misappropriation claims, and business control and dissolution claims within closely held businesses. Contact him at hjackson@shutts.com.

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Drew Limsky

Drew Limsky

Editor-in-Chief

BIOGRAPHY

Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.