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Q: Non-Compete contract question ( Answered 5 out of 5 stars,   0 Comments )
Subject: Non-Compete contract question
Category: Business and Money > Consulting
Asked by: curiousinnj-ga
List Price: $50.00
Posted: 19 Nov 2005 03:44 PST
Expires: 19 Dec 2005 03:44 PST
Question ID: 595086
A friend is currently a 1099 in the state of New Jersey.  Four years
ago, working as a 1099, she signed a non-compete contract under her
name.  Her company then asked her to form her own corporation two
years ago, and now receives payment to that corporation, though she
still actually does the work.  Is she still bound by the non-compete

Request for Question Clarification by pafalafa-ga on 19 Nov 2005 10:20 PST
A 1099?  What's that?
Subject: Re: Non-Compete contract question
Answered By: webadept-ga on 19 Nov 2005 13:07 PST
Rated:5 out of 5 stars

I?m assuming that 1099 is referring to the Form 1099-MISC for independent
contractors, since they are also the ones who are normally asked to
sign non-compete agreements as well.

A typical agreement can be found here
[ ]

First off, we are Researchers, not Lawyers, please see the disclaimer
at the bottom of the page for further information about this status.
The best person to get legal advise from would be your lawyer. With
that said?

Most Noncompete type contracts are for the term of employment with the
company. What you seem to be asking moves along the logic of something
like : ?Since the agreement terminates with her employment as a
contractor (1099) with the company, now that she is no longer working
directly with the company but through a separate entity
(S-Corporation), and that all payments are now being made to the
Corporation, and not to her directly as a sub-contractor, is the
Non-Compete agreement also terminated??

Most Non-Compete Clauses say something like the following:

?I agree that during the course of my employment and for a period of
eighteen (18) months immediately following the termination of my
relationship with the Company for any reason, whether with or without
good cause or for any or no cause, at the option either of the Company
or myself, with or without notice, I will not, without the prior
written consent of the Company, (i) serve as a partner, employee,
consultant, officer, director, manager, agent, associate, investor, or
otherwise for, (ii) directly or indirectly, own, purchase, organize or
take preparatory steps for the organization of, or (iii) build,
design, finance, acquire, lease, operate, manage, invest in, work or
consult for or otherwise affiliate myself with, any business in
competition with or otherwise similar to the Company?s business.?

Key words here [ Can you believe that is only one sentence?] are
?Relationship? with the company. It sounds like she still has a
relationship with the company right now, so even if she cut ties with
them all together (ending the relationship) she would still be bound
by this clause for 18 more months. The fact that she is the sole
operative in the Corporation would also stand up as a continuing
professional relationship, since the only reason she created this
corporation was to further her continued status as a consultant with
the company.

If her Non-Compete  statement is similar I would suggest that on the
surface and to most people reading it, the contract is still valid and
the Non-Compete is still in effect. The reasoning would be that the
relationship is still implied, because of the reasons for the
corporation to be created. Reality is that the reason the company
wanted the corporation was probably so that they were no longer
responsible for workman?s comp insurance and other expenses that go
along with having a contract employee. So they stick her in the
position of having to be a corporation.

Recently there was a case with Lycos that might help give some light
for the tunnel out of the agreement... or at least to position herself
so that she can re-negotiate her current agreement.

--?A recent decision by the Massachusetts Superior Court signals that
the scale has tipped, and Massachusetts employers must not only
carefully craft noncompetes in order to protect their core assets,
they must also consistently maintain them. In Lycos, Inc. v. Lincoln
Jackson (Middlesex Superior Court No. 2004-3009), the court ruled that
an employee?s noncompetition and nondisclosure agreement was
unenforceable because her employment relationship had changed
materially from the time she entered into the agreement to when she
walked out the door. Because the employer had failed to renew the
noncompete at each stage of the employment relationship, the former
employee was able to join forces with one of her employer?s biggest
competitors without penalty.?

Now that would suggest that since your friends status has also
changed, and that the agreement has not been revisited after this
change, then the agreement is invalid.

There is quite a bit of information on Non Compete clauses on Find Law as well.

The Lycos decision was surprising. I would say that up to that point
she didn?t have much of a chance, but with that precedent being set,
and the shifting legal status of non-compete agreements on the whole,
it would be worth it to expend the time to consult an attorney.



Clarification of Answer by webadept-ga on 19 Nov 2005 13:17 PST
Here's something from the other side as well.. 

--"ii.  Change in the Former Employer's Status

In recent months, a new ground for striking down a non-compete
agreement has emerged: the absence of a party in interest under the
agreement. Where an employer merges with another company and forms a
new company, an employee may successfully argue that the agreement is
not enforceable because the party in interest under the non-compete
agreement no longer exists.

In a recent Virginia state court decision, an employee successfully
evaded enforcement of his non-compete agreement by arguing that the
agreement could not be enforced by the surviving company, Christian
Defense Fund ("CDF"), after its merger with his former employer, Hart
Conover Inc. ("HCI"). Despite the fact that CDF inherited all of HCI's
duties and obligations under its contracts as well as the right to
enforce them, the court agreed with the employee noting that contracts
for personal services cannot be assigned to or enforced by third
parties unless both parties agree to the assignment. Because the
employee had not consented to an assignment, the surviving company had
no right to enforce the non-compete agreement, or any other provision
of the consulting agreement. See Mullen, "Court Refuses to Enforce
Noncompete Following Merger," Virginia Employment Law Letter, February
1999; see also Gelsomino v. Trade Advisory Services, Inc., N.Y.L.J.,
March 15, 1999 (Cozier, J.) (denying motion for summary judgment where
there was an issue of fact as to whether employer still existed and
whether it had any enforceable interest in the non-compete

Clarification of Answer by webadept-ga on 19 Nov 2005 13:26 PST
Here's another good article that I forgot to post as well
curiousinnj-ga rated this answer:5 out of 5 stars and gave an additional tip of: $50.00

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