Contractual Covenants That Continue After Termination
Introduction
- Certain promises (called covenants) in contracts between manufacturers and sales reps continue to apply even after the contract ends.
- It is essential for sales reps to understand these obligations, and to revisit them after a termination, to avoid costly lawsuits and damages.
- Covenants covered below include non-compete agreements, confidentiality, and non-disparagement provisions.
Key Covenants That Persist After Termination
Non-Compete Agreements (NCAs)
- What are they? NCAs are promises that prohibit the sales rep from competing against their principal, with whom they are about to contract.
- Duration is important. Sometimes NCAs apply only during the life of the contract (those are OK). Other times, they apply for a certain time even after the contract ends (those are not OK).
- Certain States prohibit NCAs that apply after a sales rep contract has ended because it tends to harm a free marketplace. Principals include them in contracts anyway, in hopes that if they “run it up a flagpole the sales rep will salute.”
- Limitations in NCA’s can be blanket limitations or include geographical limits, or product scope limits also. Each NCA should be analyzed to see if it’s reasonable.
- Enforceability. Many courts will not enforce NCAs if they are not “reasonable.” Other courts will not enforce them at all, if they extend beyond a sales rep’s termination.
An example of an “unreasonable” NCA: a sales rep works for a competitor to their Principal, and their Principal tries to prohibit them from working for that competitor, but the rep is not selling the same products for the competitor, only products in the same industry. That restriction would likely be held as unreasonable and voided by a Court.
- When NCA’s are valid, however, the potential risks of violating one includes lawsuits for lost profits and attorney fees paid by the plaintiff, also.
- Case study. In a very unfortunate situation, a large electronics industry sales agency found a better deal, terminated their contract with a manufacturer, and then simply ignored an NCA and began competing against that manufacturer through a competitor, right after termination. The manufacturer immediately issued a cease and desist letter through an attorney, and when the sales agency did not comply, a lawsuit in federal court ensued. Yes, they made a Federal case out of it!
- The agency wound up incurring their own attorney fees, and had to pay a settlement to the plaintiff manufacturer equal to their lost profits from the wrongful competition and resulting loss of business.
Confidentiality Agreements
- What are they? A confidentiality agreement is a covenant to protect a principal’s proprietary business information.
- Targets. This can include protecting everything from customer identification to price considerations and costs, product design, copyright, trade secrets, and other intellectual property, as well as business strategies and processes.
- The consequences of breaching confidentiality agreements can include lawsuits for violation of intellectual property rights or for unfair business practices, lost profits, lost customers and the like.
Non-Solicitation Covenants
- What are they? A non-solicitation clause prohibits sales reps from hiring or soliciting their Principal’s employees, and more importantly for a sales rep, it prohibits the Principal from hiring or soliciting the sales rep’s employees.
- Importance. These covenants are critical for maintaining stability in business relationships, through continuity of personnel
- The consequences of breaching non-solicitation clauses are lawsuits and resulting damages for harm to business or business reputation by the plaintiff.
Legal and Practical Consequences of Violating Covenants
Lawsuits and Financial Penalties
- Again, these protective covenants are essential to identify and comply with, or potential negative legal outcomes can result. Such as the plaintiff recovering damages for lost profits, attorney’s fees, and other court-imposed penalties.
- Refer to the case study above for a look at the severe consequences.
Complex Legal Defenses
- Defending against covenant violations can be costly and time-consuming, even if the rep ultimately prevails. The sales rep’s time is much better spent developing new markets and sales.
Best Practices for Complying With Post-Termination Covenants
Understanding Your Obligations Before Signing
- Reps must review covenant provisions carefully before agreeing to them and signing the contract. If there is a covenant and the sales rep is uncertain of their duties, discuss it with the manufacturer before signing.
- Better yet, consult with an attorney to ensure the terms are non-ambiguous, reasonable and enforceable.
- Seeking legal advice can also help determine any exposure to liability, before accepting new contracts that may conflict with existing covenants.
Proactive Steps Upon Termination
- Review the representation agreement to assure compliance with all covenants.
- Return or destroy confidential information immediately after termination, as required by the contract
- Document compliance to avoid disputes.
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When to Seek Legal Advice
Clarifying Ambiguous Terms
- It is much more cost-effective to hire an attorney before signing a sales rep contract with covenants, if the covenants are unclear or appear overly restrictive.
- Better than having to hire an attorney to defend lawsuits later.
Addressing Potential Violations
- If a Principal sends a cease and desist letter or other communication advising the sales rep to stop doing something, the rep should seek immediate legal help, and not respond without the assistance of counsel.
Negotiating Reasonable Modifications
- When sales reps and manufacturers work with legal professionals to negotiate less restrictive covenants before signing contracts, both sides benefit.
Conclusion
A sales rep Attorney can help with 1099 violations by:
- It is critical for any sales rep or agency to understand and comply with post-termination covenants, to avoid legal and reputational risks.
- Proactive steps and legal advice can help navigate duties required by covenants.
- Consult with an attorney to review contracts or address potential covenant violations, before signing the contract. Our attorneys have over 70 years combined experience in analyzing and advising sales reps on covenant responsibilities.
FAQs About 1099 Violations for Sales Representatives
Contractual covenants are promises in contracts between manufacturers and sales reps which continue to apply even after the contract ends.
A sales rep who violates a noncompete agreement, can be sued for damages, and lose if the noncompete agreement is found to be valid.
To assure compliance with confidentiality covenants, after a termination, start by reviewing the provisions and if there is any question contact an attorney with experience in sales rep disputes.
If a contract includes a non-solicitation clause, be sure to comply with it. Courts will enforce them.
Less restrictive covenants can be negotiated before signing a contract. Sometimes, parties can do that on their own. Other times, it will require a more nuanced approach where hiring an attorney may be sensible.
Noncompete agreements are not enforceable across the board in every state. It depends on the scenario and the restriction.
If you suspect that your new job might conflict with an NCA you had with a prior employer or principal, consult an attorney before signing the new contract.
To document compliance with confidentiality requirements in sales rep contracts, follow the contract provisions by either destroying or returning the confidential information and then never revealing it verbally. Document this.
Principals can sue for accidental showing of confidential information, if it effects their business negatively.