ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

NON-COMPETE AND NON-PIRACY

WHAT ARE THEY AND HOW CAN THEY BE APPLIED?

A non-competition agreement is traditionally defined as the prohibition of a person from competing against a former employer. A standard definition is “a contract that restricts participation in a certain market by a company or individual under specific circumstances.” Quite often an employer, an insurance agency for purposes of this article, requires an employee, such as a producer, to sign a non-competition agreement as a condition of employment. Sometimes an agency realizes that it is at risk to losing employees and having them compete with the agency and attempts to implement a non-competition agreement on existing employees.

We are NOT attorneys and don’t purport to define the laws of the various States pertaining to non-competition. However, we do act as Expert Witnesses on cases regarding common practices of insurance agencies and many times these court cases revolve around unfair competition of former employees.

The first question you must ask is, “Why should my agency employ any form of non-competition wording?”

We have spent years helping agencies generate more value in their asset, the book of business owned by the agency that generates revenues and, subsequently, income and earnings that build the insurable and transferable value of the business.

How much would your agency be worth if the employees who produced that book of business or service employees and maintained the relationships between the agency and its clients were free to leave and solicit those customers AT WILL?

Obviously, the value of any insurance agency changing hands under that circumstance would be minimized. So the reason you want to establish the clear and total “ownership” of the book of business is to establish and maintain the value of your agency when you will need to sell or transition ownership. That means that if you NEVER intend to sell it, nor do you expect any residual value from the future conduct of the book of business after your ownership ends, you don’t need a non-competition agreement in place with your employees. Of course, that also implies that during your ownership of the agency, any departure of a producer or service employee could affect you far beyond simply finding a replacement. They could leave and market themselves as having access to hundreds or thousands of the clients with whom they established relationships or about whom they had access while employed with you. Of course if they “steal” confidential information about your client from your files, you may have a cause of action, but not if they simply call the client and offer them services from their knowledge and memory of the client.

So it becomes apparent that a non-competition agreement is important to an insurance agency.

The Second Question is, “What’s The Difference Between Non-Competition and Non-Piracy?”

There have been a myriad of problems applying non-competition agreements over the years as the courts have determined that a non-competition agreement can not stop someone from practicing their chosen profession in the community in which they live. Since most of the traditional non-competition agreements have been written with geographic considerations (i.e. non-competition within 25 miles of the former employer), many courts have routinely invalidated the entire agreement because of this consideration.

The answer is to change the definition of “Non-Competition” to eliminate geographic considerations and include a separate “Non-Piracy” consideration in employment agreements and contracts.

Our definition of Non-Competition is different than the traditional definition. Non-Competition is “the prohibition for an “X” year period of a former employee from assuming or accepting the insurance products of the clients or of influencing the clients to move to another insurance entity or of accepting any remuneration from another insurance entity related to the clients of the former employer that the employee produced or renewed on behalf of the employer or for which they had service or administrative responsibilities.”

Notice, that the definition prohibits the former employee from “assuming or accepting” the insurance products of the agency’s clients, not just from soliciting them. The clients, of course, can go wherever they wish to fulfill their insurance needs. However, if this agreement is properly executed, while the client may leave your agency, the former employee may NOT become the client’s agent for some agreed-upon period of time.

A Non Piracy Agreement is more liberally defined as “The prohibition for an ‘X’ year period of a former employee from 1) assuming or accepting the insurance products of the clients or active prospects of an agency or of influencing the clients to move to another insurance entity or 2) accepting any remuneration from another insurance entity related to the clients of the former employer for whose confidential information they had access.”

Clients are further defined as “a) current clients with current policies at the time of the employee’s departure, b) current prospects who were contacted by an agency employee within the last twelve months for the purposes of establishing and building a relationship toward the sale of insurance products or c) clients who had an active policy within twelve months prior to the employee’s departure.”

How Long Should a Non-Compete/Non-Piracy Agreement Be Enforced?

The period of time that would be acceptable to courts for a non-competition or non-piracy agreement really relates to the general fairness doctrine. We impose non-competition and non-piracy agreements to keep former employees from unfairly using confidential information regarding the agency’s products and its clients to which the employee became privy while actively employed at the agency. We should have no problem with the employee using his/her knowledge to pursue his/her career. But they shouldn’t be permitted to use information for which they were compensated by the agency about the agency’s clients. The fairness doctrine would have the prohibition from competition or acceptance of those clients for a time “reasonable” for the agency’s information to be accessible in the public domain or to become ‘stale’ and no longer useful in the solicitation of the client’s policies. A second issue is a reasonable time period to permit the agency to replace the relationship management role for which the former employee was compensated with another current agency employee. This ‘levels the playing field’ to permit open competition between the agency and the former employee. Typically the time period acceptable to ‘stale’ current information about the agency and to permit fair replacement of the relationship management role is the balance of the current policy periods and two successive renewals, between two and three years.

When Should Non-Competition and Non-Piracy Agreement be Executed and For Whom?

In our opinion, every new employee should sign both agreements as a condition of employment. This is the most secure protection for the agency. The employee didn’t have to take the job if he or she didn’t agree with the prohibition against unfair competition once they leave the agency’s employ.

In order to protect the agency, all current employees who deal with clients from a sales or service standpoint should also sign Non-Competition and Non-Piracy Agreements. However, if this might be viewed as a further limitation of the employee’s rights, it can only be done safely with some form of compensation that a court would be considered reasonable for the acceptance of the perceived limitation on the employee’s previous rights. This means that the consideration for the signing of the agreement must be sufficient for a court to agree that the employee was reasonably compensated for the elimination of his/her ability to freely competed with the agency should he or she leave.

We are not trying to propose any legal agreements as the result of this article. Our goal is to explain the logic behind the implementation of Non-Competition and Non-Piracy Agreements for the protection of the books of business of insurance agencies. Appropriate legal advice should be solicited to create any legal agreement to adhere to the laws of your State.