These perspectives have allowed me to gain an understanding of how to make non-competes effective, enforceable, and fair.

It’s important to understand the purpose of the non-compete covenant.  Non-Compete clauses are designed to help businesses maintain their market share and their intellectual property after a key employee or partner leaves the business.  The general purpose of the non-compete from the employer’s viewpoint is that a business, through its continued employment of the employee, has provided that employee with job experience, compensation, valuable connections, and trade knowledge.  Therefore the business believes that it would be unfair for the employee to use that information against the business by starting or participating in a competing enterprise.

But, there are obvious public policy concerns that conflict with the employer’s logic.  First and foremost, in America and in any free market economy, we encourage competition.  And a non-compete is about as anti-competitive as it gets.  Courts are reluctant to allow non-compete clauses that would create a permanent monopoly for one business solely due to the fact that the only people with the training and experience to compete with that business have worked for it at one time or another.  Second, putting aside economic competition, there are some industries that we want to grow for reasons that benefit the greater public good.  For instance, the public benefits most when the best health care is available to the most number of people.  For that reason, courts are reluctant to enforce non-competes against doctors, especially doctors who would be estopped from providing potentially life-saving techniques to the public, due to the terms of their non-compete.  Third, we want to encourage employment.  If no business could ever hire someone who worked for a competitor, then a lot more Americans would be unemployed.

Two concepts — fairness to the employer and public policy concerns — are in constant friction when we consider the propriety and the enforceability of any non-compete clause.  And, each state and its courts have found their own solutions in their attempt to balance those two concepts.

In Pennsylvania, non-competes are enforceable, however, because courts discourage their existence, courts interpret them very narrowly.  Accordingly, a good non-compete agreement will be one that was actually discussed and negotiated between the parties and one that is artfully and narrowly drafted to reflect those negotiations and protect the public’s interest.

Several things that the parties should consider when drafting the agreement:

• The duration of the non-compete.  Non-compete agreements in excess of a year are highly discouraged.  In excess of two-years, they are rarely enforceable.
• The geographic scope of the non-compete.  If a medical practice is based in Pittsburgh, it’s unlikely that a former partner of that practice will compete with it when he sets-up shop in Philadelphia, or even Erie.  And a court is unlikely to enforce a non-compete that stops the new business from starting in either of those locations.
• The scope of the non-compete.  A hair stylist is unlikely to compete with the former employer if he or she opens up a restaurant and a court won’t prevent him or her from doing so.
• The specific industry.  If there are only two (very over-worked) hand surgeons in the entirety of Western Pennsylvania, a court doesn’t want to prevent one of them from opening a competing practice, when demand and public importance are so high for the industry.  Likewise, if a non-compete prevents a lawyer from meeting with former clients, the court won’t enforce that agreement, because it would be unfair to the clients, who have a relationship and history with that lawyer.

I frequently field the call from a small business client asking whether or not I think it is worth pursuing the claim.  I am always straight forward with my clients and I tell them there are no hard rules or cutoffs for determining which claims to pursue and which to write off.  Instead I consider the question on a case by case basis that takes into account three factors.

1.  How much money is in controversy?   (i.e. how much money do you believe that you are owed?)

This factor is probably the most obvious for the “risk / reward” analysis that a small business person (or any person) does prior to hiring an attorney.  If there is very little money in controversy, then it probably isn’t worth hiring a lawyer to file a lawsuit.  If my client still wants to pursue the claim at all, I advise them that they can file a civil suit themselves at the district magistrate’s office.  The magistrate’s office allows simplified pleading (a “complaint” — the document that initiates the lawsuit — can be as simple as a brief paragraph describing what occurred).  It also provides a far more relaxed environment where you can simply testify yourself, without a lawyer asking you questions.  There are, however, several downsides.  First, the magistrate’s decision, in Allegheny County, can be appealed de novo (i.e. from the beginning) not just once, but twice.  This means that you may be required to attend three different hearings (only the last of which would be in front of a judge or jury) prior to getting a final verdict.  The defendant may choose not to appeal the award, but, if the dispute is particularly contentious, they might.  Moreover, the next two hearings will be significantly more formal and I would never recommend a non-lawyer proceeding through these stages alone.

2.  Who is the defendant?  (i.e. will they be able to pay a judgment and how vigorously will they defend the action?)

I always take into account two factors about what type of person or entity the prospective defendant is.  The first is the financial solvency of the prospective defendant.  The old saying goes that a judgment is only worth as much as the paper that it is written on if the person or company doesn’t have the ability to pay it.  You could have a great claim for $10,000 against a corporation that owed you money for the services that you legitimately rendered, but, that company is teetering on bankruptcy or the principals have already skipped town, it might not be worth your time pursuing it.   But, then again, that corporation may have some assets that you can execute your $10,000.00 judgment against or you may be able to get in line after another creditor in bankruptcy. Solvency is critical to consider and attorneys generally have a good feel for what defendants would be able to pay a prospective judgment and what defendants wouldn’t.

It’s also critical to consider how vigorously the entity will defend the action.   Will they fight all the way or will they offer a reasonable settlement at some point?  This question hinges generally on how litigious the person or corporation is as a matter of practice or principle and how reasonable they are when considering their own risk/reward.  Corporations generally do the math and determine that if there is some risk of having to pay money at trial, then they would rather settle, especially when they know they will have to pay more significant attorneys fees if they don’t.  As a result, they are more likely to settle early, sometime after filing a law suit.  Individual defendants may see it differently, especially if they are personally vested in the services that they perform.  A person or company who vigorously defends your lawsuit will expose you to higher attorneys fees and therefore may change your risk/reward analysis.

3.  Are Attorneys Fees an available remedy.

Most people believe that if they win a lawsuit, they will always get their attorneys fees paid by the losing party.  This is a myth.  The actuality is that there are only a relatively small number of instances in which attorneys fees are available to the winning party.  Generally, there either has to be a statutory provision providing for the reimbursement of fees or there has to be a contractual provision.  And even when there is a contractual provision, it may not always be enforceable.  Accordingly, your contract with a vendor MAY have an attorneys fees provision, but you will have to ask an attorney whether that provision is enforceable (many contractual provisions for fees are unenforceable, especially if they are not easily visible or are just part of a contract of adhesion).  Certain statutes also allow for attorneys fees or if a person’s conduct was fraudulent or intentional, they may be available then as well.  You should consult with an attorney to determine if you would be eligible to collect attorneys fees under the facts of your lawsuit.

If attorneys fees are available, it obviously makes it far more attractive to hire a lawyer and bring your lawsuit.  Not only does it change the risk/reward analysis, but it also provides further incentive for early settlement.

The important thing to remember with your small claims is to call a lawyer and ask for their opinion.  Often times, if there is a relatively simple claim, I will offer flat fees, so that my clients will have the advantage of an attorney, and will at least be able to know what my services will cost up front, as opposed to only guessing whether or not they will exceed the amount the are seeking. Other times I will advise them honestly that it isn’t worth their while to engage me.  Remember, it’s always worth a call.

If you have a small claim, feel free to email me at pkurzweg@PittsburghLitigationFirm.com or give me a call at (412) 258-2223 to discuss it.

Some Basics:

There are two primary ways to structure the sale of your business.  The first is the “stock deal,” which is likely the way you’ve always conceived of selling your company.  This deal is relatively intuitive.  You and your partners own shares of stock (or some other measure of equity) in your company.  You have a prospective buyer who wants to purchase the company.  You therefore decide to enter a deal in which you transfer these shares to the prospective buyer.  With the stock, comes ownership of the company, and once that is transferred, the business entity continues to exist, but now with different owners.  This deal is generally the more favorable structure for sellers, as the debts and other liabilities of the business transfer directly with the shares of stock, and the seller is generally able to walk away after the deal unconcerned about past and future liabilities of the corporation.

The second way of structuring the sale of your business is the “asset deal,” which is generally more favorable to buyers.  In an asset deal, the buyer doesn’t purchase the stock, but offers compensation to the stock holders for the assets of the company.  Assets can include but are not limited to things like real estate, leases, materials, inventory, liquor licenses (for bars or restaurants), machinery, equipment, computers, servers, websites, intellectual property, and the name and/or “good will” of the company.  After an asset deal is complete, the corporation pays off the outstanding liabilities, the corporate entity formally dissolves with the state, the stock holders of the selling company are compensated per the terms of the shareholder or membership agreement, and the new entity, which purchased the assets, continues business with the assets and often the name and good will of the entity that just dissolved.  Sellers prefer this structure, because they do not necessarily take on the past liabilities of the corporation whose assets they purchased.

The two basic structures are only the framework for a sales agreement that should account for the important considerations that are often unique to the specific business type or the specific terms of the sale.  Here are a few of the most basic considerations:

Who Is the Buyer:  Is the buyer already a shareholder who is buying out his partners or is it a larger company that is absorbing the business that it is purchasing?  Is the buyer financing the purchase or is the buyer paying in cash?

What are the debts:  Does the selling corporation have debts and are any of those debts personally guaranteed?  If there are personal guarantees, is the bank willing to release the person from the debt and if not, how can the buyer assure the seller that he will not be sued if the buyer defaults?

Employees and Management:  Are there key employees with contracts that have to be considered?   Are there going to be layoffs that could give rise to unemployment filings or lawsuits?  Are any of the selling shareholders going to work for the buyer after the transaction as a manager or executive to assist in the transition?

Non Compete:  Does the seller intend to start or work for a business in a substantially similar field and does the buyer want to assure that the sellers do not compete for a period of time following the transaction?

Liabilities:  Does the company make and/or sell products that could be the source of a claim that has not yet been filed?  Does the company have any third-party claims, worker’s compensation claims, etc. that are outstanding?  Is the company actively involved in litigation as either a plaintiff or defendant?

Intellectual Property and Goodwill:  Are there product names or company names that are trademarked.  Does the buyer want to continue selling products or doing business with those names?  Who owns the patents that the company is using?

Leases:  Is the company subject to a long term lease?  Does the buyer intend to stay at that property?

These considerations are only the beginning.  At the early stages of your prospective sale, you should meet with an attorney to discuss what your business does, what your goals are, and what your concerns are.  A well-structured deal will not only provide you peace-of-mind in the future, but it will also help you avoid litigation that arises because critical issues either were not considered or were not adequately addressed.

If you are selling your business or if you are considering buying a business, call my office to arrange a consultation.  412-258-2223.

The Act applies only to construction on an existing building or the land on which or adjacent to an existing building.  New construction is not covered.  The Act is also limited to private residences and to contracts in which the total price of the work exceeds $500.00.  But even these limitations allow the Act to cover a broad range of construction that contractors perform for private individuals in Pennsylvania.

What does the Act say that is so important?  The primary function of the Act is to keep contractors above-board.  It forces them to put their contracts into writing, with specific language that itemizes the work that they are going to perform and provides a price breakdown, with a start date and a completion date.  All contractors must be licensed and must print their full names, addresses, and license numbers on any contract that they execute with the homeowner.  The contract must contain a date, it must include a total sales price, and it must include a “right of rescission” clause, which states that the homeowner “shall be permitted to rescind the contract without penalty regardless of where the contract was signed, within three business days of the date of signing.”  In other words, the contract must allow the homeowner to change his or her mind without penalty up to three days after he or she has signed the contract.

Perhaps most important is a provision that protects the homeowner from the classic contractor speaches of “I’m afraid I can’t do this in the price that I quoted you,” or, worse yet, “this turned out to be more expensive than we originally thought.”  The Act expressly forbids a contractor from charging for any work outside of the original contract specifications “without a written change order signed by the owner and the contractor.”  No longer are the days when the contractor could perform and bill the homeowner for upgrades without having a written modification of the agreement.

The homeowner has the ability to sue the contractor for a breach of any of the conditions mentioned above (which are by no means the only conditions included in the Act).   The homeowner can sue for the excess charges that he or she incurred above the contract price.  Moreover, in its discretion, a court can award attorneys fees and treble damages (meaning damages up to three times as much as the overpayment) to the homeowner.

The Act, which you can read in full here, provides the homeowner with a whole new set of rights and new remedies that can be enforced in a lawsuit.

If you’ve recently renovated your home and you suspect your contractor has violated the Act, give me a call (412) 258-2223 or send me an email for a free consultation.

Peter Kurzweg, Esq.

Your small business can avoid this problem by working with attorneys to find mutually beneficial, creative means of compensation that you can structure so that you can afford the legal services that you need. Attorneys do not need to work on an hourly basis — and if you don’t think you can afford monthly invoices (or the retainer that an attorney requires for hourly work), then I suggest that you work with a willing attorney to explore the following options.

Consider Compensating Your Attorney with Equity in the Company:

Although it may be a difficult sell, it can’t hurt to see if your attorney is willing to work for equity in your business (assuming, of course, that you are willing to give up a slice of your equity). This may be a difficult sell for two reasons. First, in regard to an attorney’s reluctance to accept equity, an attorney may think that your business plan is too risky for her to consider equity in lieu of hourly compensation. With a well-presented business plan, you may be able to convince her otherwise.

An attorney may also be reluctant to accept equity for a more subtle reason: Any attorney ought to recognize that she will immediately assume a potential conflict of interest by accepting equity as compensation (i.e. the lawyer’s ability to give prudent legal advice may be compromised by her personal stake in the company as a shareholder and her desire to be compensated as such). This conflict is curable — indeed it would be up to you the shareholders to cure the conflict by waiving it — but some attorneys may still be uncomfortable at the prospect of the conflict, no matter how vigorously you contend that you are willing to waive it.

You also ought to consider whether you are comfortable with such a conflict and, moreover, whether you are comfortable with giving a slice of equity away to anyone. However, if you are looking for immediate (and competent) legal advice at the company’s outset, but you have no means to afford it, this may be the best way of attaining it.

Flat Fees:

Flat fees may not actually save your company much money over paying an attorney on an hourly basis (attorneys will likely set a flat fee for the scope of their work based on their experience in handling a matter on an hourly basis), but it will allow you to plan your budget much more easily. A lot of attorneys purposefully obfuscate the number of hours they estimate they will put into a legal matter, as they don’t want to mislead you or be held to any number should a time-consuming problem arise. Requesting a flat fee will hold them to the fee that they quote you and will allow your business to budget for the legal work that will be done. Also, paying upfront as opposed to paying on an hourly basis won’t affect your time value of money, as most attorneys will require a retainer that they hold in trust for hourly work anyways (so the money you paid at the outset of a matter for flat fee representation wouldn’t be collecting interest for you during the course of your representation had you elected to pay an hourly rate invoiced monthly). Flat Fees are ideal for relatively simple matters like entity creation, simple contract drafting, and simple litigation (litigation matters where the money at stake is under the compulsory arbitration limit in Allegheny County of $25,000).

Find an Attorney Who Will Take a Collection Matter on a Contingency Basis:

Contingency fees are not exclusive to personal injury cases. If your business needs to litigate an unpaid contract and you are having liquidity problems, ask if your attorney will take your collection case on a contingency fee basis. You may be able to negotiate a graded fee that will allow you to pay her less if she is able to reach a quick settlement or more if she must file a law suit. Contingency fees generally allow your company to avoid attorneys fees and the costs of litigation until you successfully recover the debt or the amount in dispute.

There may be even more ways to structure your lawyer’s compensation so that you can avoid an hourly rate that your company can’t afford (including some hybrids of the above mentioned fee agreements). Each company has a unique situation. Explain yours to your attorney and work together to find an affordable solution to legal problems.

Peter Kurzweg, Esq.

While many lawyers dread serving on a panel, I’ve always enjoyed the opportunity to “play judge” as an arbitrator because it provides me with the chance to observe litigation from a unique angle for many attorneys: that of the fact finder.

The majority of cases that I’ve arbitrated to date are contract disputes between two small businesses or between a service business and a consumer. And I’m always terrified to see how many small businesses are doing business with horrifically drafted contracts or (suprisingly often) no written contract at all. These cases are almost always the ones that make it to trial or arbitration as opposed to settling, because neither party really knows where they stand legally pursuant to the contract, and neither party wants to concede its position. In cases like these, many times the arbitrators are left to decide the case on a “he-said-she-said” credibility determination or, worse yet, on a “what does ‘is’ mean” analysis, where the contract is so terribly ambiguous that we can do nothing more than guess as to the intended meaning of terms. These cases are essentially coin flips for the litigants, where, unable to form an opinion on a more rational basis, the arbitrators’ moods or personal opinions will come into play.

And while someone will win the coin flip, there are no winners in this type of litigation. Both parties will have incurred legal bills that they would have rather avoided. Both parties will have dealt with the uncertainty in their accounts books for the duration of the litigation. And the companies’ employees’ time will have been wasted at depositions, trials, or arbitration hearings.

Contract litigation does not NEED to be an inevitable cost of doing business. Instead, it can be avoided by carefully drafted contracts that reflect the parties negotations and a mutual understanding of the terms settled upon during these negotiations.

The next time your business, no matter how small, needs to enter into a contract, HIRE A LAWYER TO DRAFT THE CONTRACT! Consider these points:

* Lawyers know what questions to ask and what outcomes should be considered. They understand what protections the law provides each party and know how to draft the contract to provide or waive these protections.

* It will cost you less in the long term to hire a lawyer to draft your contract! A lawyer will generally bill disproportionately fewer hours in drafting a contract than he will in litigating a dispute arising from it. And, when the parties KNOW concretely what happens pursuant to a contract when certain conditions occur, then they are exponentially less likely to sue one another when a certain condition occurs. They can read the contract and, when it was well drafted, they each know where they stand in relation to one another.

* Lawyers have drafted contracts in the past and they probably can draft this one quickly based on that experience. Not only does this mean that they won’t bill you nearly as many hours as you may expect (i.e. it’s cheaper than you’d expect), it also means that they will take far less time than you will in attempting to draft your contract. Focus your time and attention on what you do best, managing a business. Allow your lawyer to do your legal work.

* Allow lawyers to take the blame in negotiations! Many small or family businesses are too concerned that they will look “untrustworthy” or “aggressive” if they ask for a written contract. This is CRAZY! Contracts PROTECT relationships; they don’t destroy them. Everyone should be on the same page in any business deal. And, if you feel uncomfortable asking for a specific provision, allow your lawyer to negotiate for it. Your customer or vendor can blame your request on your evil lawyer, and won’t think any less of you for it.

As always, if you or your Pittsburgh business has a legal question regarding contracts, don’t hesitate to contact me for a free consultation. (412) 246-2023

Peter H. Kurzweg, Esq.

It is true that perhaps the most fundamental advantage in creating a corporation for your small business (as opposed to forming a partnership which is often better for tax purposes) is the protection from personal liability that the corporate identity provides to shareholders. The state allows the corporation to be its own legal entity with its own legal liabilities, thus protecting those persons who own the corporation from personal liability. But Pennsylvania, like many other jurisdictions, allows plaintiffs suing a corporation the opportunity to “pierce the corporate veil,” thereby holding the shareholders themselves liable if certain circumstances exist with respect to their relationship to the corporate entity. In other words, a plaintiff can potentially go after your personal assets (your house, your bank accounts, etc.) for the negligent acts of the corporation.

The circumstances in which Pennsylvania allows plaintiffs to pierce the veil are multiple, but the most common three factors that I have seen courts use against the shareholders of a corporation are the following: commingling of personal and business funds, undercapitalization or underinsuring of a small business, and failure to follow corporate formalities. Courts, when faced with a plaintiff who names the shareholders of a small business individually for the liabilities of a corporate act, will look to see if any or all of those factors exist in the shareholders relationship to the corporation, and, if they do, will often allow the plaintiff to proceed in the litigation against the individual shareholders.

How do you protect yourself? Don’t allow your relationship with your small business to meet any of those three factors.

1) Never, EVER mix your business funds with your personal funds. Courts will look at this factor first, and if it exists, may be prone to believe that the corporate existence is nothing more than a sham to protect an individual from liability. Keep your accounts concrete and separate — do not deposit checks owed to your business into your own bank account.

2) If your business has physical property that could somehow cause an injury or involves labor that could cause injury, then be sure that you are well-capitalized and well-insured to be able to compensate an injured individual (if you are a contractor or construction firm, you will obviously need more insurance than a internet start-up). Keep up-to-date liability insurance on your real property. Make sure you carry general liability insurance. Be sure that your business is capitalized well enough that it can keep up with its contracts and debt payments.

3) Observe corporate formalities (even when it seems silly to do so). A good business, even one with a sole shareholder, keeps corporate meetings, elects board members (even if there is only one) and keeps minutes. Closely held businesses and sole-shareholder corporations may find this a waste of time — but dotting the i’s and crossing the t’s keeps shareholders safe and makes for responsible businesses that can keep up with their debts and meet legal liabilities.

As always, if you are a small business in the Pittsburgh area in need of legal advice, call my office for a free consultation. (412) 246-2023.

Peter H. Kurzweg, Esq.

So what does a good lawyer do when he’s starting your company that you wouldn’t do yourself?

Simply put, a good lawyer does four things: a good lawyer 1) listens to your business plan, 2) asks you questions that you have not thought to ask yourself, 3)creates consensus and understanding among all of the principals involved in the creation of the company, and 4) translates all of these concepts into sound legal documents that encompass and protect the parties’ expectations and relationships and provide for both the possibility of the company’s growth or the company’s termination.

I’ll further explain these points one at a time.

1. A good lawyer listens: When you and your business partners first visit my office for a free consultation, the first item of business will be for you to explain to me what it is that you want your business to do, how you wish to do it, and what you expect from each other in meeting your business goals. This gives me an overall sense of what type of business you wish to create and what type of personalities are going to be involved. After passively listening and taking notes, I then become active in the process.

2. A good lawyers knows what questions to ask: The most central role of the lawyer in helping form a new business is to make sure that the articles and bylaws (and other documents depending on the choice of corporate entity) of the business reflect the intentions and expectations of the principals. And to create such documents, the lawyer not only must thoroughly understand these intentions and expectations himself, but he must also make sure that the principals fully understand their own intentions and expectations. In other words, many times a good lawyer must ask the questions that the principals have not thought of, or are afraid to discuss. From my experience, there are two things that are true for almost every small business when first getting off the ground: the principals rarely discuss the possibility of the business’s failure and the principals rarely discuss problems that they have with each other, or their role. If the business plan isn’t working, we must discuss how the principals wish to close the business’s doors, if there is an escape plan for the individual shareholders if other shareholders wish to carry-on, the priority in which principals will be paid or reimbursed from the sale of any assets, and a laundry list of other rather depressing scenarios that new business partners don’t wish to discuss with each other because they are, frankly, rather socially uncomfortable. Which brings me to the third point.

3) A good lawyer gets all of the principals on the same page: In small, closely owned businesses, shareholders often double as directors and officers. There are inherent conflicts that can arise from this situation, which are best remedied by careful legal planning at the outset of the formation that will be reflected in the By-Laws or Operating Agreement of the company. Principals also need to know what their expectations of each other are. If a shareholder is putting sweat equity into the corporation, do the passive investors who are only investing capital expect him to have greater or lesser equity than themselves? How will the shareholders and directors control the company? How is voting to be conducted? Will minority shareholders have a voice in electing directors? Again, there are a laundry list of questions, the answers to which highly affect the principals and the shareholders relationships to each other, that if not addressed until a problem arises can become very costly to the corporation.

4) A good lawyer is an interpreter: Finally, at the end of our meeting, if the client chooses to retain me, I ultimately act as an interpreter who takes all of the input that I received from the client, and generates legal documents that reflect this input, ultimately reflecting the intentions and the expectations of the parties with regard to what they want to happen if the corporation is successful and what they wish to happen if the corporation is not successful. It is these documents, which have been custom built for your business (and not generated by a computer program or form book), that will provide your business with legal stability down the road.

All of this help may look expensive, but it can be affordable through the use of flat fees or discounted-rate billing. For a free consultation for your small business, please visit my website or call (412) 246-2023 to speak with me and set up an appointment.

Peter H. Kurzweg, Esquire