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Noncompete agreements: Keep or break?

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There’s so much confusion about two simple verbs: “can” verus “should.” Just because you can drive 125 miles per hour on the highway — or leap from one rooftop to the next for sport — doesn’t mean you should.

Apparently, Martha Stewart, the home fashion magnate, has confused these verbs, too. After she got out of prison for insider trading, she persuaded Macy’s to bankroll her renaissance by giving her company exclusive merchandising rights. But then she signed a similar deal with JC Penney.

How’d she double-dip these two arch rivals? By getting JCP to set up Martha Stewart-branded boutiques inside its stores. This allowed her to dive through a contract loophole that permitted selling goods from “her own stores.” Should she have done this to to an invaluable business partner? From an ethical perspective? Probably not. But the fact she could do the Penney deal blinded Stewart to the ethical inpropriety of doing it.

In a similar vein, I recently heard an advisor ask colleagues whether it was OK to break a non-compete contract with a former general agent (GA). In fact, the questioning agent had been asked to do so by his new general agent. The majority argued for compliance. But some counseled breaking the agreement since non-competes are hard to enforce.

My reaction to their advice?

  • Even though non-competes may be difficult to enforce, former employers can easily bring action in court. They may lose, but you will, too (in terms of legal fees).
  • Do you want to work for a GA who pushes you to do unethical things? First he (or she) wants you to break a valid agreement, then he wants you sell unsuitable products. Where does it end?
  • Breaking a non-compete in order to flip existing contracts is bad business. As we discussed in our last column, churning with no regard for suitability or surrender penalties is illegal. Get caught and you may well lose your license.

So here’s the deal. When asked to sign or break a non-compete agreement, get legal advice first. After signing it, follow these ethical guidelines:

Always demonstrate that you are a person of your word. Walking away from prior commitments conveys you are not to be trusted.

Never dare a former employer to sue you. It simply isn’t worth the stress, worry, or expense of defending yourself in court.

But don’t let anyone hold you hostage. Sometimes a GA or IMO will promise over-the-moon service in return for access to your book. But then they’ll fail to deliver. If you try to walk, they’ll use your non-compete as a club. When someone uses an agreement in this fashion, don’t hesitate to defend yourself.

Finally, remember that your reputation is fragile. All it takes is one bad decision to smash it. Sure, Martha Stewart can get away with it, but should you?

For more from Steven McCarty, see:

When advisors churn, clients get burned

How to set an ethical precedent

Top 5 ‘don’ts’ for financial advisors


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