Protecting Your Book of Business

* PROTECTING YOUR BOOK OF BUSINESS Presented 9/10/13 Leland C. de la Garza Dallas, Texas

Who’s Book of Business – Three Different Perspectives

Producer: My book because:  I developed relationship  Customer bought from me  Customer’s loyalty is to me

Customer: “I will deal with who I please”

Agency Owner: My book because:  I paid for everything  You work for me  EA says I own book

Who’s book of business?

From actual deposition of case tried in 2011: Q. Okay. So your initial agreement was all that commission checks would go to [the agency], right?

A. That is correct.

Q. And was that actually discussed between you and [agency owners]?

A. No. It really happened over time.

Q. But that – A. It evolved over time. That part is correct. Who owns the business? That’s a big, big question. *** Q. Earlier I got the impression that you have the view that you were the owner of the book of business that was the [division’s] book of business. Is that your – was that your view?

A. I don’t know who owns the business, I’m not a legal expert, but what I can tell you is I built it from the ground up, and the clients bought from me and my team so ---

Who’s Book of Business – The Courts’ View

• “Book of business” is also known as “expirations,” refers to the list of policies issued, the names of the insureds, the expiration dates, and other vital information regarding the elements of the policies in force.

Gotchis v. Allstate Ins. Co., 1993 U.S. Dist. LEXIS 20882 (D. Mass.

1993) • Generally, courts resolve dispute over ownership between employer and employee in employer’s favor • But, courts have held that independent contractor agent can own “book of business” On a more practical level: “In the absence of a contractual agreement barring such conduct, free enterprise permits anyone to solicit and service PCI’s clients.”

Oak Street Funding, LLC v. Ingram, 511 Fed. Appx. 413 (6th Cir. 1/9/2013):

Who owns the book of business?

Threats to the Book of Business – The Outside Threat

 Loss of business due to – o Lack of competitiveness o pricing o lack of access to markets o Lack of relationship with customer (no bonding) o Lack of quality service  E and O claims  Rising costs of operations

The Threat From Within

HMMM? Your best producer

The Risk is Real ...

May 2010 120 CRC employees resign to join R-T Specialty

Litigation followed by confidential settlement

June 2011 38 Aon employees resign to join Alliant (taking more than 100 clients worth $20 million)

Litigation in three states

How to Guard Against an Exodus of Producers

Partnership Building

Policing

Partnership Building

TOOL

NEED ADDRESSED

Incentive Compensation

Fair compensation

Transparency Recognition

Fair treatment Importance

Team Building Co-opting with equity rights

Belonging Ownership

Enhance quality of service

Pride

Policing

1. Employment Agreement 2. Non-Disclosure Agreement 3. Non-Solicitation Agreement 4. Non-Compete Agreement

Non-competition agreements

5. Anti-piracy Agreement 6. Willingness to enforce consistently

Employment Agreement

Goals of Employment Agreement: 1. Define term of employment and events that can lead to termination 2. Define position to avoid disputes over what job entailed 3. Define compensation 4. Establish clear ownership of book of business 5. Establish that hiring and performance will not violate prior employer’s agreements

Employment Agreement

GET IT IN WRITING!

Employment Agreement

Reasons to Get it in Writing – 1. Avoid expensive dispute over 1. whether agreement was reached 2. what the terms are 2. Courts are more likely to enforce a written agreement 3. Robert B. Cialdini, Psychology professor wrote in “Influence, the Psychology of Persuasion” that a person is more likely to honor a commitment if it is in writing and signed

Non-Disclosure Agreement

C u s t E o T v mr e e a r r d y e t R h e S i l e n a c g t r i e E o t l n s s s e h i p

Protection of trade secrets comes from common law fiduciary duty and from non-disclosure agreement

Non-Disclosure Agreement

“Trade secret” is information that is not generally known to the public which can be used to obtain a competitive advantage To be protectable, the trade secret owner must use reasonable efforts to maintain secrecy  restrict access (lock and key, passwords)  stamp “confidential”  Non-Disclosure Agreements

Non-Disclosure Agreement

1. Define “confidential information”  generally  specifically: customer lists, list of expirations, list of coverages, premium and commission information, contact information  tangible and intangible  does not extend to information already in the public domain 2. State consideration if required  access to confidential information is usually enough 3. State remedies, damages and injunctive relief

Non-Competition Agreements

E v T re r a y d t e h Si n e cg r E e tl s e

C u s t o m e r R e l a t i o n s h i p s

Protection of customer relationships comes from common law fiduciary duty and from noncompetition agreements

Non-Competition Agreements Non-Solicitation Agreement

Prohibits producer from soliciting business of current and potential customers

ISSUES:  Definition of “solicit” (sometimes defined broadly to encompass even a passive solicitation, i.e., customer calls on producer at new shop)  Definition of “customer” (frequently includes “potential” customers)  Definition of “business” (usually defined broadly to include all insurance business done by the former employer)

Non-Competition Agreements Non-Compete Agreement

Prohibits producer from engaging in competing insurance business ISSUES:  Enforceability under local law  Proper consideration ($$ not enough)  Reasonableness of restraint o Scope (not more than necessary) o Duration o Geographical area

Non-Competition Agreements

Non-Piracy Agreement

Prohibits producer from inducing coworkers to leave employer ISSUES: ďƒ˜ Application of non-compete statute ďƒ˜ Reasonableness of restraint

Non-Competition Agreements Are Non-Competition Agreements Worth the Paper Their Written on?

Non-Competition Agreements Enforceability of Non-Competition Agreements – Varies from State-to-State

California – no, unless associated with the sale of goodwill of a business or sale of a partnership interest The rest of the country – yes, for the most part, dependent on compliance with local laws dealing with consideration and reasonableness of restraint

Non-Competition Agreements The Answer Depends on – 1. State law where services are rendered 2. Quality of lawyering (drafter and resisting former employee) 3. Demonstrated need for protection 4. Reasonableness of restraint (don’t go overboard) 5. Resources of parties (litigation is expensive) Effectiveness of Non-Competition Agreements 1. Highly effective if properly drafted and enforced by employer with staying power 2. Gives employees pause over whether to try to take book 3. Gives employer leverage to force a settlement, which is the most common outcome of litigation over noncompetes

Non-Competition Agreements in Texas TEXAS STATUTE: ยง 15.50. Criteria for Enforceability of Covenants Not to Compete (a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Non-Competition Agreements in Texas TEXAS CASE LAW: The starting point: Centel v. Centel Cellular Co. of Texas (1994). Centel required: 1. consideration given by employer in an otherwise enforceable agreement must “give rise to the employer’s interest in restraining the employee from competing” 2. the covenant must be designed to enforce the employee’s consideration.

Under Centel, the only consideration that worked in an employment setting was a promise of special training or confidential information and the promise had to be made at the inception of the agreement. A promise in an at-will employment relationship wouldn’t work because it was illusory.

Non-Competition Agreements inTexas TEXAS CASE LAW: Recent Trends toward enforceability of covenant not to compete: 1. Court can enforce an executory unilateral contract (employee promises not to disclose confidential information and compete, but employer does provide confidential information until later in the relationship) Alex Sheshunoff case (2006) 2. Court can find implied promise to provide confidential information when agreement does not contain express promise and would therefore be unenforceable for lack of proper consideration. Mann case (2009) 3. Stock options agreement can be the “otherwise enforceable agreement� Marsh case (2011)

Non-Competition Agreements

REVIEW EXAMPLE OF COVENANTS

Non-Competition Agreements

Leland C. de la Garza Partner Shackelford, Melton & McKinley, LLP 3333 Lee Parkway 10th Floor Dallas, Texas 75219 214-780-1400 ldelagarza@shacklaw.net