NON-CIRCUMVENTION AGREEMENTS

BY G. A. FINCH

 

This post is for those executives and professionals who have left their organizations  for one reason or another and are bursting with great ideas for business opportunities.  We have all heard stories from people who lament that “my business idea was stolen from me” or “this person I trusted cut me out of the very deal that I conceived.” anger-svg-med A well drafted non-circumvention document could have protected them from such shenanigans.    A non-circumvention provision or agreement is designed to prevent a party from taking an opportunity or idea brought to this first party by a second party and then doing an end run around the second party to a third party. football10Typically, the second party expects to engage in or execute some kind of commercial transaction together with the first party in relation to some third party.

The non-circumvention can also be mutual so neither party can go around the other using the information obtained from one another.  The third party could be a prospective seller, customer, client, vendor, supplier, investor, inventor, etc.  As the opportunity or idea is usually considered proprietary and confidential, the non-circumvention agreement is often used in conjunction with a non-disclosure/confidentiality provision.  Sometimes for good measure, companion non-competition, non-solicitation and no-grant-of-license provisions may be added.quiet-1

What does a scenario for non-circumvention look like?  One of my clients was negotiating with an investor to fund an acquisition of unique assets that had tremendous upside value and the client inked an agreement that prevented the investor from directly acquiring the assets from the seller without involvement of my client.  A confidentiality provision was also included in the agreement.

What does a non-circumvention provision look like?  Here are two examples:

  • “Non-circumvention. The Receiving Party and its officers, employees and directors will not make any effort to circumvent terms of this Agreement in an attempt to gain the benefits or considerations granted to it under this Agreement by taking any of the following actions:    The Receiving Party will not in any way use, sell, transfer, develop, market, finance, or invest in directly or indirectly, through its owners, shareholders, directors, advisors, employees, subsidiaries, agents or other parties under its direction or control, any product or  service that contains or uses the Confidential Information.”

 

  • “Non-circumvention. Receiving Party agrees that it shall not, either directly or through any third party, enter into any contract, joint venture, partnership, business arrangement or otherwise conduct any business whatsoever with any person regarding the Transaction without the written consent of Disclosing Party.”

 

The upshot in your business dealings is create trust but construct protection.  content_tn-smiley-face A non-circumvention agreement is a building block of protection.

 

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

Copyright © 2017 by G. A. Finch, All rights reserved.

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): MORAL RIGHTS

BY G. A. FINCH

To the uninitiated, the term “moral rights”, would at first blush (pun intended), seem to suggest having something to do with bad character, improper behavior or religious and philosophical subjects.

Actually it has to do with intellectual property rights of an author, artist, or creator beyond mere copyright interests.

Moral Rights is beginning to appear more often in employment agreement provisions pertaining to intellectual property rights.  The employer usually seeks to obtain a waiver of the employee’s moral rights to works subject to copyright which works are made by the employee within the scope of employee’s employment or using employer’s resources or confidential information.

It is a European legal concept and not rooted in American jurisprudence, although similar and analogous concepts have been asserted or litigated in the United States from time to time.  I believe burgeoning multinational corporations and global trade have facilitated the infiltration of moral rights provisions into American legal documents. The American version of moral rights became codified as the Visual Artists Rights Act of 1990 (VARA) pursuant to the mandates of the Berne Convention.

VARA provides that the author of visual art has the right:

 

A) to claim authorship of his work,

B) to prevent the use of his name as author of any visual art that he did not create,

C) to prevent any intentional distortion, mutilation or other modification of his work that would prejudice his honor or reputation,

D) to prevent any destruction of a work of recognized stature, and any intentional or grossly negligent destruction of that work is a violation of the right.

 

Under VARA, only the author of the subject visual art has these rights whether or not the author owns the copyright. VARA does not provide moral rights for authors of literary or musical works.

Black’s Law Dictionary sets out the most succinct global definition of Moral Rights:

“Moral rights include rights of (1) attribution (also termed “paternity”): the right to be given credit and to claim credit for a work, and to deny credit if the work is changed; (2) integrity: the right to ensure that the work is not changed without the artist’s consent; (3) publication: the right not to reveal a work before its creator is satisfied with it; and (4) retraction: the right to renounce a work and withdraw it from sale or display…”  Black’s Law Dictionary, p. 1030 (Eighth Edition, 2004).

 

INTERNAL REVENUE CODE SECTION 409A

 

BY G. A. FINCH

If your employment agreement has deferral of compensation provisions, you may very well see a section or paragraph captioned “Internal Revenue Code Section 409A” or simply “409A.”  Its official citation is 26 U.S. Code Section 409A – Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.

This section is too complex and tedious for most lay person executives to understand and figure out.  Your reading Section 409A of the IRS Code is certainly an instant cure for insomnia.080914_jmanscratchhead_tnb

At the outset, before you execute an employment agreement, your retaining an attorney is necessary to interpret and apply Section 409A to the various scenarios of deferral of compensation to ascertain whether such compensation adheres to Section 409A’s deferrals and distributions timing rules.

Failure to comply with the rules concerning deferred compensation has onerous consequences of 1) inclusion of such deferred compensation as gross income for the subject taxable year, 2) payment of the amount of interest on the underpayments, and 3) a penalty amount equal to 20% of the deferred compensation which is required to be included in gross income.IRS_tnb

Accordingly, employers often have a Section 409A provision in the employment agreement that allows the employer to adjust payments under the agreement to comply with Section 409A and allows the employer to disclaim any liability to the employee.

A typical provision can be lengthy paragraphs and include some language like the following:

 

“Anything in this Agreement to the contrary notwithstanding, the parties intend that   all payments and benefits under this Agreement comply with Section 409A of the Code and the regulations promulgated thereunder and, accordingly, to the maximum extent permitted by law, this Agreement shall be interpreted in a manner in compliance therewith.  To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extend reasonably possible, maintain the original intent and economic benefit to you  and the Employer of the applicable provision without violating the provisions of Section 409A.  Notwithstanding the foregoing, the Employer shall not be required to assume any increased economic burden in connection therewith.  Although the Employer intends to administer this Agreement so that it would be exempt or comply with the requirements of Code Section 409A, the Employer does not represent or warrant that this Agreement will be exempt from, or otherwise comply with, Code Section 409A or any other provision of applicable law.  Neither the Employer, its affiliates, nor their respective directors, officers, employees or advisers shall be liable to you (or any other individual claiming a benefit through you) for any tax, interest, or penalties you may owe as a result of compensation paid out pursuant hereto, and the Employer shall have no obligation to indemnify or otherwise protect you from the obligation to pay taxes pursuant to Code Section 409A.”

 

The point of this blog post is that your deferred compensation provisions could trigger 409A tax consequences and your employer, through its employment contract with you, is shifting the risk to you as employee.

I WROTE IT SO WHY CAN’T I USE IT?

BY G. A. FINCH

You are leaving your job or you have already left. After you leave, you want to use all of your power point presentations, white papers, newsletter articles, and blog posts that you did for your employer. Not so fast. Are you allowed to do that? Who owns the written work that you produced? Increasingly I am called to advise incoming or departing executives and professionals on how to preserve and protect their intellectual property rights or understand how to avoid violating the intellectual property rights of their former employers. This post focuses on copyrights, not trademarks or patents or trade secrets.

quill_writingYou need to know the copyright laws. You also need to know what confidentiality/intellectual property agreements you may have signed either in an employment agreement or in a separation/severance agreement or both.

The basics for a copyright are:

  • A work must be original
  • A work must be completed and in tangible form like a written article
  • A copyright holder has the right to reproduce, to distribute, to modify the work, and to perform or display it
  • A copyright holder does not have to register his\her\its work to gain copyright protection and does not have to display the copyright symbol

An employee should note well that ordinarily the employee’s work authored within the defined scope of employee’s employment constitutes a work made for hire. Although the employee physically created the work, the employee may not own it, rather the employer does. Most savvy employers will eliminate any legal ambiguity of copyright ownership by having the employee sign intellectual property and invention assignment agreements.

Although they can vary in length from three sentences to two pages, an assignment of intellectual property provision typically looks like the following:

“ASSIGNMENT OF INVENTIONS. I agree that I will promptly make full written          disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks or trade secrets, whether or not patentable or registrable under copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company ….”

no_copyrightPrior to commencing employment, an employee would do well to carve out in a written agreement any invention, original works of authorship, etc. to ensure such work product or invention is not assigned or deemed owned by employee’s new employer. Also prior to any departure, the employee should set out in an agreement what works employee created that were not created on the job or are not assigned to the company.

When the employee does not own the written work employee created, the most obvious and practical thing to do is simply ask permission from the previous employer.

Lastly, there is a limited way to use copyrighted material without permission and not infringe. This way is called “fair use.” For example, if you fairly and reasonably use a short quote and credit it for commentary and criticism, news reporting, teaching, research or parody, you are probably okay. The evaluation includes whether your use adversely affects the market for or value of the work. When in doubt, consult an attorney.

FIVE SUCCESS LESSONS FROM MOM

BY G. A. FINCH

My mother, Louise Antoinette Finch, passed away last month just two and half months shy of her 100th birthday. She is survived by all six of her sons and one daughter. As an older brother gave a eulogy and the priest gave a homily about my mother and what she represented spiritually, I ruminated about her legacy and the impact of her teachings. Although we are far from perfect as individuals and have had our own share of ups and downs, and some of the siblings may be viewed as more materially successful than other siblings, she obtained the same result from each of her children: all finished college and graduate or University_hatprofessional school. How did she do that? She had a few maxims to live by that she drilled into us. These aphorisms would benefit anyone (executive, professional, and others) seeking to get a leg up in life. I share five of the most salient ones below:

1. When you start something, whether it is a project, a task, a job, an extracurricular activity, or a degree program, you must complete it. My mother abhorred quitters and lack of follow through. She correctly knew that the lack of follow through was a serious impediment to success. So despite unfair teachers, mean camp counselors, arbitrary coaches or a tedious activity, we had to finish whatever program we started. To this day, my siblings and I talk about the little voice in our heads, when times got tough in medical, graduate or law school or in a demanding job, that repeated the mantra: “When you start something, you must finish it.”

2. When we complained of being sick, whether severely or lightly, real or imagined, my mother would say, “Get up, wash your face, brush your teeth, put on your clothes, eat some breakfast, go to school, and, if you are still feeling lousy, then call me.” By the time we did all those things, our ailments seem to Smile Face with Colddisappear or become sufficiently mitigated that we forgot that we were physically or psychologically under the weather. This was her ways of saying a) have a strong work ethic, b) “show up” to where you are supposed to be, and c) adjust your attitude. This anti-slacker and anti-lazy approach again carried me and my siblings through many a school and work day.

3. Surround yourself with quality people and people of integrity. Your friends and peers will make or break you and you will be judged by the company you keep. I think of the hyper academic high school that I was fortunate enough to be able to attend; the super intellectual students forced me to up my game and pull myself up from the mud of mediocrity. Counterintuitively, I did not find the competitive atmosphere intimidating because it actually inspired and stimulated me. My siblings and I have never gotten into serious trouble or arrested because our friends are sensible and have a lot of impulse control.HandcuffsMany a prison inmate laments associating with the “wrong crowd” or corrupting friend that landed him in jail.  In short, choose your friends, associates and peers very carefully.

4. Don’t lie or cheat. Being an honest person meant a lot to my mother. A person of character was the benchmark by which my mother evaluated people. She had an expression, “Pretty is, is as pretty does.” A variant was “Pretty on the inside is more important than being pretty on the outside.”

5. Lastly, my mother was a big one in standing up for yourself when another is perpetrating a wrong upon you or a family member or trying to diminish you or a family member. Mom taught us not to look for fights but not to allow ourselves to be victims. She led by example and did not wait around for my father to get home to go address an injustice at any level or push us out the door to face a bully.Boxing_glovesShe made it clear that this attitude and posture must be based on our position being legitimate and righteous as well as our being without fault.

 

Often times you do not have to travel far to learn self-evident truths; they can be found within the four Home-clipartwalls of your own upbringing without ever stepping outside your own front door. I hear my mother’s voice as I counsel my young daughter and young son about how to stand up to bullies and admonish them to finish their activities.

Resolution Passed Thanking G. A. Finch

PRECKWINKLE AND COUNTY BOARD HONOR FINCH

PRECKWINKLE AND COUNTY BOARD HONOR FINCH

Cook County Board President Toni Preckwinkle today, October 23, 2013, presented her Chief of Staff, G.A. Finch, with a resolution thanking him for his service to the County.

On November 1, Finch is leaving Cook County to rejoin his law firm, Hoogendoorn and Talbot, LLC.

Finch accepted the position, he said, because he thought he could make a difference while learning new skills to take back to the private sector.

Finch brought significant experience to the County, having served as a City of Chicago Deputy Planning Commissioner in Mayor Harold Washington’s administration and as the General Counsel for the Chicago Housing Authority. His combination of experience in the public and private sectors made him a valuable asset to the administration, where he played a key role in the President’s continued transformation of County government.

Most recently, Finch worked closely with the President and her team to help craft both County and Forest Preserve District budgets without tax, fine or fee increases.

“I’m grateful to G.A. for his service and dedication to Cook County,” President Preckwinkle said.

EXECUTIVES’ MITIGATION OF PERSONAL FINANCIAL RISKS

G. A. Finch interviews Charlie Russ, a financial representative with Northwestern Mutual .

FINCH:     Charlie, what are some of the strategies you would suggest to clients to manage the impact of taxes today and for the balance of their lives?

RUSS:     If a person has the option of a ROTH IRA or a ROTH contribution to a 401k, we’d advise to take advantage of those options.  Trouble is, many people make too much money and exceed the IRS set income limits for contributing to a ROTH, and very few 401k plans offer that option.  Assuming folks are maximizing their pretax

CHARLIE RUSS

contributions to their retirement plans, the another approach is to use a deferred annuity. The tax deferred treatment of any accumulation can help manage the impact of taxes.

FINCH:     When we met last, you told me about strategies that could materially enhance clients’ retirement distributions.  Would you mind sharing those strategies with my readers?

RUSS:     The key to optimizing retirement distributions is having assets funded in several buckets, and preferably most of those buckets are tax deferred. Anybody retiring now or in the near future is in a panic.  They thought they’d be way ahead in the stock market from where they are now.  They may be in a position to feel as if they’re forced to sell equities at a loss and move to bonds, (as a rule) because they no longer can accept the risk of another 40-60% collapse in the market.  Moving away from equities to bonds affects the long-term yield and can create a very negative tax consequence in the taxable portfolio.  We’re not talking about proper asset allocation within a stock portfolio.

Furthermore, one standard in the financial services industry, sometimes called the safe withdrawal rate, states that one may only draw down 4% of one’s assets if they expect to never run out of money for 30 years.  This assumes a growing market, which we have not faced in 10+ years!  The traditional wisdom of 4% being considered safe is simply not accurate in today’s environment.

FINCH:     We have talked about six risks associated with retirement:  Longevity Risk, Market Risk, Inflation Risk, Tax Risk, Health Care Risk, and Long Term Care Risk.   What kind of strategies have you suggested to clients to mitigate each of these risks?

RUSS:     Again the objective of our practice is optimizing retirement distributions while mitigating risks our clients face.  Therefore it’s critical to address these risks long before retirement; otherwise it is unlikely you will be able to fully mitigate the risks.

Annuities address longevity risk; long-term care planning addresses the financial impact of a long term care event.

Broader asset allocation across accumulation vehicles not in the stock market  is one strategy to address Market Risk;

Running retirement analyses with higher inflation rates and incorporating lifetime incomes through annuities and whole life insurance can help identify a strategy for addressing Inflation Risk;

Placing assets in tax deferred tools with tax free distributions is another way to manage the impact of taxes;

Budgeting for healthcare costs is important to offset healthcare costs; we estimate $1000 per month appreciating with inflation be written in to a retirement analysis in addition to lifestyle requirements;

Addressing potential long-term care needs is prudent unless one can be self insured, which would require considerable assets.

FINCH:     What are your thoughts about handling potential future estate tax liability?

RUSS:     The IRS announced that the estate tax exemption will be raised from $5,000,000 to $5,120,000 in 2012. That’s the good news. The bad news is that it returns to $1,000,000 on 1/1/2013 when the Bush tax cuts expire. Many are gifting the maximum with the thought there will be no “claw back” of prior gifts.  You may not wish to gift that today, for obvious reasons. However, I believe it’s important to consider the need for permanent insurance to cover estate taxes.

What these changes mean in plain English is that all assets, north of $1MM, including real estate and all investments remaining inside the estate at the 2nd to pass will be taxed at ~50% between state and federal taxes.  Those taxes will be due 9 months from the date of the 2nd to pass and will be payable with or without insurance to fund.  You could place all the insurance in an irrevocable trust and avoid estate taxes on 100% of those proceeds.

And, there are some tools which can permit a client to put potentially a substantial amount away on a tax deferred basis keep those assets in the estate and still provide for life insurance to protect against estate taxes.  If you’re worried about estate taxes but cannot afford or choose not to fund an irrevocable trust today because you might need your own money in 50 years, this is a very relevant conversation to have.

FINCH:     Do you have any thoughts about what if any role insurance products might have in seeking creditor protection?

RUSS:     We have a very strong practice among doctors and other professionals who have personal liability from malpractice or on personal loans or other business obligations.  Permanent life insurance is purchased primarily for the death benefit.  Over time, it accrues cash values which are generally protected, similar to the equity in a primary residence or assets in a retirement account from the claims of creditors in Illinois.  Keep in mind creditor protection varies from state to state. Of course one would always need to consult with one’s attorney concerning the applicability for individual circumstances.

Another  important idea around wealth accumulation is contractual guarantees.   The cash values within a whole life contract with Northwestern Mutual are guaranteed by the good faith and credit of the company to never go down year to year. It’s common for people today to be less concerned with the return “ON” capital vs. the return “OF” capital!!!

FINCH:      Charlie, whole life insurance sometimes gets a bad rap in the personal finance press as not being a smart financial investment as compared to term life insurance.  Could you give us your take as to why whole life insurance can be advantageous to an executive or professional?

RUSS:     It’s not a panacea and it has its risks.  We go out of our way to explain and articulate those risks.  We only put whole life plans in place for clients where those inherent risks are minimized.  That said, the truth is that most people need and want life insurance.  Most need and want to grow their wealth, which the cash value build up of permanent life insurance can help accomplish.

The job of our team is to design a financial strategy for our clients which meets their needs today and through their lifetime.  The objectives are most often to minimize or eliminate risks and to accumulate wealth in the most tax efficient tools available.  Your readers should be asking themselves these simple questions.  Do you have a distribution strategy?  What asset will you sell first to try to optimize the yield and manage the impact of taxes on your entire portfolio now and through your lifetime?  If you don’t have an answer, we can work with you to get it answered and identify a plan designed to achieve all of your objectives discussed in this interview.

Charlie Russ

Financial Representative

Northwestern Mutual

312-443-7382

web site:  www.charlieruss.com

 Northwestern Mutual (NM)  is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Charlie Russ is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM. Registered Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM,broker-dealer, member of FINRA and SIPC. There may be instances when this agent represents companies in addition to NM or its subsidiaries.

LEGAL, INVESTMENT AND TAX NOTICE: THIS INFORMATION IS NOT INTENDED TO BE AND SHOULD NOT BE TREATED AS LEGAL ADVICE, INVESTMENT ADVICE OR TAX ADVICE.  READERS, INCLUDING PROFESSIONALS, SHOULD UNDER NO CIRCUMSTANCES RELY UPON THIS INFORMATION AS A SUBSTITUTE FOR THEIR OWN RESEARCH OR FOR OBTAINING SPECIFIC LEGAL OR TAX ADVICE FROM THEIR OWN COUNSEL AND TAX ADVISORS.  THIS POST DOES NOT ESTABLISH AN ATTORNEY-CLIENT RELATIONSHIP AND DOES NOT CONSTITUTE AN ENDORSEMENT.