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Beware of “Good” Legal Advice

by Jackie Hutter

Entrepreneurs must recognize that good legal advice can often be bad for business. Indeed, taking the advice of your lawyers can mean that your company is so well-protected from risks that business failure results. It is axiomatic to say that “business success requires risk taking,” but lawyers see their jobs as minimizing risk. This means that the very risks that enable entrepreneurs to create success are exactly the things that your lawyers may wish to eliminate. It follows that placing too much reliance on your lawyer’s advice can end up killing your company.

This topic is on my mind because of a new client. His employer, a funded technology startup—let’s call it “BioCo”—is requiring all employees to sign an employment agreement that includes a 2 year restrictive covenant that, among other things, prevents any solicitation of actual or potential customers. My client, a PhD-level manager with many years of experience, has been working at BioCo for almost a year. It is customary that such agreements are presented at the start of employment, not as a condition of continued employment, as in this situation. The reason for the CEO’s sudden interest in employment agreements is that a former high-level employee went to work for a competitor, and BioCo is suing her and her new employer for misappropriation of trade secrets. However, the lack of an employment agreement that spells out what the former employee could (and could not) do certainly decreases the possibility of BioCo’s stopping him from working with his new company. At a minimum, the litigation is costly for BioCo, and the CEO is now focused on obtaining employment agreements from his key employees.

I can imagine the conversation between BioCo’s CEO and his lawyer now: “Stop this from ever happening to us again!” The lawyer responded with an employment agreement that, from a purely legal perspective, is perfect in that it stretches the restrictive covenant to the fullest extent permissible by the 2010 constitutional amendments to Georgia Restrictive Covenant law. (As an aside, prior to 2010, restrictive covenants in Georgia were somewhat rare; as a result of a “pro-business” constitutional amendment, the law today very much favors such restrictions on employee movement between companies.) From the perspective of employees like my client, however, the BioCo employment agreement seems draconian. Indeed, after reading it, I was taken aback by the duration and scope of the restrictions that the lawyer put in the agreement. I should note that I have written plenty of employment agreements in my day, but this one seemed so one-sided for BioCo, I was left thinking “these restrictions cannot be legal,” but, as noted, they are perfectly legal today.

Moreover, even where Georgia law requires employment agreements to be interpreted to cover only those aspects of the employer’s business that the employee actually worked on, BioCo’s lawyer failed to acknowledge these limitations in the document. This means that, even though BioCo cannot really enforce the employment restrictions to the fullest extent that the terms imply, unless the employee obtains legal advice about the form and effect of the employment agreement (as my client did), he might think that he is prevented from working in places or professions that are otherwise freely open to him. In other words, this employment agreement is intended to scare the you-know-what out of BioCo’s employees using threats couched in legal language.

The lawyer did exactly as directed by BioCo’s CEO and BioCo will likely not again be put through the type of litigation against a former employee that is now ongoing. But does this excellent legal advice make for good business for BioCo? Absolutely not!

Probably not surprisingly, the moment that BioCo’s CEO circulated this employment agreement to his managerial and technical staff, mutiny occurred. Notably, this employment agreement showed up in their inboxes with no explanation by the CEO, and the employees only found out about the litigation from online searching, a poor managerial decision that made morale even worse. Several key personnel are now looking for new jobs. While these employees are willing to sign an employment agreement that limits them from going to work for BioCo competitors, they are not willing to sign one that effectively prevents them from practicing their technical specialties for two years after they leave BioCo. (Some commentators have indicated that such broad restrictions can seem like “modern day indentured servitude.”) In other words, this employment agreement is written to appear to make it impossible for them to leave BioCo and get related employment elsewhere for 2 years.

Yay! for the excellent legal interpretation of the Georgia Restrictive Covenant law by BioCo’s no doubt expensive lawyer! But even while BioCo’s lawyer has successfully limited the company’s legal risk, the company is now in danger of failure because there is about to be a mass exodus of key personnel.

The learning opportunity here for entrepreneurs is that lawyers are trained to protect their clients from all perceived legal risks, but this objective often results in unintended consequences for the business. While legal issues such as employment law are arcane and hard to learn, entrepreneurs cannot outsource everything to their lawyers. To the contrary, success in business often requires understanding when to step in front of your lawyers to make business decisions that trump legal advice. At a minimum, entrepreneurs should be prepared to ask their lawyers “what might be the unintended consequences of your legal recommendations?” Knowing the difference between good legal advice and legal advice that is good for business are key metrics for successful entrepreneurship.

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