Why Noncompetes Rarely Work

Posted on June 1, 2014 by

Stop operating out of fear—there are better ways to protect your business.  

99101042If it hasn’t happened to you, it’s definitely happened to a studio owner you know: An employee—someone you trusted, confided in, mentored—suddenly announces she’s opening her own studio. Down the block. Before you can say “pas de chat,” she’s absconded with a third of your clientele and modeled every detail of her new business after one she’s found perennially successful—yours!

To protect themselves, many studio owners include a noncompete clause in their employees’ contracts, stipulating that the employee promises not to pursue a similar profession or trade in direct competition with you, the employer. A well-crafted noncompete has three restrictions for the employee: geographic distance, time frame and the type of conduct or employment. For example, a newly hired instructor may be restricted from teaching dance at another school or owning her own studio within 15 miles for three years after leaving your studio.

Sounds foolproof, right? Think again: You’ll need to pay hefty legal fees to take a former instructor to court over a noncompete—and then it may not even be worth it: Noncompete agreements are famously difficult to get upheld in court. Judges are more and more reluctant to rule in favor of an employment clause that interferes with someone’s ability to make a living, according to Frank A. Natoli of law firm Natoli-Lapin, LLC. “Even conservative judges don’t want to rule against a guy’s living,” he says.

Any noncompete agreement that comes under scrutiny in a court will also be carefully judged for its reasonableness—that is, are the agreement’s restrictions of duration and area typical for similar contracts within that jurisdiction? Natoli can’t emphasize enough how important reasonableness is: “You look at what the case law speaks to in that jurisdiction,” he says, “and stay within those limits.”

When The Academy of Dance Arts studio owner Sherry Moray—who routinely includes a noncompete clause in her employee contracts—had a teacher quit her school and open up a studio in the town next door, she ended up not pursuing it in court. “She knew it would cost me a lot of money to go after her,” says Moray.

If You Can’t Beat ’Em…Help ’Em?

Instead of running your business from a place of fear (“Who’s about to turn on me and run off with all of my students?”), consider these alternatives to protect your business.

Some legal remedies do work. Nonsolicitation clauses restrict your employees from soliciting other employees or customers of your business after they leave your studio. This type of clause, generally viewed as a legitimate effort by a business to protect its goodwill, is often upheld by the same courts that strike down noncompetes. Nondisclosure agreements prevent your recent employee from disclosing proprietary information about your studio, such as client lists, outstanding contracts and the business’ history.

Or follow the example of owners like Sue Sampson-Dalena, who focus on good management and being the boss people want to work for. Sampson-Dalena, who owns The Dance Studio of Fresno in California (one of several states that routinely refuses to uphold noncompetes), has never had a staff member sign any sort of contract in more than 32 years of business. Instead, she’s careful about whom she hires. “I hire many of the girls who have grown up in the studio and share my philosophy,” she says. The satisfaction goes both ways. “They’re exactly the style of teacher I need them to be, and they’re really committed to me,” she says.

What’s more, Sampson-Dalena views her talented young teachers not as a threat but as an opportunity to expand her own teaching style and grow her business through creative partnerships. She will actually groom certain students-turned-instructors to begin studios of their own eventually (at a good distance from her main studio, of course, “so it won’t draw too many people away from me”). “When I see someone who’s really ambitious, who has the type of personality that would be good for a studio owner,” she says, “I talk to them about partnering and growing a location that’s far away from the main studio.”

Sampson-Dalena has helped three former instructors establish their own California studios, each with a slightly different setup and financial arrangement. One studio is currently operating as a franchise of her studio; one started out as a partnership, though Sampson-Dalena’s employee is gradually becoming the school’s sole proprietor; and the third studio—Sampson-Dalena’s first joint venture, which she invested cash in—now functions entirely as its own entity. These continue to be mutually beneficial arrangements—Sampson-Dalena will invite students from these schools to the master classes she hosts at her own studio, and she’s also offered to take on any advanced students at her own Fresno branch, should they need further training down the line.

Through Thick and Thin

Sampson-Dalena chalks up her employees’ loyalty to her management style. “I’m not a micromanager,” she says. She’s also strongly supportive of her staff in any issues with studio parents, and she makes a point of fostering mutual respect among all her teachers, no matter what genre or age they teach. “None of them feels like what they’re doing is any less important than what the others do,” she says.

Moray, too, understands how taking care of her faculty is the key to a happy, loyal staff and a healthy business. Her instructors’ salaries are competitive, and she encourages them to set their own rates for any private lessons they give. “It’s like they each have a built-in clientele,” she says, should they need to make some extra money on the side or fulfill a need to play studio owner for a few hours.

Sampson-Dalena characterizes herself as a relaxed, confident business owner, and it shows: Her turnover, in both faculty members and students, is minimal. Remember that treating your students well—offering them quality dance education in a warm, drama-free setting—is another built-in defense against the allure of new studios and greedy former employees.

“We have good chemistry here,” Sampson-Dalena says. “You’ve got to look for those quality kids in your own backyard.” Channeling the ambition she sees in her own stock of students, rather than fearing it, has helped her develop strong teachers and a growing business. DT

 Photo by Mitch Aunger/Thinkstock

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