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Crypto / Blockchain Businesses Surrender their Competitive Advantage with Weak Non-Compete Agreements

Posted on by Matt Hamilton

Crypto / Blockchain Businesses Surrender their Competitive Advantage with Weak Non-Compete Agreements

Non-Compete agreements have become commonplace within the Crypto Blockchain ecosystem.  Most of these non-compete agreements are unenforceable.  This is because the companies fail to draft a tailored non-compete agreement using a lawyer with specific expertise.  This article explains what needs to occur.

Every Crypto / Blockchain business uses employees to leverage its competitive advantage over its competitors.  Employees profit when they take that advantage, are hired by a competitor, or become a competitor themselves.  Effective non-compete agreements protect against this risk.  Basic, form non-compete agreements do not.

The cryptocurrency / blockchain field is expanding rapidly with many new businesses.  Nearly all blockchain crypto businesses are small to medium size.  New, small, and medium size companies usually cannot afford their own, high quality, experienced lawyer.  Instead, legal issues are either ignored, or are delegated to an employee who “googles” for answers to legal questions.

Legal search engine answers are nearly always wrong.  Analogies show how this is true.  A crypto yield farmer would not “google” an answer for the “best liquidity mining strategy” and expect an accurate answer.  A blockchain crypto software engineer would not “google” the “best way to scale a DeFi Ethereum-based application” and expect a meaningful answer.  So, too, specialized legal experience is needed, but not obtained through non-specialist employees.

CRYPTO EMPLOYEES ARE LIKELY TO TAKE YOUR BUSINESS SECRETS WHEN THEY LEAVE

It is common for crypto / blockchain employees to start employment at one blockchain business, then later leave to work for themselves, or a competitor.  Employment turnover exacerbates business secret risks for every crypto business’ confidential information.

Two recent studies reveal the pervasiveness of this risk.  The Verizon Data Breach Investigations Report analyzed 41,686 cyber security attacks.  It included 2,013 data breaches from 73 data sources in 86 countries.

Outside cyber-attacks from crypto mining get much media attention.  However, the Verizon study shows leaving employees are the real risk.  External crypto attacks account for only 2% of business cyber-attacks.  (Verizon study at page 3) Many breaches of confidential business information come from within.  Specifically, the data show:

  • 34% of information breaches are perpetrated by employee insiders.
  • 2% involve partners, the executives and founders, themselves.
  • 5% involve multiple employees colluding together.
  • 43% of the victims are small businesses.

(Verizon study at page 3)

Stealing employees are not taking crypto confidential information for curiosity.  Your stolen confidential information is being “sold” to your competitors as part of your former employee’s “employment package.”

Indeed, a study reported by Information Security Magazine reveals the prevalence of employee theft:

  • 72% of departing employees admit to taking company data.
  • 70% of intellectual property theft occurs within the 90 days of the employee’s resignation announcement.

Your Employees are Taking Your Date, Richard Agnew, 10-10-2019, infosecurity-magazine.com

Are you a Founder or Executive?  Watch Out!

Founders, and business executives are at particular risk.  In fact, C-suite level executives are 12 times more likely to be the target of an attack.  (Verizon study at page 3)

Crypto and Blockchain businesses that store their secrets on the cloud must pay particular attention as the theft of confidential information stored on the cloud is rising rapidly.

NON-DISCLOSURE AGREEMENTS DO NOT PREVENT EMPLOYEE COMPETITON

Taking business secrets and confidential information is a breach of contract when the employee has signed an effective non-disclosure agreement.  Taking confidential information is even a crime in some instances.  However, non-disclosure agreements (NDAs) do not prevent an employee from taking the skills and residual knowledge you taught them, and becoming your competitor.  Indeed, even in situations where an employee does take confidential business secrets, a poorly drafted NDA offers no protection.

WEAK NON-COMPETE AGREEMENTS OFFER PEACE OF MIND WITHOUT PROTECTION

Non-Compete agreements are common.  In the United States, 18% of the entire workforce (30 million employees!) have signed a non-compete agreement.    In fact, 40% of all workers will sign a non-compete agreement at some point in their career.

Non-compete agreements are common areas of top-down abuse.  Only 10% of non-compete agreements undergo any employee negotiation.    40% sign the non-compete agreement after they are already employed.  Id.  Judges know this, and respond in favor of the employee who breaks his agreement, to the business’ detriment.

Many aspects of non-compete agreements defeat them, making the non-compete agreement unenforceable.  These defects include:

  • Failing to have “consideration” from the existing employee (like signing after he is already an employee)
  • Being overly broad (the non-compete agreement tries to do too much, so the judge invalidates it entirely)
  • Vague (If you can’t understand it; it is vague, and a judges may invalidate it)
  • Does not comply with the laws of your jurisdiction (Form non-competes downloaded from the internet posted by businesses in other locations)
  • Does not apply to the type of person using it (the non-compete is not tailored to your specific type of employee)
  • Executives (C-suite officers will need special non-compete agreement drafting)
  • Contractors (third party contractors require specialized non-compete language for the Non-Compete Agreement to be effective)
  • Applies to the wrong type of conduct (different types of employees compete differently; enforceable non-compete agreements address these distinctions)
  • Wrong Time Period (Most jurisdictions have specific rules for allowable time periods.  Some businesses have different time period needs.  Enforceable non-compete agreements need to be tailored for the “time” issue)
  • No Legitimate Company interest (This is an element for a non-compete agreement in many places; what a “legitimate interest” is differs from place to place)
  • Employee does not have the “unique” or extraordinary skills” required for the agreement to be enforceable (Your subway sandwich maker is not subject to an enforceable non-compete agreement.  A crypto yield farming analyst is.  A blockchain programmer will qualify for an enforceable non-compete agreement)
  • Employee was not fired for cause (Some judges require the employee to be fired for good reason before the non-compete agreement is enforced.  You fire an employee for no good reason, which may be your right, you risk creating a competitor)
  • You Waived any restrictions (Some judges will look to the actions and statements of the employer and declare a non-compete agreement invalid, if those actions do not meet the judge’s approval)
  • You have no remedy (You may have a valid, enforceable, non-compete agreement, but cannot cure the problem, like with a foreign company in an uncooperative jurisdiction.  You cannot collect against a party with no traceable money)
  • You Cannot Enforce against this party (collection, venue)

Competition between businesses in the crypto blockchain ecosystem is fierce.  Your competitive advantage may be only slight compared to other crypto businesses.

One can conquer the world with only a slight advantage; it is true.  Compare with an analogy to sports.  The sports team who scores only once more than its competitor, wins every game!  So, too, a blockchain crypto company that barely but consistently wins over each customer, gets all the profit.

Companies act through their employees.  It is these employees who bring reality to the vision of their founders and executives.  Your competitive advantage is lost when your employees take your advantage to your competitor.

Large, wealthy corporations with large legal departments know this.  They draft specifically tailored non-compete agreements with care.  Large company non-compete agreement lawyers adapt these restrictive covenants so they are enforceable.

New, small crypto businesses often overlook this detail, and pay the price when they powerlessly watch their former employee turn into their competitor.

Author:

Matt Hamilton, Juris Doctor

Are You Over Paying for your Accident Lawyer? [Analysis of Fees]

Posted on by Matt Hamilton

HOW MUCH SHOULD YOUR ACCIDENT LAWYER COST?

We have to pay for things every day.  Plumbing breaks.  Electricity fizzles in houses.  Luckily, most of us do not experience frequent injury accidents.  Handling injury accidents requires the expertise of an injury accident lawyer.  Accident attorneys do not volunteer, but are paid.  This article informs on how these lawyers are paid, the amounts, what is, and what is not reasonable.

THE OPTIONS: CONTINGENCY FEE VS. ATTORNEY FEE AWARDS VS. HOURLY

The Hourly Rate Method of Paying a Lawyer

There are three main ways on which attorneys are paid.  The most common is an hourly rate.  Hourly rates are determined by the amount per hour the attorney charges and the amount of time he spends.  The more he works, the more you pay.  Hourly attorneys will keep detailed records of exactly what they are doing and how long they are spending on a particular task.  You should receive a monthly statement.  That monthly statement will indicate the hourly rate and break down (typically in six minute intervals) what the attorney was doing and why he was doing it.

Rates for attorneys vary between $150 per hour and $500 per hour.  How much an attorney charges hourly is based entirely upon what people will pay for his services.  Shopping around can save significant money here.  However, remember, the best attorneys are paid more for a reason.  It is often financially better to hire the more expensive attorney and get the better result.

Remember also, you are paying the attorney for keeping close track of his time, which will be included in the hourly fee.  Hourly pay is common for attorneys and clients who regularly work together.  It is common for an hourly attorney to require a “retainer; an amount of money paid in advance to put towards the hourly fee.

Paying through an Attorney’s Fee Award Case

Sometimes you do not have to directly pay the lawyer at all.  Certain types of cases (like vexatious refusal to pay by insurance) carry with them awards of attorney fees.  This means at the end of the case, if you win, the other side pays for your attorney’s fees.

One would want to check with their particular jurisdiction and particular case type to determine whether an attorney’s fee awards can be expected.  Few cases invoke statutes where attorney’s fees are mandated.

You should be able to understand the contract your own lawyer gives you.  The vast majority of contingency fee lawyers contracts are pages long, with lots of fine print.  Many have “tiered” results, with different payment amounts being paid based upon how far the legal claim proceeds.  This, however, is unnecessary.  For example, the contingency fee contracts my offices uses for personal injury and wrongful death cases, contains ONLY the following language:

I, We, _____________, hereby employ Matt Hamilton, Hamilton & Associates, Lawyers as my attorney to represent me in my claim against _________________, and all other persons considered liable by said attorney for personal injuries sustained by me on the ______ day of ________.  It is agreed that said attorney shall receive ______ percent of whatever is realized on said claim for his services.  Client agrees to pay for expenses incurred in pursuing the claim.  Signed ______________. 

Sometimes, simpler is better.

The British System Versus the American System of Paying Lawyers

There is an old philosophical difference between British law and American law.  In the British model, the losing side always pays for the other person’s attorney’s fees.  In the American model, typically each party (whether they win or lose) pays for their own attorney’s fees.  The American model is preferred because it gives an advantage to the ordinary person who is the victim. Often, corporations will pay tens or hundreds of thousands of dollars to their attorney.  This would mean that a person simply could not afford to take the risk of suing a large corporation and incur that level of expense under the British model.

Paying the Lawyers through a Contingency Fee

The contingency fee is the most common reimbursement for accident injury lawsuits.  The contingency fee is governed by state law.  In it, the attorney takes a percentage of the win; however large or small that may be.  The attorney takes a considerable risk by fronting the expenses.  He advances his efforts in hopes of winning.  If the case loses, the attorney gets nothing, and loses his cost and time.  If the case wins, the attorney gets a generous reward.  Each attorney must take multiple cases in order to justify the risk of being paid through a contingency fee.

Complaints About High Pay Low Effort Contingency Fees

Sometimes clients complain about the generosity of contingency fee versus the amount of time their attorney has spent on it.  This attitude presumes all cases will win.  It also does not take in account the risks and efforts of the attorney.  Lastly, there is the considerable time, training, and monetary investment for the attorney to get his skills to the level to allow for victory.

Contingency Fees are Sometimes Prohibited

Rule 4-1.5 (c) and Rule 4-1.5 (d) of the Supreme Court of Missouri prohibits contingency fees in certain types of cases.  For example, family law and divorce cases cannot have contingency fees.

How Long is the Attorney Required to Work on a Contingency Fee Case?

The Supreme Court of Missouri in the case of In re Crews, 159 S.W. 3d 355 (Mo. 2005)  speaks to this issue.  The Supreme Court of Missouri ruled that it is presumed in an attorney contingency fee agreement that the attorney must represent that party through judgment.

This means if an appeal should be attempted after a judgment, a separate agreement should be reached.  Naturally, contingency fee agreements are creatures of contract.  The parties can agree to whatever specifics they may want if it expressed in the contract.

When is an Attorney’s Fee Unfair?

The Missouri Supreme Court in the case of Murphy v. Dalton, 314 S.W. 2d 726, 733 (Mo. 1958), spoke to the issue of fairness in contingency fee contracts.  These include injury cases and accident cases.  In Murphy, the Supreme Court ordered that every contingency fee contract must be viewed from the point and time and under the circumstances of the parties at the time of the execution of the contract.  This means if circumstances later change, that does not matter.  If certainty or uncertainty change later on that is not taken into account.

Neither the attorney nor the client can view in retrospect (after the fact) regarding the success or failure of the case to determine whether the contingency fee is reasonable.  For example, if both parties are expecting long and drawn out litigation, a jury trial, and perhaps even an appeal, and signed a large contingency fee, the attorney cannot later complain.  On the opposite side of the scale, if the case settles after a simple one page demand letter, the client can no longer complain.  If ten years or fifteen years of litigation ensues and hundreds of thousands of dollars in expenses are incurred the attorney cannot later complain that he should have been paid more.  The reasonableness of a contingency fee is taken at the time that the paper is signed.

WHAT ARE TYPICAL CONTINGENCY FEE AMOUNTS?

Like stairs, contingency fee amounts typically go up in steps.

Thirty Three Percent (33%) Contingency Fees

 A one third contingency fee was once common and nearly ubiquitous. Almost all accident and injury lawsuits were signed up for a one third contingency fee.  This was through the mid-90s.  The philosophy was that one third went to the lawyer, one third went to the victim, and one third paid for past medical and other expenses.

In practice, this was never true.  Some cases had large values and required small amounts of work.  Other cases presented large amounts of work and small value.  “Tort Reform” in the early 2000s vastly increased the cost of doing litigation and increased the cost of making claims for innocent victims.  Many attorneys went out of business.  The surviving law firms had to change, adapt, and improve, just to make less money.  The cost of bringing lawsuits increased substantially.  More experts are now needed.  This requires greater expenses.  One third contingency fees are still common.  However, do not expect to get that amount as an offer from the attorney.  Those are only when competition is high or the value of the case is high with little work.

Forty Percent (40%) Contingency Fees

Forty percent of the total take on the case (not counting expenses) is common nowadays.  This accounts for the increased cost and expertise needed to be victorious in litigation.

Forty Five Percent (45%) Contingency Fees and Higher

Contingency fee agreements where the attorney takes forty-five percent or more of the take are uncommon.  Typically, one will see this in strict product liability product defect cases and manufacturing defect cases.  Medical malpractice and other professional liability cases also can carry contingency fee agreements of this high percentage.  These higher fees are to offset the increased litigation costs (sometimes hundreds of thousands of dollars) and the risky of the case.

WHY SHOULD I PAY SO MUCH FOR A CONTINGENCY FEE LAWYER?

There is an old expression as a joke for divorces.  The joke goes; “Why are divorces so expensive?  Because they are worth it.”  The opposite is true (with the same rational) in contingency fee cases.  Simply put, the client gets more money at the end of the case, does less work, and has fewer headaches on average with a competent contingency fee lawyer working on their case compared to handling it on their own.  High priced contingency fee lawyers tend to get better results and tend to get more money for their clients.  In short, contingency fees are expensive because they are worth the investment.

Author:

Matt Hamilton of Hamilton & Associates, Lawyers

  • Juris Doctor
  • Trial Attorney