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Spring 2011

Vol. 1

Non-­‐Compete  Issues  in   Employment  Agreements   Impact  of  Non-­‐Compete  and  Non-­‐Solicitation   Agreements  in  Arizona  When  Employment  Ends     One of the most frequently asked questions when employment terminates is what rights and obligations an employer and employee possess under employment contracts. Under Arizona law, a covenant not to compete in an employment agreement is ‘valid and enforceable by injunction when the restraint does not exceed that reasonably necessary to protect the employer's business, is not unreasonably restrictive of the rights of the employee, does not contravene public policy, and is reasonable as to time and space.1 Correspondingly, a restriction in a covenant not to compete will be considered unreasonable and will not be enforced: (1) if the restraint is greater than necessary to protect the employer's legitimate interest; or (2) if that interest is outweighed by the hardship to the employee and the likely injury to the public.2 In Arizona, restrictive covenants that tend to prevent an employee from pursuing a similar vocation after termination of employment http://www.wallinharrison.com

are disfavored.3 It is for this reason that these contractual provisions are strictly construed against the employer. In particular, restraints are only construed reasonable in duration “for the time necessary for the employer to put a new employee on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness to the customers.4 Further, a covenant not to compete is generally held to be invalid unless it protects some legitimate interest beyond the employer's desire to protect itself from competition.5 Therefore, in order to be enforceable, a covenant not to compete must do more than simply prohibit fair competition by the employee. While a covenant not to compete is more strictly construed, nonsolicitation agreements are less restrictive and more enforceable than a covenant not to compete. The purpose of a non-solicitation

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N EWSLETTER ARTICLES The  Short  Sale  Question   Impact of non-compete and noncompetition agreements when employees and employers part ways in Arizona.

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Are  Unvested  Stock  Options   Community  Property?   All property acquired by either spouse during a marriage is community property. Are stock options?

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Are  You  Still  an  “Accredited   Investor”?   Changes to Regulation D Private Placements Pursuant to the Dodd-Frank Act of 2010

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CONTRACTUAL  RIGHTS   From page 1 fair business practices.10 Finally, the or anti-piracy agreement is to law imports into every contract of prevent former employees from employment a prohibition against the using information learned during use of a trade secret by the employee for their employment to steal his own benefit, to the detriment of his 6 customers. Personalized contact employer, if the secret was with a former acquired by the employee customer, in the course of his including A business must employment.11 A list of mailings and customers, for example, if be afforded telephone calls, protection against their trade and patronage constitutes have been secured by solicitation and is the wrongful years of business effort prohibited under appropriation of and advertising and the most solicitation expenditure of time and confidential agreements.7 money, constitutes an Because it is less information. important part of a restrictive on the business and is in the employee than a nature of a trade secret. covenant not to compete, a non-solicitation Therefore, it is important for employers agreement is not deemed and employees to understand their unreasonable or oppressive. rights under employment agreements, Employers have a right to protect both during and after their employment their interests, including terminates. customer lists, business tools and other confidential and proprietary information and 1 Bed Mart, Inc. v. Kelley, 202 Ariz. 370, 372, 45 P.3d 1219, 1221 (App. 2002). trade secrets through non2 Valley Medical Specialists v. Farber, 194 Ariz. solicitation agreements. 363, 369, 982 P.2d 1277, 1283 (1999).

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Recent Events On  March  3,  2011,  firm   founder  Troy  A.  Wallin   presided  over  the   Second  Annual  Zanjeros   Charity  Golf  Event  as   the  Immediate  Past   President  of  The   Zanjeros,  a  prominent   Arizona  East  Valley   service  organization.     Significant  funds  were   raised  for  the  benefit  of   local  charities,  including   The  House  of  Refuge,   The  Forever  Young   Foundation  and  The   Anasazi  Foundation.  

Further, Arizona adopted the Uniform Trade Secrets Acts (“UTSA”), which codifies the basic principles of common-law trade-secret protection, to govern the resolution of trade secret issues.8 By definition a trade secret may consist of a compilation of information that is continuously used or has the potential to be used on one’s business and that gives on an opportunity to obtain an advantage over competitors who do not know of or use it.9 A business must be afforded protection against the wrongful appropriation of confidential information by an employee, not only to encourage innovation and invention, but also to establish

3 Amex Distributing Co., Inc. v. Mascari, 150 Ariz. 510, 514-515, 724 P.2d 596, 600 - 601 (App. 1986). 4 Bed Mart, 202 Ariz. at 374, 45 P.3d at 1223. 5 Valley Medical Specialists, 194 Ariz. at 367, 982 P.2d at 1281 6 Alpha Tax Services, Inc. v. Stuart, 158 Ariz. 169, 761 P.2d 1073 (App.1988). 7 Hilb, Rogal and Hamilton Co. v. McKinney, 190 Ariz. 213, 946 P.2d 464 (App.1997). 8 Enterprise Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 3 P.3d 1064 (App.2000). 9 A.R.S. 44-401. 10 See, e.g., Amex Dist. Co. v. Mascari, 150 Ariz. 510, 724 P.2d 596 (App.1986). 11 Prudential Ins. Co. of America v. Pochiro, 153 Ariz. 368, 736 P.2d 1180 (App. 1997).

About the Author Chad A. Hester practices primarily in the area of commercial transactions litigation. He represents small and medium-sized businesses. Contact Chad at [email protected] for more details.

http://www.wallinharrison.com

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The  Short  Sale  Question   The     Decision  To  Allow  Your  Home  To  Be  Foreclosed  

Or  Go  Through  A  Short  Sale  Is  Never  An  Easy  Choice   More and more property owners are parting ways with their distressed real estate via foreclosure or short sale. The risks and potential benefits of foreclosure and short sale depend on the specific facts of a given situation. The process of non-judicial foreclosure in Arizona is governed by statute and does not require the cooperation of the defaulting homeowner.1 Typically, it will take 78 months after the first missed payment for a lender to complete the foreclosure process culminating in the Trustees’ Sale.2 The big question is whether the homeowner will remain liable for the deficiency, defined as the difference between the balance owed and the fair market value of the property. In many cases, the lender has no recourse against the defaulting homeowner after the Trustee’s sale. In some cases, the lender has the right to waive its security under the deed of trust and sue for the balance owed as an unsecured debtor.3 A short sale involves an offer submitted by a third party to purchase the distressed property. Since that offer is less than the amount owed on the property, the lender(s) must agree to release their lien(s) on the property before clean title can then be transferred to the third party buyer. Generally, the lender(s) are not inclined to approve a short sale unless the borrower is behind on the payments.

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Nearly every lender will require significant financial disclosure from the defaulting homeowner. This could pose a risk when dealing with the lender as a possible creditor. If approved, the remaining risks for the homeowner can be evaluated in the lender’s written approval letter or agreement. Lenders who have no recourse against the homeowner in foreclosure will often give written assurances as part of the short sale approval that they will not seek a deficiency against the homeowner. In some cases, the lender reserves whatever right it has to sue on the deficiency and a detailed legal analysis is required to determine the extent of that liability. Other examples of a “dirty” short sale could include requirements by the lender that the homeowner sign a new note or come up with a cash payment at the closing of the short sale. There may be compelling potential benefits to weigh against the inherent risks of a short sale. For instance, a short sale can result in a significantly reduced waiting period for the defaulting homeowner to qualify for another home loan. Furthermore, a short sale can take much longer to close than the typical 7-8 months it normally takes for the lender to foreclose, resulting in increased beneficial use of the property by the owner. The process of short sale can also present a favorable context to negotiate any residual liability on a deficiency.

The truth is this: there is no onesize-fits-all choice that makes sense for everyone. A homeowner facing default should carefully consider the effect of foreclosure vs. short sale on his or her specific set of facts and personal objectives. 1. A.R.S §33-801 et. seq. 2. A.R.S §33-814(G). 3. Baker v. Gardner, 160 Ariz. 98, 770 P.2d. 766 (1988).

About the Author Bert D. Millett focuses his practice primarily on business law, real estate law and contract issues. For more information, contact Bert at [email protected].

Find an attorney: See the directory on the back page of this newsletter or visit us online at http://www.wallinharrison.com

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Are  Unvested  Stock  Options   Community  Property?   given, at least in part, for consideration of his future employment with Apollo University. The trial court sided with Wife, finding that the unvested stock options were payment for services rendered during the marriage, and therefore were community property. In Arizona, all property acquired by either spouse during a marriage is community property except for property acquired by gift, devise or descent.1 However, despite the plain language of that statute, some exceptions exist. One such exception is stock options. In Brebaugh v. Deane,2 a divorce matter, Husband had been an employee of Apollo University for many years. He had received stock options, which had vested during the marriage, which Husband and Wife agreed were community property. Husband had received stock options after the date he served Wife with the Petition for Dissolution, which Husband and Wife agreed were separate property. Husband and Wife disagreed on whether stock options that Husband received during the marriage but which could not be exercised until after the date of service were community or separate property. At trial, Husband argued that the unvested stock options were

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On appeal, the Court noted that “pension rights, whether vested or non-vested, are community property insofar as the rights were acquired during the marriage,” and further noted that many other jurisdictions analogize unvested pension benefits and unvested stock options in determining the community interest. The Court declared that “[i]f, however, the options are, in part, intended to induce future employment, then, to that extent, they are Husband’s separate property.” In that regard, the Court relied on evidence that the trial court rejected. An Apollo University executive testified at trial that stock options “generally are granted as an incentive for employees to remain with a company, to think like stockholders and thereby consider the company’s longterm benefits.” Husband’s expert accountant similarly testified. The Court found such testimony clear and convincing evidence that the stock options

were given, at least in part, to incentivize Husband’s employment past the date of service of the Petition for Dissolution. The Court remanded the case back to the trial court to determine the extent to which the unvested stock options were given for Husband’s future employment. As this issue arises frequently in Arizona and other jurisdictions, many companies are now issuing stock options with language indicating that they are offered as an incentive for future employment. With such language, combined with the clear instruction in Brebaugh, Arizona trial courts are compelled to find that unvested stock options are separate property at least in part. Upon such a finding, trial courts are required to employ one of two “time-rule” formulas to determine the percentage of unvested stock options that are separate property. Such a determination can be quite difficult on its own accord, but Brebaugh at least provides a framework for making that determination. 1. A.R.S. § 25-211 2. 118 P.3d 43 (Ct. App. 2005)

About the Author Richard D. Lyons practices in the areas of family law, personal injury and medical malpractice, representing the rights of victims and families throughout Arizona. For more information, contact Richard at [email protected].

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Are  You  Still  an  “Accredited  Investor”?   Changes   to  Regulation  D  Private  Placements     Pursuant  to  the  Dodd-­‐Frank  Act  of  2010   It has been almost a year since the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”) became effective on July 21, 2010. Many investors are already feeling its effects. Notably, the DoddFrank Act makes significant changes to the definition of “accredited investor” under Rule 501(a) of Regulation D. 1 Section 413 of the Dodd-Frank Act 2 changes the definition of “accredited investor” for natural persons to exclude the value of a person’s primary residence from the $1 million net worth test. All other parts of the accredited investor definition remain the same, including the net income test for natural persons. Pursuant to the net income test, if you have received $200,000 in individual income over the last two years ($300,000 in joint income with your spouse) and have an expectation of reaching the same income in the current year, you qualify as an “accredited investor”. As to the $1 million net worth test, the Securities and Exchange Commission (“SEC”) recently clarified an unfortunately increasingly common situation where an investor’s mortgage debt exceeds the value of the primary residence. Regarding the $1 million net worth test, the SEC will allow an investor to exclude a mortgage or other debt secured by the investor’s primary residence that does not exceed the fair market value of the residence. But if the amount of such debt is greater than the fair market value of the residence and the lender can go after the investor personally for any deficiency under

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applicable state law, the investor must deduct the excess liability from the net worth calculation. The Dodd-Frank Act does not provide guidance on how to how to calculate the value of the investor’s primary residence. The new definition also affects companies who are currently conducting an offering pursuant to Regulation D or Section 4(6) of the Securities Act. Such companies should obtain new accredited investor representations from investors. If some of the investors who qualified under the old standard do not meet the new standard, the company risks losing its registration exemption unless the newly unqualified investors are barred from participating in the offering. In addition to these immediate changes, more changes may come in the future. Beginning in 2014, the Dodd-Frank Act requires the SEC to review the definition of accredited investor for natural persons at least once every four (4) years. Upon such review, the SEC may revise the net worth requirement for natural persons. However, the SEC may not change the net worth requirement prior to 2014. On January 25, 2011, the SEC proposed amendments, which would conform the definition of “accredited investor” in the SEC rules to the definition as amended by the Dodd-Frank Act. In addition to adopting the Dodd-Frank Act’s definition, the SEC’s proposed

amendments codifying its earlier guidance on the treatment of indebtedness secured by the residence in the net worth calculation. The amendments, as proposed, provide that the value of the primary residence is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property. As such, for the purposes of determining whether an investor is an “accredited investor”, net worth will be reduced by the amount of value that the primary residence would have contributed to net worth if the residence were not required to be excluded. The SEC sought public comments on the proposed rules through March 11, 2011. Because the primary residence exclusion became effective July 21, 2010, companies and private funds raising capital should review their offering documents, including investor suitability questionnaires, purchase agreements and private placement memoranda, to ensure conformity with the new net worth component of the accredited investor suitability standards. 1. 17 C.F.R.§230.501 et seq. 2. Pub. L. 111-203, H.R. 4173

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About the Author Troy A. Wallin practices primarily in the areas of corporate law, securities, real estate, and administrative law, including private placements, SEC filings and compliance, mergers and acquisitions, securitizations, commercial litigation, and general business law. For more information, contact Troy at [email protected].

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ATTORNEY DIRECTORY Wallin Harrison is a business and litigation law firm that strives to provide the highest quality legal services for both large and small businesses and individual clients. Our attorneys are committed to satisfying the legal needs of all in the most cost-effective manner possible.

Arizona  Office:     1425  South  Higley  Road     Suite  104     Gilbert,  Arizona  85296   T:  (480)  240-­‐4150     F:  (480)  240-­‐4151     Nevada  Office:       10161  Park  Run  Drive     Suite  150     Las  Vegas,  Nevada  89145   T:  (702)  851-­‐5875       F:  (702)  926-­‐2554      

Troy  A.  Wallin      

Steven  E.  Harrison    

Richard  D.  Lyons    

Chad  A.  Hester      

N.  Patrick  Hall  

Jason  P.  Thayn  

Bert  D.  Millett  

Kam  H.  Brian    

Attorney

Position

Email Address

Practice Areas

Troy A. Wallin

Partner

[email protected]

Administrative Law Banking Law Business Formation Commercial Litigation Commercial Transactions Litigation Construction Litigation

Corporate Law Healthcare Professionals Advocacy Labor and Employment Mergers and Acquisitions Real Estate Securities

Steven E. Harrison

Partner

[email protected]

Automotive Accidents Commercial Litigation Commercial Transaction Litigation General Litigation Insurance Defense

Medical Malpractice Personal Injury Products Liability Real Estate Litigation Wrongful Death

Richard D. Lyons

Associate

[email protected]

Automotive Accidents Commercial Litigation Family Law

Medical Malpractice Personal Injury Wrongful Death

Chad A. Hester

Associate

[email protected]

Administrative Law Appellate Law Commercial Litigation Commercial Transactions Litigation

Construction Litigation Corporate Law General Litigation Labor and Employment

N. Patrick Hall

Associate

[email protected]

Appellate Law Automotive Accidents Commercial Transactions Litigation Construction Litigation General Litigation Healthcare Professionals Advocacy

Insurance Defense Labor and Employment Law Medical Malpractice Personal Injury Products Liability Real Estate Litigation Wrongful Death

Jason P. Thayn

Associate

[email protected]

Commercial Transactions Litigation Commercial Litigation Corporate Law

Estate Planning and Probate Real Estate

Bert D. Millett

Associate

[email protected]

Business Formation Commercial Litigation Commercial Transactions Litigation

Corporate Law General Litigation Real Estate

Kam H. Brian

Of Counsel

[email protected]

Commercial Litigation

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