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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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Pennsylvania LLC was established one year ago by two members

Customer Question

Pennsylvania LLC was established one year ago by two members including myself. Additional member added three months later. This member is having financial and marital issues and is considering going back to the competitor. He worked for them prior to joining the LLC.

Operating agreement does not allow a withdrawl of membership unless company is disolved. He has been gone for a week and a half and will not return any phone calls. Not sure if he is working for the competitor or not.

What should we do? Can he just decide to leave?
Submitted: 5 years ago.
Category: Business Law
Expert:  socrateaser replied 5 years ago.

LLC members are partners and owe a fiduciary duty to each other. A member withdrawal would give the remaining members the right to terminate the agreement with the withdrawing member, even if the operating agreement didn't provide for this, because of the breach of partnership and fiduciary.

 

However, this legal answer may not resolve your question. So, tell me: What would you like to accomplish at this point?

 

 

 

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Customer: replied 5 years ago.

I understand we would have a right to terminate the agreement. However, if we do, that would allow him to work for the competitor. According to the operating agreement, a member may not engage in a business or investment opportunity that would compete with the existing LLC.

 

If we do not allow the withdrawl can he still work for the competitor and violate the operating agreement?

Expert:  socrateaser replied 5 years ago.

You can't prevent him from withdrawing -- that's involuntary servitude, and the court clearly can't enforce it against your partner.

 

Re enforcing the non-compete, in Pennsylvania, restrictive covenants are enforceable if:

  1. they are incident to an employment relationship between the parties;
  2. the restrictions imposed by the covenant are reasonably necessary for the protection of the employer, and;
  3. the restrictions imposed are reasonably limited in duration and geographic extent.

See Hess v. Gebhard & Co. Inc., 570 Pa. 148, 808 A.2d 912 (Pa. 10/16/2002).

 

Here, you have a partnership agreement, which while not strictly an employment relationship, the goal was for you all to earn a profit, so this likely satsifies element #1.

 

Without reading the operating agreement, it's hard to tell if the restrictions imposed are reasonably necessary to protect you from harm caused by the partner's withdrawal and work for a competitor, that's something you would have to prove to a court, based on the fact of the injury that you will suffer if the partner is permitted to compete.

 

Re the geographic and durational restrictions, the question is: where do you operate, where does the competitor operate and is it localized or national/international, and; what is a reasonable period of time to prevent the partner from competing so that you can avoid the partner's trading on your existing goodwill, which is really the crux of the issue.

 

Showing a court that the partner will be using your goodwill in conjunction with a competitor, because of the partner's knowledge of the existing customers and/or your business operations is the most compelling means of getting a court to enforce the non-compete, because you will be demonstrating a real injury potential, rather than just a need to squash competition.

 

Regardless, if you want to stop it before it starts, you can notify the partner that you expect him/her to observe the non-compete agreement, or you will have no choice but to take legal action against him/her. No specific threats, because that can quickly turn into criminal extortion, which will ruin your whole day/week/year/life.

 

Ultimately, you will need a lawyer, if this gets ugly enough.

 

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