Non-Compete Agreements

Appraisal Firm and AMC Non-Compete Agreements

Are non-compete provisions between appraisal firms and employee-appraisers enforceable? What problems can they create? 

To begin answering these questions, the following is one appraiser’s story that concerns a typical non-compete legal situation. This is a true story, except that the location and practice niche have been changed. 

The appraiser in this scenario is a long-time staff appraiser at a firm whose specialty is the valuation of small medical office properties. This employee-appraiser started work at the firm seven years ago, while he was working toward a general certification. He got that certification, and the firm then covered the cost of education and dues for him to earn an MAI designation. The appraiser worked hard to earn the designation, and this designation was good for both himself and the firm. The firm was based in Nashville, Tennessee, but it later moved the appraiser out to Orange County, California, to spearhead a new office. He became the “face of the firm” in Southern California, and he was principally responsible for performing appraisal work for some of the firm’s key clients—mostly investment organizers focused on medical properties. 

For months, the appraiser had yearned to go out on his own. This yearning came from a gut feeling that the owners of the firm had no intention of inviting him to join in the firm’s ownership. In fact, he raised that possibility with them two years ago, after the stormy departure of several other appraisers from the firm. When he brought it up, the owners said “Maybe, in the future.” The owners then offered him a new employment agreement, bumping up his base earnings and giving him a strong bonus on the work he originated. He took the deal, but two years later, he didn’t feel any closer to becoming an owner. His mind was made up to leave and start his own firm.

While the appraiser’s new firm probably would handle other types of assignments (in addition to medical properties), the appraiser planned to continue offering appraisal services focused on the medical office niche. Unlike the appraisers that left before him, however, he didn’t have any plans to take or use the proprietary data that the firm owners fiercely protect. He has his own ideas and didn’t feel any need to take what belongs to the firm. 

The appraiser’s heart sank when he pulled out the employment agreement he signed two years ago. The language in a section entitled “Non-Competition” read:

For a period of three years following the termination of your employment with the Firm, whether such termination is voluntary or involuntary, with or without cause, or at your choice or the Firm’s choice, you will not engage in the performance of professional appraisal services relating to medical office properties located in the States of Tennessee or Kentucky, or in the California counties of Los Angeles, Orange, Riverside, San Bernardino, San Diego or Ventura.

Does this section really mean what it says? Are the owners of the firm legally able to stop the appraiser from appraising medical offices in Southern California? That would make the success of the appraiser’s upstart business very unlikely, given that his exclusive practice had been valuing such properties for the last seven years and given the fact that this is the expertise for which clients seek him out. For the foreseeable future, he wouldn’t be able to earn a living on his own if he couldn’t appraise this property type.

The appraiser then decided to meet with a lawyer, who put him at ease. Since the appraiser had been employed by the firm in California and planned to open his firm in California, the legal answer was pretty clear: under California statutory law, the owners of the appraisal firm almost certainly could not enforce the non-compete provision in the agreement the appraiser signed. Except in very limited circumstances, it is generally contrary to California law to prohibit competition by a former employee. However, if the appraiser were planning to open his firm in another state—such as Tennessee—he might have found himself in a very different legal position or at least in a courtroom paying for expensive legal arguments.

Non-Compete Basics for Appraisal Firms and Appraisers

Many appraisal firms consider non-compete provisions as part of their employment or contractor agreements. The purpose of a non-compete clause is to prohibit an employee or contractor from competing against his or her employer after the employee or contractor ceases work. The understandable desire of an appraisal firm is usually to protect itself from future competition by a staff member after the firm has spent time and money educating the appraiser and contributing to his or her professional development and after the appraiser has experience with the firm’s clients. Sometimes, the desire is simply to stifle any competition at all.

A non-compete clause is usually part of an overall employment or contractor agreement but can also be the subject of a stand-alone, specific non-compete contract. It’s important to note, however, that the inclusion of a non-compete provision in an independent contractor agreement can signify that the appraiser is not properly classified as a contractor (as opposed to being considered an employee). Non-compete clauses can also be found in the context of partnership, LLC, or business sale agreements. Usually, a non-compete clause is limited to a certain length of time. It might also be restricted to certain types of work or specific geographic areas. 

If your firm needs assistance creating a sound employment agreement, please reach out to me. 

---