A Quarterly for the Real Estate, Design, and Construction Industries
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- Five Dynamic Forces Energizing Today's New Projects
- Reconsidering Noncompete Agreements
- The Statute of Limitations for Design Professionals
Five Dynamic Forces Energizing Today's New Projects
By Barry B. LePatner, Esq.
The next three years leading to the 21st century will be unlike the preceding seven years of this decade. The years of unwinding the worst recession for architects since the Great Depression have given way to a new era characterized by five dynamic forces: 1) the global economy, 2) the technological/brainpower transition, 3) the universal appeal of quality design, 4) the aging of our global population, 5) and the telecommunications revolution. These forces favor the large, multi-disciplined architectural firms that are uniquely positioned to take advantage of the new transformations that are shaping the business world and those who service their corporate and institutional needs.
The Global Economy
During the 1980s the large U.S. architectural firms all designed projects in countries abroad. However, in recent years, major shifts in the way the corporate world has committed itself to a global market has accelerated the need for architects to accept international assignments as a regular fact of life.
International corporations no longer are tied inextricably to their national governmental policies. Global trade and the ability to do business in many countries in order to develop worldwide products and services has transformed the way in which successful architectural firms will adapt to the changing design and construction imperatives of their clients.
The trend to move away from world trade regulation will also be of huge benefit to architects. The increasing ease of exporting American design and technical expertise abroad will open up countless new areas for the predominance of the U.S. design product to become a staple of countless new international markets as the 21st Century dawns.
Technological/Brainpower Transition
Today, as economist Lester Thurow notes in his new book "The Future of Capitalism", "Shifts in technology, transportation, and communications are creating a world where anything can be made anywhere on the face of the earth and sold everywhere else on the face of the earth." The costs of these advances have decreased dramatically and will continue to do so in the years ahead.
Those firms which have an abundance of advanced design skills, a grasp of the cultural nuances of the countries in which they design projects, and the latest technological tools to speed communications with clients will hold the dominant sources for strategic advantage over competitors with less of these tools and talents.
The firms that truly succeed in this next century will be those who move quickly to garner the most talented brainpower and lock these employees into long term contracts so that they do not move over to competitors. All large firms will be able to purchase the latest computer equipment and software tools. It will be the minds and talents of the independent decision-makers of the successful firms that will determine which organizations stay ahead of those who fall behind. Vision and the ability to adapt to changing conditions will be the hallmark of the astute leaders of tomorrow's international architectural firm.
The Universal Appeal of Quality Design
Quality-designed buildings and products whether built for the U.S. market or built thousands of miles away, have taken on the characteristic of a universal aesthetic. The lessons learned from the wildly successful designs of the Ford Taurus, the Gillette Sensor razor blade and the Apple Macintosh are but a few of the pro-ducts that have been designed for appeal to customers in every part of the world.
One need only look at the success of the design of I.M. Pei's glass pyramid at the Louvre in Paris, the eventual success of the Disney design construct in Japan and Europe, and the selection of U.S. architects for major governmental and private projects in Hong Kong, Malaysia, Berlin and Australia, to name but a few, to recognize the appeal that the American design ethos has across the international spectrum.
The Aging of Our Global Population
Our national and global population is soon to experience a massive change in generational impact as it continues to grow and get older. In the U.S. today, those over sixty-five total 13% of the population. By the year 2025, the number of elderly will reach 20%.
As the baby boom generation ages, our society will, for the first time, have a large segment of the elderly who will be economically well-to-do, active, living in residential settings that have yet to be built. They will be demanding more services of their government, demanding expensive social services and utilizing health care facilities that will be undergoing drastic design changes to meet their special needs.
The large architectural firms who can recognize these revolutionary changes early, adapt them to the new ideas their talented designers produce, and market them everywhere across the globe, will be the major success stories of the early years of the 21st Century.
The Telecommunications Revolution
The "Digital Revolution" is here. Rich Karlguard, writing in the December 2, 1996 issue of Forbes Magazine's ASAP, identifies the trademarks of the computer advances we are currently experiencing: (1) Whatever computation can replace, it will. Soon computer chips will be so powerful and so cheap...Maytag...will use a cheap fuzzy logic chip, not cement, to keep your washing machine perfectly still during the spin cycle. (2) What information can replace, it will. Instead of driving to the local Barnes & Noble or Borders bookstores, you can hop on the Internet and call up www.amazon.com which carries more books than the local store. Information trumps real estate; and (3) What can be done, will be done. The ideas and logic of today will be replaced by the new physics of tomorrow&emdash;limited only by the imagination of those bold thinkers of today who are rethinking everything about them.
Imagination will spur the development of newer and faster ways of communicating ideas, designs, ways of constructing those designs and the mechanism for constructing them faster and cheaper. The smart architectural firms will hire these most imaginative thinkers and develop the internal systems for delivering these ideas to their global clients for projects in developed and underdeveloped countries alike.
Bill Gates, the genius behind Microsoft, says that "to make intelligent bets on the future, you have to understand what will be going on in the next ten years. Most people overestimate what is going to happen in the next two or three years and underestimate what is going to happen in the next decade."
What Will This Mean For You?
Grasping the enormity of new thinking that will be the concomitant of the five dynamic changes described above may be difficult. Adapting the large architectural firm to act in a positive way that strengthens the firm and works in a complementary fashion along with these changes is the true challenge. Certainly, one must look long and hard at the strengths and weaknesses of today's firm and compare them with the talents and abilities needed to meet the new economic realities described above.
Reconsidering Noncompete Agreements
By Barry B. LePatner, Esq., Timothy F. Hegarty, Esq., and Roy R. Pachecano, AIA
One of your firm's top rainmakers is off to join the competition. Is your client base safe?
Two of your key professional employees tell you they're leaving the firm. You're in shock, and it gets worse: Several staff members are joining them to start a small office a half mile from your own. Pretty soon it's clear the defectors have convinced several of your firm's top clients, on whose projects they worked, to follow them as well. Besides feeling surprised, disappointed, and betrayed, you feel guilty for failing to prevent this crisis.
Could this situation have been avoided? Presuming you missed or ignored the signs of dissatisfaction, you might still have stemmed such a loss by implementing noncompete agreements or restrictive employee covenants with these employees.
After a decade in the drawer, noncompete agreements are again receiving new attention from firm principals. One reason is the economy's slow but steady recovery. Work is picking up in firms that struggled to maintain a healthy balance sheet through the sluggish early 1990s. Architects who have kept in touch with their clients during this time have discovered that their business outlook is entirely different today compared to the earlier half of the decade. For example, AT&T, General Motors, IBM, and other blue-chip corporations have undergone significant internal makeovers. State and local government leadership has dramatically changed as well.
With the current growth cycle, human resources and the ability to keep new work in the office have again become a business imperative. Most architectural firms are having no trouble occupying their full-time professional employees with increased workloads. Problems will arise, however, in firms that fail to strike a delicate balance between the need to develop relationships among key employees and their new clients while minimizing the associated risk of losing that business to an employee who leaves the firm.
Creating employee loyalty is as time-consuming and costly as building a new client relationship. Design firms spent the recession of the early 1990s nurturing their current clients. Now that this costly investment is finally showing dividends, firms must move to protect their internal assets, especially the creative talents of their staff. Otherwise, key people may ride down the elevator one evening and take the firm's hard-earned business with them.
Why does this happen? As is often the case, personal relationships govern client relationships. Key employees market their own personalities as well as the firm's design product. In the worst cases, if this conduct steps across the line and turns unethical, it is possible to revoke the license of the professional responsible for illegally taking advantage of his or her employer's client relationship.
To avoid this scenario, many firms turn to noncompete agreements or employment agreements with restrictive covenants. These contracts are designed to set limits on how far employees can depart from the basic responsibilities of their employment as prescribed by the firm. Most states' laws frown on restrictions that seriously inhibit a person's livelihood. Courts have historically looked at noncompete agreements and restrictive covenants from three perspectives: (1) transactions involving the sale of a business; (2) employment agreements for professionals or for employees with special skills; and (3) employment agreements in general. Courts have issued clear guidelines concerning the sales of businesses and general employment agreements. For transactions that involve the sale of a business, reasonable covenants not to compete agreed upon at the time of sale are routinely enforced to protect against unfair or illegal conduct that causes economic injury. However, restrictive covenants that preclude former employees from engaging in their profession are generally unenforceable.
Since professionals have special skills, they stand on slightly different footing than less-skilled employees. Covenants restricting a professional from carrying on his or her profession are common, and courts have enforced restrictive covenants with the following characteristics: the restrictive covenant must be neither harsh nor oppressive, and it must include specific and reasonable time frame, as well as geographic and/or limitations of the scope of work.
Design professionals often shy away from incorporating restrictive covenants in their shareholder, partnership or employment agreements. They either believe it is not part of their firm's culture or think that these situations, when they do arise, will work themselves out. Some firms believe that, if necessary, courts will infer a covenant not to compete when there is none. What these firms fail to understand is that while some courts may indeed infer a covenant not to compete, they will only do so for the term of employment. This decision means that anticompetitive covenants covering the post-employment period is generally regarded as the most critical time for the former employee to woo clients from a former firm, a firm's reliance on legal prohibition in these situations is its best recourse against such conduct.
In contrast, the rest of the business world understands that these provisions safeguard the firm's ongoing client business. The corporate world views their absence in employment agreements as gross dereliction of sound business policy.
Before drafting a noncompete agreement for the professional firm, principals must remember that courts take a strict approach to all anticompetitive covenants in employment agreements. The reason behind this strict approach is that once the term of an employment agreement has expired, general public policy favors open competition.
Furthermore, courts will generally dismiss any suit filed by an employer who seeks to enforce a noncompete agreement where the employee has been terminated without cause.
Since a noncompete agreement is simply a contract, the courts apply the same rules of contract law in constructing their terms, with the notable caveat that they will strictly construe these agreements against the employer.
While each situation is different, it's best to draft noncompete agreements for professionals as clearly as possible to reflect all parties' intentions in an effort to survive the strict scrutiny of the courts. In other words, when a court is presented with a restrictive covenant that bears more than one reasonable interpretation, the preferred interpretation is the one that least restricts competition, and will generally be resolved in favor of the employee.
Noncompete agreements should include a provision similar to the following:
The Employee agrees that the services he/she provides to the Firm are based upon the provision of architectural services arising from the development of, relationships with, clients of the firm. The Employee recognizes that in the event the Employee leaves the Firm to compete with the Firm, the Firm shall suffer significant damage. The Employee hereby agrees that until the [fill in number of years] anniversary of the date on which the employment relationship between the Employee and the Firm is terminated (the "Non-Competition Period"), the Employee shall not, within the Geographical Area (as hereinafter defined), and without the prior written consent of the Firm, directly or indirectly, compete or associate with, or participate as an agent, representative, consultant, stockholder, partner, joint venturer, director, officer or employee in any business, directly or indirectly, competing with the business of the Firm or in the fields of [insert description of fields].
A second provision would come into play in the event of the employee's actual or threatened breach of the noncompete provision. In that case, the firm would be entitled to an injunction restraining the employee from such action. Finally, it's always advisable that the employee have an independent attorney review the agreement on his/her behalf.
For example, one New York architectural firm included a restrictive covenant that required an associate not to compete for 24 months following the date of the agreement. The employee left the firm after 30 months and immediately joined a competitor. The employer sued the former employee, and the court ruled in favor of the employee despite the employer's argument that the covenant should be read to mean that the 24-month period would not start until after the employment contract terminated. In short, the court simply enforced the provision exactly as stated in the agreement. If the employer meant that the time period would not start until after termination of the employee, the covenant should have stated so.
Another firm in the Midwest sued a former employee who solicited one of the firm's clients. The firm thought it had protected itself bi including in its employment contract a covenant prohibiting employees from soliciting any of its top three clients, all specifically named in the agreement. Over time, the firm's top three clients changed, but the principals never modified the covenant. When a former employee solicited a client who was not specified in the agreement, the firm lost its case.
While courts have a tendency to protect an employee's interests, they do recognize valid business concerns. In one recent non-design firm case, an appellate court determined that a noncompete clause was reasonable in terms of the scope of employment prohibited and the time period. But it also found that the employer had not proved the geographic limitation reasonable. The contract restricted the employee from engaging in the specified business within a radius of 250 miles of any of the firm's offices. The appellate court remanded the case back to the trial court so the jury could make a determination whether the geographic limitation was reasonable.
Five reasons to seek noncompete agreements:
1. On average, the cost of replacing and orienting a mid-level to senior professional equals 150 percent of the employee's their current salary.
2. Losing key personnel disrupts organizations.
3. Training new professionals detracts from the time needed by principals to develop and maintain client relationships.
4. When key personnel leave a firm, their experience and knowledge depart with them.
5. Departing employees try to convince the clients that they can provide services faster, cheaper and better than their former employer.
The benefits derived from a noncompete agreement are not restricted to the firm. In specific ways, they can have positive results for the employee. One such "win-win" scenario occurred in a multinational design firm that tried to expand into new markets by hiring senior personnel with specific expertise. The firm negotiated an employment agreement with new employees that included an noncompete provision and a provision rewarding employees for all new commissions they brought in. This type of balanced agreement gives key personnel an incentive not to walk away with clients, and to receive more compensation than they may gain by going outside the firm.
Experience demonstrates that when firms balance the protections they need while rewarding their key personnel, noncompete agreements can create a positive framework for such employees to become prime candidates for promotion within the organization.
Design firms destined to succeed in the next century will be those who garner the most talented brainpower and lock these employees into long term contracts. Firms that view key employees as valued assets are more likely to grow with a regular stable of talented individuals.
It will be the minds and talents of the independent decisionmakers of the successful firms that will determine which organizations stay ahead of or fall behind the competition.
Once principals recognize that their employees are the firm's most significant assets, they should be willing to make a meaningful investment in them to keep them on board.
Barry B. LePatner is the founding partner of Barry B. LePatner & Associates, a New York law firm specializing in design, construction, and real estate law. Timothy F. Hegarty, an associate with the firm, and Roy R. Pachecano, the firm's design consultant, contributed to this article.
The Statute of Limitations for Design Professionals
by Roger M. Quinland, Esq.
Architects, Engineers and Owners of real property in New York will no doubt have strong opinions as to the wisdom of recent changes in State law, which dramatically shorten the time limits to file legal actions against design professionals.
On September 4, 1996, New York Governor George Pataki signed into law legislation reimposing a three year statute of limitations against architects, engineers and other non-medical professionals. The three year statute of limitations applies whether the underlying cause of action sounds in contract or tort, and overturns a line of New York Court of Appeals cases which applied a six year statute of limitations in breach of contract actions against licensed professionals --- including architects and engineers.
In applying the six year statute of limitations, the Court reasoned that there existed an implied covenant to exercise due care in performing contractual services. By allowing plaintiffs to commence contract actions against design professionals within the six year limit that characterizes contract actions, the Courts effectively doubled the statute of limitations for architectural and engineering malpractice.
These cases had been widely viewed as having obfuscated the State Legislature's original intent to impose a three year statute of limitations on general malpractice actions against non-medical professionals.
Although the new legislation states that the act shall take effect immediately, it is not clear whether the statute applies only to claims being filed now, or whether contract based cases existing prior to the amendment can be dismissed if the claims are time barred under the three year limitations period. The language of the statute contains no explicit intent to make the amendment retroactive.
Owners and developers of real property who have previously assumed that they have six years to bring contract based malpractice actions against architects and engineers, now need to seriously evaluate their ability to do so.
The Continuing Treatment Doctrine as Applied to Architects and Engineers
As originally envisioned, the continuous treatment doctrine applied to medical professionals, and was intended to prolong the running of the statute of limitations until the defendant doctor ceased treatment of the condition which gave rise to the malpractice. The doctrine has since expanded to other fields of malpractice. Take the following example for illustration: A developer who hires an architect to design and supervise the construction of a concert hall. The design is complete in 1991; the erection is completed two years thereafter. The roof of the hall begins to leak immediately.
A roofing contractor spends three years attempting to remedy the leak, during which time the roofer is under the supervision of the architect. Dissatisfied with the continuing failure of corrective measures, in 1996 the plaintiff sues the architect for malpractice.
New York Courts have held that in this type of scenario, the statute of limitations does not begin to run until the termination of the professional relationship between the parties. The basis for this conclusion is that the considerations responsible for making the continuous treatment doctrine applicable to the professions of medicine, law and accounting, also apply to the profession of architecture. Under this reasoning, the statute of limitations did not begin to run during the time the architect sought to fix the roof.
New York's New Statute of Repose
New York State has now enacted legislation that limits the right to commence actions against design professionals to a specified period following a project's substantial completion.
The new Statute of Repose establishes a cutoff period for negligence claims of 10 years following completion of the professional's services. The new law expressly states that it is not intended to alter other applicable statutes of limitation.
New York law now also requires that a notice-of-claim be served on the design professional defendant ninety days prior to filing a lawsuit that involves design work completed within the ten year span. Architects and Engineers throughout the state are no doubt rejoicing; this new statute provides them with increased protection from liability, while establishing an effective means to dispose of actions which lack meaningful evidentiary foundation.
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