Non-Solicitation Agreements in Business Contracts
How to Keep Employees from Working for the Competition
Many businesses require top-level executives and key managers and directors to sign a non-solicitation agreement. The buyer of a business may also require the seller to sign a non-solicitation agreement to prevent the seller from taking customers and employees away from the business.
Solicitation is just a fancy word for asking for something. In a business sense, it's defined in terms of trying to get someone to do something. A non-solicitation agreement attempts to get someone's promise not to take employees or customers away from a business.
A non-solicitation agreement is an agreement not to solicit either (a) employees or (b) customers of a business, or both. Non-solicitation language can come in the form of an entire document or a clause within another document, like an employment agreement or independent contractor agreement.
Consideration and Restrictive Covenants
Restrictive covenants are contracts, and they must include all elements of a valid contract, including consideration.
Consideration is the concept that each party to the contract must give something to the other. If one party gives something (money, for example), and the other side gives nothing, that's a gift, not a contract.
In a restrictive covenant, the signer gives the agreement not to solicit in return for a consideration from the other party. That usually means money, and it must be enough to be relatively equal in value to the money they are giving up (called "sufficient consideration").
Non-Solicitation Agreements as Restrictive Covenants
The non-solicitation is one of three types of restrictive covenants, the other two being non-compete agreements and non-disclosure (confidentiality) agreements. All three attempt to restrict or force someone not to do something, either during the time of employment or after. To be enforceable, they must have reasonable limits in terms of time, area, and types of work.
State Laws and Non-Solicitation Agreements
State laws on restrictive covenants vary. California's laws on these types of restrictive covenants are the most, well, restrictive. The state says that these types of agreements are generally can't be taken to court and enforced, except in cases where they are used to protect trade secrets.
Non-Solicitation Language in Contracts
A typical non-solicitation agreement between a business and an employee would include:
- Contract language that defines how long the employee must abide by the agreement, counting both time of employment and after, and in what geographical area
- A statement that the employee has received "sufficiency of consideration" for signing the agreement
- A statement by the employee that they won't violate the agreement as an individual or as any other kind of entity (as a partner, salesperson, joint venturer, etc.) for the benefit of themself or anyone else
The main part of the agreement is a list of types of restricted solicitations, including restrictions against:
- Selling to the company's customers and prospective customers
- Recruiting anyone associated with the company to change their employment or business relationship with the company
- Employing or soliciting or attempting to employ or solicit anyone who was an employee of the company within a certain time of their employment
Non-Solicitation Agreements vs. Non-Compete Agreements
Sometimes businesses require both a non-solicitation agreement and a non-compete agreement. The two agreements sound similar but they are different. Let's take the case of Jill Jones (not a real person or company), who worked as a marketing manager for Kartun Kopies LLC, which makes and sells employee benefits materials.
A non-compete agreement is more general. It attempts to keep someone from setting up a business in direct competition with the former employer or new business owner within a defined area for a defined amount of time. For example, If Jill signed a non-compete agreement, she might have to agree not to sell employee benefits materials to any other business for two years and within a radius of 50 miles.
A non-solicitation agreement is more specific. It attempts to keep someone from hiring away employees or taking customers. The same restrictions of time and area would apply. Jill might have to also sign a non-solicitation agreement agreeing not to take Kartun's employees or their customers for five years and within a radius of 400 miles.
Two Types of Non-Solicitation Agreements
Non-Solicitation of Employees. Good employees are difficult to find, and a company may have spent many years training a valuable employee. The employer wants to prevent another employee from leaving the company and soliciting that valuable employee to leave and join the new company.
Joe is leaving his job at XYZ company. He has a great administrative assistant, and he tries to solicit her to come with him. If he has signed a non-solicitation agreement, he may not be able to do that without risking a lawsuit. This solicitation of employees might also be required in the case of the sale of a business. Sharon has sold her holistic health practice, and she tries to take her office manager with her. Same deal: that's a solicitation.
Non-Solicitation of Customers. In the same way, an employer may want to prevent a former employee from soliciting customers to draw them away from the business. This situation happens in sales and also in professional practices, with clients or patients.
If Joe is a salesperson for XYZ Inc., he may have taken his list of contacts. If he tries to contact them, he could be sued for solicitation. And if Sharon tries to solicit customers of her former business, same deal.
The Issue of Direct vs. Indirect Solicitation
Most solicitation agreements include restrictions on both direct and indirect solicitation. What's the difference? Direct solicitation is just what it sounds like. An employee who is leaving your company calls a client and says, "I'm leaving XYZ Industries. Want to buy from me instead of them?" Or a manager may leave a company and ask her assistant to come with her.
Indirect solicitation gets a little fuzzy. It can mean a variety of things. For example:
- An employee can solicit a customer indirectly through a third party. "Chris, why don't you call Sally and ask if she wants to come with me to my new company?"
- Sending cards or emails to customers telling them about a new company could be considered indirect. Since customer lists are the property of the employer, this indirect solicitation breaks the agreement on several counts.
- Advertising a new position in a special trade publication or the business section of a local paper that employees read could be an indirect solicitation.
Advertising a new position or new company to the general public gets really fuzzy. Is that indirect solicitation? Doesn't everyone have the right to advertise? And what about social media? Can you announce your new position on Facebook or LinkedIn without starting a lawsuit?
Some companies attempt to prohibit indirect solicitation, which could mean advertising or publicity. This restriction makes it almost impossible to advertise a new business without risking the violation of a non-solicitation agreement.
Salespeople, personal services employees, and brokers have a difficult situation if they leave a company. Taking a customer list can be considered a violation of a non-solicitation agreement, but not taking the list means not having any customers.
Some legal cases have come down on the side of the former employee. In a 2012 Massachusetts case, a new employer announced on Facebook the name of someone who was joining their company and some of her customers replied. The court said that since there was no direct solicitation of clients, the agreement hadn't been breached.
Non-solicitation agreements directly address the issue of indirect solicitation by including the words "or indirectly" to contract language.
Taking a Non-Solicitation Agreement to Court
The only way to test a non-solicitation agreement is to take it to court. The party that was harmed (the previous employer or new business owner) must begin the case, which means getting an attorney.
The first thing the attorney will do is attempt to get a preliminary or permanent injunction from a court to stop the person from continuing to solicit. This keeps the offender from continuing to do damage while the lawsuit is in process.
Since a contract was signed (usually), the lawsuit will be about a breach of contract. The defense will try to show that the restrictive covenant was too restrictive. This kind of thing is decided on a case-by-case basis.
The most common issue in non-solicitation agreements is that if they are not "reasonable" (as defined on a case-by-case basis), they can be considered to be the restraint of trade. That is, the agreement unreasonably restricts someone from doing business.
Proving the Value of Customers and Employees
To get a court to decide on an amount of damages, a business must show the value of what was stolen. There must be a loss to have damages. It's easier to determine the value of customers because a business can show how much money each customer spent with the business. Proving the value of an employee might mean showing how much it cost to recruit employees or how much income the employee brought in. Some employees are worth more than others.
The main thing to remember if you are considering a non-solicitation lawsuit: It is difficult to prove solicitation. What if a former employee doesn't actively seek out employees of the company, but they contact the former employee? What if a former employee runs into a former customer at the grocery store and hands out a business card?