Defining a Non-Solicitation Agreement
What is a Non-Solicitation Agreement?
A type of restrictive covenant , a non-solicitation agreement can be put in place for both employees and employers. It prevents a signatory from soliciting the other’s clients and/or employees.
Non-solicitation agreements are designed to protect a company’s business interests from being hurt by what is termed "poaching." Poaching is when an individual or group of individuals approach employees or clients of the company to gain custom for their new venture or simply go along to a new company. A non-solicitation agreement: does not cover general restrictions like geographics such as the territory an employee covers or whether the new venture is involved in the same services or selling to the same customers. If your contract of employment contains a non-solicitation clause it is likely that you will be restrained from making contact with clients and employees to solicit them to join your new company or take their custom to your new company. In other words you cannot poach clients or employees.
The Components of a Non-Solicitation Agreement
Non-solicitation agreements typically include the following clauses:
Duration: Defines the period the non-solicitation obligations remain in force (often the length of time such employee worked with the company); such length of time is influenced by the cost of recruiting and training replacements, the company’s business and the time it takes to train replacement employees. Geographic area: Defines the area where the agreement applies, such as the employer’s state, nationwide or in the area(s) where the employee provided services; the geographic area should be specific enough to not permit circumvention of the agreement by competing outside the defined area. Divisions of a business: Defines divisions of a business where the agreement applies; for example, a company may define divisions of its operations where its division A is largely unaffected by competition from division B and vice versa, and do not want its large numbers of employees from one division hired by the other division. Specificity of prohibited conduct: Defines generally prohibited conduct; for example, solicitation of employees, agents and contractors of the employer, customers and suppliers of the employer; also including prohibitions on hiring, inducing and conflicts of interest; prohibitions should be specific enough to avoid being overly broad but broad enough to encompass multiple parties; some prohibitions may apply only after the employee leaves the company (e.g., prohibitions on hiring employees).
When is a Non-Solicitation Agreement Legally Enforceable?
The legal enforceability of non-solicitation agreements among employees can vary depending on the jurisdiction. Generally speaking, a court will only enforce a non-solicitation agreement to the extent it is reasonable in its restraint of trade given the facts and circumstances at hand. For example, such agreements cannot result in an undue burden on an employee’s ability to work and earn a livelihood. For this reason, courts may closely scrutinize such agreements for overly broad provisions, especially when it appears that the employer employed independent means to protect its interests, such as through its trade secrets or proprietary information.
Whatever the laxity of the typical jurisdiction in enforcing non-solicitation agreements among employees, these agreements will not be enforceable if made pursuant to considerations of bare restraint of trade. A common example is garden leave, where an employee, upon termination, is not permitted to work until a set period of time has expired. The purpose of garden leave is often to give an employer a head start on competing with its former employee, particularly where the employee has knowledge of proprietary information that could allow the employee to "hit the ground running" upon leaving. Garden leave by itself is not inherently an improper restraint where it is reasonable and limited in scope, but it would be unreasonable if strictly used as a method of restraint to offset competition from the employee.
How Non-Solicitation Agreements Differ From Non-Competition Agreements
The most common form of other restrictive covenants are non-solicitation agreements. In fact, in my experience, I have been more likely to see individuals bartered about or used in the negotiation between two businesses as alternatives to liquidated damages than I have seen them actually included in employee contracts. The concept of a non-solicitation agreement is fairly simple. Your employer is trying to prevent you from soliciting its customers or its employees for X amount of time and/or within X distance. This means, hypothetically, if you were to leave your employment and, on your way to the new employer, convince some of your favorite customers to leave with you, or tempt them with an offer to join you at your new employer, you could be sued for breach of this agreement. A non-solicitation agreement is slightly less onerous than a non-compete agreement because your previous employer is not worth protecting against other prospective customers or employers. For example, if you want to leave and take all of the customers with you, your former employer is out of luck. It simply cannot prevent you from taking your services to another company. The only tool it has to try to protect its interests in the customers you cultivated is a non-solicitation agreement. Conversely, if you want to leave and take the clients you brought with you, but because of a non-compete agreement you cannot start your own shop, no prospective employer can hire you unless it agrees to honor the restrictive covenant as well. Non-competes are a far more effective tool for companies looking to protect their interests because they require their competitors to cooperate with them in a way that non-solicitation agreements simply do not. Non-compete agreements force another business to restrict certain employees that would otherwise bring business to their front doors. Often the two types of agreements are used in conjunction with one another. However, my experience has been that non-solicitation agreements are more commonly used as tools for businesses to try to avoid potential litigation over customer contacts and employee poaching when one of their former employees moves on to bigger and better things. Here is an example to illustrate how a non-solicitation agreement works. Imagine that you are an employee for Company A. You decide to move on to Company B and take some of Company A’s best customer contacts with you. Because you were a top sales person, all of the customers wanted to go with you to Company B. Before you left Company A, you signed a non-solicitation agreement that said: If the terms of your non-solicitation agreement with Company A are enforceable, Company B will have to either develop its own customer contact list or spend a lot of time and resources trying to do what sales people do not do well; and that is develop new business. You’ve effectively handcuffed them for twelve months, if the terms of your agreement are reasonable, because Company A will have no choice but to sue you for violation of the covenants.
Creating a Non-Solicitation Agreement
When drafting a non-solicitation agreement for employees, it is important to choose your language with care and subject it to the test of being reasonable and limited to the specific needs of the company.
The drafting process is an art. Provisions should not be drafted in a vacuum, but should be done in consultation with the company’s goals, structure, industry practices, and otherwise. Drafting should focus on whether there are legitimate business interests to be protected. If there are not, a non-solicitation agreement will not be enforceable. Perceived attempts to restrain competition must be tested to ensure that they do not go beyond what is legally warranted. Thus, consultation with the company is important to the drafting process.
Employers must take multiple factors into consideration when preparing (or enforcing) non-solicitation contracts:
Consideration
Notes
Scope , including:
• The definition of the "Company". If other businesses are owned that could be affected, consider including them as well.
• The "type" of employees. Are they ones with access to confidential information that need protection? If so, that should be noted in the non-solicitation agreement.
• Limits in time and distance for geographic locations – e.g. no solicitation within 100 miles and for 2 years.
• The business that is protected. A job description should be provided, or the position described broadly to be protected.
• Are there other agreements in place with the employee? Gaps and overlaps can be problematic.
It is best practice to consult legal counsel to confirm and to create a non-solicitation agreement that fits the business and its needs.
Considerations For the Employee
Employers may not propose non-solicitation agreements to employees unless the employee is provided with independent legal advice. If the employer proposes a non-solicitation agreement and does not provide independent legal advice, the agreement may well be unenforceable.
Independent legal advice must be provided to employees whose tips and commissions are included in their pay if they are employed in B.C. or employed by an employer when it has its place of business in B.C. The independent legal advice requirement is a statutory requirement under the Employment Standards Act of British Columbia.
Employers may be unable to enforce a non-solicitation agreement if they have failed to provide independent legal advice to an employee. Employers should take care to make certain that they meet all statutory requirements in advance of proposing a non-solicitation agreement. Conducting a survey of applicable laws can be an effective way of ensuring that an agreement does not become unenforceable.
Employees should seek independent legal advice before signing a non-solicitation agreement so that they can be fully aware of their rights protected by the agreement. Employees should be cautious of signing any contract, including a non-solicitation agreement, that contains unclear terms or does not comply with their local legal requirements.
What Happens If an Employee Breaches a Non-Solicitation Agreement
A non-solicitation agreement, much like a non-compete agreement, will be a barrier to employment for any employee making attempts to steal away customers or clients from their former employer. Beyond the bar that such agreements have on future employment opportunities, there are additional consequences for individuals that breach their non-solicitation agreement. Any breach of a non-solicitation agreement can result in significant penalties. It is important to understand exactly what the consequences can be and to avoid engaging in any activity that violates the terms of a non-solicit agreement.
The courts in Massachusetts, and most other jurisdictions across the country, will enforce covenants not to compete or non-solicit agreements to the extent that it does not impose an undue burden on a defendant. The consequences of violating a non-solicit agreement will generally fall upon the employee that is held to have violated the non-solicit agreement, however tortious behavior by a rogue or disloyal employee will more commonly lead to consequences falling upon his/her new employer. Damages for violating a non-solicit agreement can include payment for the revenue generated by the solicited customer or client as well as lost revenue attributed to the solicitation. Generally, non-solicitation agreements are entered into so that the former employer can maintain its customer base, and the formula used to calculate damages will usually incorporate lost revenue.
Verified Security Solutions, Inc. v. Innotech Systems, Inc . , found at 98 F. Supp. 2d 138, highlights how the courts calculate damages in violation of a non-solicit agreement: The court adopts the calculation advocated by Plaintiff and finds that Defendants’ breach of the covenant not to compete is subject to an award of . In Encompass Office Systems v. Davey, the Northern District of Illinois explained that the damages for the breach of a non-disclosure and confidentiality provision caused by a former employee’s violation of a non-solicitation provision under a prior non-compete agreement was measured by the revenue generated by the disputed account. In addition to the damages awarded for the breach of a covenant not to compete, the court held that the Defendant was also liable for both lost profits sustained through the public bidding process and the attorney’s fees sustained by Plaintiff. In Star Market of Greater Boston, Inc. v. Baldwin inv., the Supreme Judicial Court of Massachusetts framed its analysis in determining damages against a former employee that stole its away its customers by stating that "damages in a breach of contract action are (1) the loss of the value of the contract to the injured party; (2) the loss of profits, which may be proved to be or to exceed the value of the contract; and (3) other specific damages that were within the contemplation of the parties when they contracted…when damages may not be measured with reasonable certainty, the injured party is entitled to recover damages based on the injured party’s lost opportunity."
