Overview of Non-Solicitation Agreements
In many cases, non-compete agreements are not appropriate or even legally enforceable because of state law restrictions or otherwise. Employers should seriously consider using a non-solicitation agreement to protect valuable relationships the Company has developed with its customers and/or suppliers.
Non-Solicitation agreement – what it is. A non-solicitation agreement is defined as a provision in a Contract or Policy Manual that prohibits the departing Employee from soliciting the Customers or Employees of the Company for a period of time that is specified in the Contract or Policy Manual. Employers cannot be guaranteed that other Employees or Customers will not leave; however, Employees who violate a non-solicitation agreement may be subject to legal action such as an Injunction, Money Damages, or both.
Purpose of Non-Solicitation Agreements. The purpose of a non-solicitation agreement is to protect the legitimate business interests of the Company from interference by departing Employees. It is easier to seek to enforce a non-solicitation agreement than a non-compete agreement. When the Company invests time and money, develops contacts, builds customer loyalty, and establishes goodwill , it has created something of value. If a departing Employee attempts to interfere with that goodwill, it is entitled to protect its business by seeking a remedy through the court system.
Some examples where non-solicitation agreements are appropriate and regularly utilized.
(i) Manpower Employers: Employers in the Manpower or Staffing industry usually require them due to the unique structure of the industry; i.e., a Manpower staffing agency or Temporary Employment Agency that places individuals in positions in which they will meet the clients/customers of the temporary agency.
(ii) Retail Stores: Non-Solicitation Agreements may also be appropriate in the retail sector. These agreements are routinely entered into with salespersons at Department Stores, Bath & Body Works, Victoria’s Secret, and other specialty stores to prevent them from soliciting existing customers after their departure.
(iii) Service Industry: The Service Industry is also another good example of a situation where Non-Solicitation Agreements may apply; i.e., a personal fitness trainer may be required to sign a Non-Solicitation Agreement to prohibit him/her from personally soliciting the clients of the gym/club they previously worked for.
Understanding Non-Competes
Non-compete agreements are generally far more limiting of an employee’s future job opportunities than non-solicitation agreements. A non-compete agreement will obligate an employee not to work for a specified competitor of the employer for a defined period of time. A non-compete agreement may also prohibit the employee from working for an industry competitor of the employer, depending on how broadly the "industry" is defined in the non-compete. For example, a "non-compete" may be used to prevent a sales team member that has product knowledge from taking that product knowledge to another company that sells the same or similar product under a different brand name. Generally, non-compete restrictions will balance the potential harm to the employer against the hardship that the employee will suffer in being unable to work in his or her field.
Most courts enforce non-compete agreements so long as those agreements are not overly broad as to time, territory or scope of work. For example, a one year restriction against competing activities is usually found to be enforceable, while a five year restriction is not. Most courts have found a reasonable prohibition against competition within 100 miles of the company’s offices to be reasonable, particularly if that is where most of the company’s sales occur.
Differences Between Non-Solicits and Non-Competes
A non-solicitation agreement is a type of restrictive covenant that is less common than non-competes. It prevents the employee from contacting the employer’s customers after employment to persuade them to leave the employer. It has the effect of preserving the employer’s goodwill and the business relationship with customers while not applying restrictions on where the employer can operate, unlike a non-compete. For example, in a typical non-solicitation agreement, an employee might agree not to contact former customers of the employer for two years after leaving employment. Non-solicitation agreements are generally easier to maintain than non-compete agreements because they are more limited in scope and geographical reach.
The distinction between a non-solicitation agreement and a non-compete can be analyzed in three ways. First, you should ask whether the agreement restricts an employee’s ability to compete. If the answer is no and the agreement only places restrictions on the employee’s ability to contact and do business with prior customers of the employer, then it is likely a non-solicit agreement.
Second, if an agreement places restrictions on an employee’s ability to work for a specific customer after employment, it is a restriction located at the customer or client level (also known as "customer non-solicits") and a more limited agreement based on the former employer’s relationship to that customer.
Third, if an agreement affects the employee’s ability to work in any job or role in the relevant market, then it is a non-compete.
Integrity of Non-Solicit and Non-Competes
Enforcement of non-solicitation and non-compete agreements is often easier said than done. There are several reasons for this, the most obvious being that there are often disagreements between the employer and ex-employee about what the contract prohibits.
When there is disagreement between the parties about the contract’s terms or the scope of the restrictions, litigation is often necessary to determine whether the non-compete or non-solicit is enforceable or "overly broad". A contract that is "overly broad" is likely to not be enforceable, and could be deemed by a Court to be unenforceable even if partially "overly broad". In determining whether a contract is overly broad, Courts and arbitrators will often consider:
Another factor that’s often a source of disagreement between the former employee and the employer is whether the employee breached a non-solicit or non-compete agreement . The type of conduct that can be considered a breach varies by state.
For example, for some states, like Georgia, the mere purchase of a third-party business by an ex-employee or former agent does not necessarily violate an agreement prohibiting solicitation of customers. See, e.g., Primus, Inc. v. Worrell, 707 S.E.2d 387 (Ga. 2011). However, other federal courts applying Georgia state law have found otherwise. In AmClyde Engineered Prods. v. Barge, 9:13-cv-80650-KLR (S.D. Fla. 2014), a Florida federal court held that restricting ex-employees from purchasing industry-related businesses was reasonable and, therefore, enforceable under Georgia law, where the contract at issue included a prohibition against solicitation of customers and a prohibition on "engaging or participating in any competitive business."
Pro’s and Con’s for Company’s and Employees
Employers generally see non-compete agreements as a way to protect their business from competitors who hire away their sales brokers, or some other employee who develops important client relationships. The existing sales people or employees can take the training, clientele, business contacts, and other assets provided by the company and use that business knowledge to compete with the company they left. Non-solicitation agreements are a way of preventing a departing employee from taking that information to a competitor. Even if the former sales representative does not stay in the same position but takes to a similar industry, a non-compete can be a way to prevent them from using the protected business knowledge for a competitor.
For employees, the obvious disadvantage is that a non-solicitation or a non-compete agreement would restrict their right to make a living if the agreement is enforceable. However, if it is sufficiently limited in scope, it may be used by companies to protect that customer base while allowing the employee to remain in a restricted industry. It may not be effective at restricting a person’s employment options, depending on the restrictions contained within the agreement. Non-competes can be very effective if the existing employee contacts clients through word of mouth, or if they have a distinctive way of doing business by which they become distinct from the employer and instantly recognizable to their clients as "their" broker. If the person does not have their own business identity, a non-compete might be more restrictive.
There are often positives and negatives associated with a non-compete. For an employee, there have been cases where non-compete restrictions on an employee have kept them from working in the industry in which they are operating. However, if it is not properly drafted or is overly broad, it can go too far and fail to protect the employer and thus be thrown out by the court. It is not absolute. If the agreement is narrowly tailored to the specific address, it may work, and the concern about the employee taking clients to a competitor and starting a new company is eliminated because non-solicitation prevents that from happening. Moreover, if the employee goes to Ivy League school, or comes from that affluent group, and the client they take to a competitor is incredibly wealthy, the employer is going to worry about what else that person will do for their clients, and the employee attempts to grow their business by getting all wealthy people as clients.
Recent History and the Future
Recent trends in the use of non-solicitation and non-compete agreements have shown a retraction in their use for the protection of employers. In a growing employer friendly market, employers are finding it more difficult to retain employees. Employers are becoming less inclined to restrict the mobility of their employees so that they can maintain the loyalty of their workers. As a result, we see the rise in popularity of the non-solicitation agreement when compared to the non-compete agreement. The non-solicitation allows employers to build goodwill with certain employees by rewarding them with positions in upper management , without subjecting them to the unreasonably restrictive terms commonly found in non-compete agreements. We are also seeing social movements on non-compete agreements. In August 2016, the White House issued a report which started a national movement to limit the use of non-compete agreements to the most essential of circumstances. Over half of all states in America have taken steps to limit the use of non-compete agreements. While states vary substantially in the limit of restrictions imposed on these agreements, it is clear that non-compete agreements have entered into the spotlight as more than just a tool for employers to limit the mobility of their workers.