Non-solicitation agreements are common contracts in many companies, requiring executives, key managers, and advisory directors to sign these agreements. The buyer of a company may also require the seller to sign a non-solicitation agreement to prevent them from taking customers and employees from the company.
Consideration of Contracts and Binding Obligations
Binding obligations are contracts and must include all the correct elements of a contract, including consideration for the contract.
What are Non-Solicitation Agreements?
Non-solicitation agreements are agreements not to solicit employees or customers for the benefit of the company. The non-solicitation language can come in the form of a complete document or a clause within another document like an employment agreement or an independent contractor agreement.
State Laws and Non-Solicitation Agreements
State laws vary concerning binding obligations. California state laws are the most restrictive regarding these types of agreements. The state states that such agreements cannot typically be presented to courts for enforcement, except in cases used to protect trade secrets.
Non-Solicitation Language in Contracts
A typical non-solicitation agreement between a company and an employee includes:
- Contract language specifying the duration of the employee’s commitment to the agreement, including the duration of employment and afterward, and in which geographic area.
- A statement that the employee has received “adequate consideration” to sign the agreement.
- A statement from the employee that they will not violate the agreement as an individual or in any other entity (partner, vendor, joint venture, etc.) for their own benefit or for the benefit of anyone else.
Non-Solicitation Agreements vs. Non-Compete Agreements
Sometimes, companies require both a non-solicitation agreement and a non-compete agreement. The two agreements may seem similar but 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 produces and sells employee benefits materials.
A non-compete agreement is more general. It seeks to prevent someone from establishing a directly competitive company with their former or new employer in a specified area for a specified time period. For instance, if Jill signs a non-compete agreement, she may have to agree not to sell employee benefits materials to any other company for two years and within a 50-mile radius.
A non-solicitation agreement is more specific. It seeks to prevent someone from hiring employees or taking customers. The same time and geographical restrictions would apply. Jill may also have to sign a non-solicitation agreement agreeing not to take Kartun’s employees or customers for five years and within a 400-mile radius.
Two Types of Non-Solicitation Agreements
Employee Non-Solicitation. Finding good employees is challenging, and it may take many years to train a valuable employee. An employer wants to prevent another employer from hiring away that valuable employee.
Client Non-Solicitation. Similarly, an employer may want to prevent a former employee from luring clients away from the company. This situation occurs in sales and also in professional practices with clients or patients.
Direct Solicitation vs. Indirect Solicitation
Most solicitation agreements involve restrictions on both direct and indirect solicitation. What is the difference? Direct solicitation is exactly what it sounds like. An employee leaving your company contacts a customer and says, “I’m leaving XYZ Industries. Would you like to buy from me instead of them?” Or a director can leave the company and ask an assistant to join them.
Indirect solicitation becomes a bit murky. It can mean many things. For example:
- An employee can indirectly lure a customer through a third party. “Chris, why don’t you call Sally and ask her if she wants to join me at my new company?”
- Sending
Customer cards or emails to inform them about a new company can be considered indirect promotion. Since customer lists are the property of the employer, this indirect promotion violates the agreement in several ways. - Advertising a new job in a trade publication or in the business section of a local newspaper read by employees may be considered indirect promotion.
Some companies try to prevent indirect promotion, which means advertising or publicity. This restriction makes it almost impossible to promote a new company without breaching the non-promotion agreement.
Sales representatives, personal service employees, and brokers face a tough situation when leaving the company. Taking a customer list can be considered a violation of the non-promotion agreement, but not taking the list means no clients.
There may be some legal cases that rule in favor of the former employee. In a case in Massachusetts in 2012, the new employer announced on Facebook the name of a person who would be joining their company and some of their clients responded. The court said that since there was no direct promotion to clients, the agreement had not been violated.
Note: Non-promotion agreements directly address the issue of indirect promotion by adding the phrase “or indirect” to the language of the contract.
Presenting the Non-Promotion Agreement to Court
The only way to test a non-promotion agreement is to present it in court. The harmed party (the former employer or the new employer) must initiate the case, meaning they need to hire a lawyer. The first thing the lawyer will do is try to obtain a temporary or permanent injunction from the court to stop the person from continuing the promotion. This keeps the source of harm from continuing to cause damages while the lawsuit is ongoing.
Due to the signing of the contract (typically), the lawsuit will be about breach of contract. The defense will try to show that the restriction was too restrictive. This type of decision is made on a case-by-case basis.
Proving the Value of Clients and Employees
To get a judge to decide on the amount of damages, the company must demonstrate the value of what was stolen. There must be a loss to obtain damages. It is easier to determine the value of clients because the company can show how much money each client spent with the company. Proving the value of an employee means showing how much it costs to hire employees or how much revenue the employee brought in. Some employees are worth more than others.
The main thing to remember if you are considering pursuing a lawsuit regarding non-promotion: it is difficult to prove promotion. What if the former employee wasn’t actively seeking out the company’s employees but they contacted the former employee? What if the former employee met a former client at the grocery store and handed them a business card?
Source: https://www.thebalancemoney.com/non-solicitation-agreements-in-business-contracts-398359
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