Non Solicitation Agreement Asset Sale Continuing Interest
What is a non solicitation agreement?
How does it work and what are the elements to consider?
Are non solicitation agreements enforceable?
We will look at what it means, its definition, why it is used in contracts, how it is scoped, when it should be used, how the courts enforce it, what it means the solicitation of employees or non solicitation of customers, compare it with a non compete agreement, look at example clauses and more.
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What is a non solicitation agreement
A non solicitation agreement (or non solicit agreement ) is an agreement where one party agrees not to solicit the employees or customers of another following the termination or expiration of their contractual relationship.
Most often, we see non solicitation agreements as part of employment contracts where an employee agrees not to solicit his or her employer's clients, customers or prospects in favour of another company.
Non solicitation agreement restricts a person's ability to solicit another's customers or employees
The non solicitation agreement's aim can also be to prohibit a former employee from soliciting other employees of the company or have them leave their employment in favour of another company.
A non solicitation clause is a restrictive covenant limiting a person's ability to communicate and do business with a company's clients or other employees.
Non solicitation agreement definition
According to the Cambridge Dictionary, a non solicitation agreement is defined as:
A statement in an employee's contract saying that if they leave the company they will not do business with its customers and will not try to get other employees to leave it to work for someone else
What is notable with this non solicitation definition is that non solicit agreements represent a statement by an employee that he or she will not do business with the customers of the employer or have other employees leave their job.
Restrictive covenant
There are three types of restrictive covenants that prevent someone from doing something:
- Non solicitation
- Non compete
- Non disclosure
A non solicitation is a restrictive covenant whereby a person agrees not to solicit customers or employees of a company for a certain period of time.
If the covenant is reasonable in time, territory and scope, it will be upheld in court and legally enforceable.
Why a non solicitation agreement
In today's global economy and with increased individual mobility, companies have a legitimate reason to protect their valuable business assets (customers, trade secrets, key personnel etc) from harm caused by a former employee taking them to a competitor.
Companies also have the legitimate reason to protect themselves from competitors who actively poach and entice their key personnel to snatch customers, trade secrets, employee knowledge and competitive intelligence.
Companies want protection against employee and customer poaching
Customers with whom an employee has built a relationship through his or her former employer are the easiest to lure to the new employer.
For companies to effectively protect themselves against the potential harm that may be caused by client-poaching or employee-poaching activities can enter into a non solicitation agreement designed to prevent such an outcome.
Scope of non solicitation provisions
Non solicitation provisions will typically have the following scope:
- Non solicitation agreement for employees prohibiting an employee from taking an employer's customers once the employment relationship is over
- Prevent an employee from taking an employer's other employees or resources once the employment relationship is over
- Prevent a company, vendor, service provider or supplier from taking another company's clients, customers and prospects for competitive purposes
- Prevent a company, vendor, service provider or supplier from taking another company's employees and resources to hire them for competitive purposes
When to use a non solicitation agreement
A non solicit is generally used as part of a larger agreement like an employment agreement or business purchase agreement or it can represent a standalone agreement on its own.
Typically, non solicitation provisions are used in:
- Employment contracts when a person is hired
- Signed by an employer or employee during the employment or in the context of its termination
- Signed along with a non compete agreement
- In the context of a merger or acquisition (M&A)
- Signed along with a non disclosure agreement (NDA)
- Non solicitation agreement between two companies in the services sector or sales
- A subcontractor non solicitation agreement is used when dealing with a company who will gain intimate knowledge of your business
For example:
In the context of an acquisition, the acquirer and the target company promise one another that they will not engage in competitive business for a certain period of time and will not attempt to solicit, lure or entice their respective employees or customers to leave in their favour.
A company hires a sales executive.
In the executive's employment contract, the executive contractually commits, during his employment and following his departure, not to take the customers, clients, prospects, client lists or contacts acquired during the employment period.
A company can have a person or a business partner sign a standalone non solicitation agreement scope for a very specific purpose.
Even though non solicitation obligations are often embedded in a larger agreement, it's perfectly valid to enter into a standalone non solicitation contract.
Non solicitation clause
Let's look at how non solicitation clauses should be drafted and what are the considerations you should keep in mind.
Non solicitation contract language
To draft a non solicitation clause, you must first validate whether or not the laws of your jurisdiction authorizes such contractual provisions.
In most states and jurisdictions, non solicitation provisions are recognized by law.
Next, you need to draft your clause in such a way that you protect the legitimate interest of the business on one hand and an employee's ability to work and earn a living on the other hand.
Here are the main aspects you should think about when drafting a non solicitation clause:
- For how long should the non solicitation obligations apply?
- In what geographic area do you want the obligations to apply?
- What are the restrictions or scope of the restrictions?
- Are you putting limitations that are fair and commercially justifiable?
- Will the limitations seriously hamper the employee's ability to find employment elsewhere?
Non solicitation of employee clause
In employment contracts, very often, you will find a non solicitation of employee clause.
The objective is to prevent an employee from leaving the company and taking other employees with them or encouraging them to leave.
For example:
Suzanne works for a high-tech company where the company has spent lots of money to train her on the job and academically, she has a very specialized skill set and has deep competitive insights into the company.
John, a great friend and colleague of Suzanne, leaves for a competitor.
Without a non solicitation agreement, John can contact Suzanne to entice her to leave her job for the competitor who may be willing to pay her a premium, perks and a better position.
To prevent that, John's employer will require that he sign a non solicitation agreement either upon his hiring or prior to his departure to protect employees like Suzanne.
Companies spend a lot of time and money to find good employees.
Good employees are an asset to a company as they provide expertise, knowledge and help the company grow.
It's reasonable for companies to protect their employees and their investment in their employees from being lost in favour of the competitor in an unfair manner.
Non solicitation of customers clause
Companies spend a lot of time and money to find prospects, convert them into clients and retain them by building relationships.
Companies build these relationships through their employees and nurture their customers through their employees.
It is common and legitimate to see companies wanting to protect their customers and customer relationships (their investment).
Companies have a genuine business interest to protect their customers
A non solicitation of customers clause is drafted and designed to specifically protect a company's customer base, relationships, prospects, pipeline and other customer-related assets.
However, companies are not 'entitled' to their customers.
Companies must expect fair competition and cannot prevent it from using non solicitation provisions
Companies operate in competitive markets and must accept to legitimately compete in the market.
As such, they cannot use non solicitation provisions to restrict trade, limit a competitor's ability to do business or prevent employees from working for competitors without any real and genuine legitimate reason.
Enforceability of non solicitation agreements
Non solicitation agreement enforceable
In most jurisdictions, a non solicitation agreement is enforceable and recognized by the courts.
Balance of competing interests
The courts have two competing interests to balance:
Now, what are the elements of a non solicitation agreement for it to be enforced by law?
Non solicitation requirements
You can enforce a non solicit provision if you meet the following requirements:
- The company or person invoking the benefit of the non solicitation obligation must have a valid business reason (client list, trade secret, price list…)
- The scope of the non solicitation obligation must be clear and reasonable (what company, what industry, what market…)
- Geographic area and territory clear and reasonable (in what city, region, area…)
- The obligation must be reasonable in time (for how long, 3 months, 6 months, 12 months…)
- The non solicitation provision must not prohibit an employee or customer to voluntarily leave the company for a competitor
- The non solicitation should not prevent an employee's professional mobility
Legitimate business interests
A company has a valid reason to protect business assets such as:
- Customer list to the extent it's not public information and the company has spent time and resources in developing it
- Customer relationships and actual customers
- Trade secrets
- Confidential information
- Price lists
- Proprietary knowledge
Duration of obligation
With regards to how long a non solicitation agreement should have legally binding effects, for an employee, typically it's for the entire duration of the employment and between 6 to 12 months following its termination.
For business entities entering into a non solicit, they can mutually agree to even longer periods up to 2 years or more depending on the scope of the provision.
Non solicitation agreement not enforceable
Unreasonable obligations
The courts will not enforce a non solicitation provisions if the scope unreasonable, if it prevents a person or employee from earning a living, unfairly prevents an employee from working in another company.
The objective of a non solicitation clause or obligation is not to impose obligations on employees to prevent competitors from competing with you but rather to legitimately protect valuable business assets.
Solicitation
Without an act of "solicitation", the court will not enforce the non solicitation clause.
For example:
An employee leaving a company and factually informing his or her contacts of the change in employment is not soliciting his or her contracts
To 'solicit' is to 'lure', 'entice', 'encourage' or 'compel' someone to do something that they did not have an intention to do.
For example:
An employee calling former customers and contacts and letting them know that the new company is so much better than the previous one can be considered an act of solicitation
Violation of the public policy
In some jurisdictions, the law may also prohibit or limit a company's ability to enter into an enforceable non solicitation agreement.
In the state of California, as a matter of state public policy, the law prohibits an employer from having an employee sign a non solicitation agreement preventing them from soliciting their former employer's customers.
Direct vs indirect solicitation
Very often, non solicitation agreements and non solicitation clauses prohibit direct solicitation and indirect solicitation.
Direct solicitation
Direct solicitation is when an employee or company directly entices another employee or customer to jump ship.
For example:
John leaves Company ABC with whom he had signed a non solicitation agreement.
John took Company ABC's customer list and contact information and starts calling them one by one telling them they should leave Company ABC for his new company.
Direct solicitation is pretty straightforward.
Indirect solicitation
Indirect solicitation can be a little trickier.
Indirect solicitation is when a person or company deals through a third party or intermediary to circumvent, get around or bypass the non solicitation agreement.
For example:
John leaves Company ABC with whom he had signed a non solicitation agreement.
John enters into a secret partnership with his friend Marc who will use John's customer list for competitive reasons.
Non compete agreement vs non solicitation agreement
A non compete agreement is an agreement restricting another person or entity from competitively doing business, in the same industry or with certain specific companies.
Non compete agreement is a restriction on trade
On the other hand, a non solicitation agreement is not a restriction on trade but a limitation of who a person may contact.
Non solicitation agreement is a restriction on communication
With that being said, a non solicitation is a form of non compete provision.
For example:
If Company A is preventing you from communicating with your contacts to entice them to go to the competitor, it's sort of saying that you are prevented from doing business with them in a competitive way.
That sounds like a non compete to a certain extent.
If the court considers that the non solicitation is a restraint on the trade or commerce, the provision will not be enforced whereas if it's viewed as a covenant not to compete, it can be enforced provided it meets the requirements of the law.
To illustrate what it means a "restrain on trade or commerce", let's look at an example:
If Microsoft enters into a contract with Dell where Microsoft agrees not to solicit Dell clients in Europe while Dell agrees not to solicit Microsoft clients in North America, that may violate an assortment of laws and is surely a restraint on trade.
That law will not enforce that.
Both non compete and non solicitation agreements are generally enforceable if they respect the statutory requirements and they are reasonable.
Some jurisdictions (like California) prohibit non competes or non solicitations for certain classes of people like employees.
Overall, the enforcement of a non solicitation provision is somewhat easier than a non compete.
Non solicitation clause examples
It may be useful to look at a couple of non solicitation clause examples to better understand non solicitation agreements and how they are formulated.
Example 1:
During the term of the present Agreement and for the twelve (12) month period (the "Non-Solicitation Period"), the Company B agrees that it shall not, and shall cause its subsidiaries and affiliates not to:
(a) Directly or indirectly, hire, engage, contract with or employ (as an employee, agent, consultant or otherwise) any employee or any independent contractor engaged exclusively by Company A (collectively, "Restricted Employees");
(b) Directly or indirectly, solicit for employment or the engagement of services of any Restricted Employee or induce or attempt to induce any Restricted Employee to leave his or her employment with Company A, or in any way intentionally interfere with the employment relationship between any Restricted Employee and Company A or any of their affiliates, in each case for the purpose of employing or engaging the services of such Restricted Employee or soliciting such Restricted Employee to become an employee or consultant of the Company B or any of its affiliates or any third person; provided, however, that nothing herein shall preclude the Company B from employing or soliciting any Restricted Employee (i) who independently responds to any public advertisement or general solicitation (such as a newspaper advertisement or internet posting) not specifically targeting such Restricted Employee, or (ii) following the termination of such Restricted Employee's employment with Company A for any reason, provided, that the Company B has not induced such Restricted Employee to terminate his or her employment in breach of the Company B's obligations hereunder; or
(c) Take any action or attempt to take any action with the intent of impairing any material relationship, contractual or otherwise, between Company A and any Restricted Employee or any customer, supplier, consultant, independent contractor, distributor or reseller of Company A
Example 2:
Party A acknowledges, and Party B agrees, that in the course of Party A's employment with Party B and tenure on the Board, Party A has and will be provided by Party B, and has and will become familiar, with Party B's and its affiliates' trade secrets and Confidential Information (as defined in the Employment Agreement). Party A further acknowledges that having access to and knowledge of the Confidential Information of Party B and its affiliates was and is essential to the performance of his duties with Party B and that such information is an extremely valuable and unique asset of Party B and its affiliates that gives them a competitive advantage over persons or entities that do not possess such information and knowledge. Therefore, Party A will not, during the Non-Solicitation Period, directly or indirectly solicit Customers or Clients of Party B or its affiliates with whom Party A had direct contact or about whom Party A received proprietary, confidential or otherwise non-public information for the purpose of providing services relating [NATURE OF BUSIENSS] (collectively, the "Business") or interfere or attempt to interfere with the relationship, contractual or otherwise, between Party B or any Customer or Client of Party B in the Business.
Non solicitation FAQ
How to get around non solicitation agreements
Here are some tips on how you can get around non solicitation agreements:
- Don't sign a non solicit agreement
- Build your own book of business, customer list or contacts
- Exclude your contacts and relationships from the scope of the non solicit clause
- Make sure that the non solicitation obligation is only triggered if you are terminated for cause
- Include a provision allowing you to pay an amount to get out of the obligation
Is a non solicitation a non compete
A non solicitation clause is different than a non compete clause but will be enforced in similar ways.
What does that mean?
Essentially, a non compete clause is a restrictive covenant prohibiting or limiting trade (ability to compete) whereas a non solicitation clause is a restrictive covenant prohibiting or limiting who you can contact (ability to contact).
It can be validly argued that a non solicitation obligation is a component or a facet of non competition obligations.
In other words, to prevent a person from competing, you can prevent them from communicating with your customers or employees.
Courts will generally enforce a non compete agreement or non solicitation agreement provided it observes the requirements of the law and it is reasonable.
What is a non solicit provision
A non solicitation provision is a contractual obligation or clause where one person or entity agrees not to communicate or entire another's customers or employees for a certain period of time.
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