What are non-solicitation clauses, and why do they exist?
Non-solicitation clauses restrict someone from trying to win something from another - mostly customers or employees. These can make a lot of sense, in certain situations. For example
- In commercial agreements (e.g., partner or co-sale agreements), Party A might worry that Party B might try to hire Party A employees they work with as part of the partnership relationship, or that Party B might try to go directly to Party A customers that Party B was introduced to by Party A. These could be solved by an agreement for Party B to not solicit the employees or customers of Party A.
- In a staffing, outsourcing, or professional services context, the provider might worry that their client might try to hire provider employees that they work with as part of the engagement. At some professional service firms, this might be seen as a positive way to better client relationships, but service firms might see this as a threat to their business. For places where it is a threat, they can make clients agree to not-solicit provider employees (or include a pre-arranged monetary settlement if a provider employee is hired).
- In an employment agreement, the employer might worry that if their employees go to another business (especially a competitor), they might try to take customers or employees from their previous employer. As such, one-way non-solicits are very common in employment agreements, preventing employees from trying to win employees or customers from their previous employers.
Is a non-solicitation agreement enforceable?
Generally, a reasonable agreement to not solicit is enforceable. What’s reasonable is going to depend on what the actual non-solicitation obligations are, and will differ somewhat by jurisdiction. Courts are more likely to uphold non-solicitation clauses than overly broad non-compete agreements, non-solicitation tends to impose fewer restrictions, for example, on an individual’s ability to find new employment. Some factors that will impact reasonability are:
How tight is the scope of non-solicitation?
- Does it restrict all solicitation, or only of customers/employees that the restricted party came into contact with via the contract relationship? The latter is tighter and so more reasonable.
- Does it restrict all solicitation of customers, or only solicitation of customers for a competing product or business. The latter is narrower and more reasonable.
How long do the non-solicitation obligations last for?
- Shorter times are more reasonable. The duration of the agreement plus a year or two is pretty common in most situations (though can push a fair bit longer (e.g., to five years total) in connection with something significant, like sale of a business.
Competition law is one final wrinkle in determining whether an agreement to not solicit is enforceable. If a non-solicit pledge restricts competition (e.g., two competitors agreeing to not steal each other’s clients; or a bunch of big Silicon Valley tech companies saying that they won’t hire employees from each other), these agreements may be against the law, and so not enforceable (and could even lead to liability for the companies involved. These situations are pretty rare, but happen.
What are the pros and cons of non-solicitation agreements?
The main upside to a non-solicitation agreement is that it protects a company’s interests by preventing counterparties, employees, or contractors from actively pursuing or soliciting the company’s customers, clients, or other employees, for example, when employees join a new business. This can increase trust. If you are worried that a business partner might steal your employees, you won’t be as good a partner to them. If you’re worried that an employee might steal clients when they leave, you might give them less client interaction and responsibility. Non-solicitation covenants can increase trust, and, so, grease the wheels of commerce.
However, non-solicitation agreements can hinder employee career advancement. Being unable to reach out to former colleagues or clients can limit opportunities in a highly interconnected professional world.
Non-solicitation covenants are also one more operating restriction that a business needs to keep in mind. In some cases, non-solicitations are pretty easy to remember. E.g., it’s pretty obvious to someone that they may have some action restrictions related to their previous job. But for a business with lots of contracts, non-solicitation commitments can be hard to keep track of. This is amplified because non-solicits don’t only occur in a company’s biggest agreements. They can be anywhere. To comply, a business needs to know what their contracts say. Thankfully, you’re in the right place to find some AI software that can help!
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How do you get around a non-solicitation agreement?
Non-solicitation agreements serve a legitimate business interest. These restrictions are usually legally binding.Attempting to evade them can result in breach of contract lawsuits and financial penalties. We suggest seeking legal advice from a law firm or employment attorney if you’re looking to navigate these agreements without violating their terms. Non-solicits are contractual terms, and their specific wording matters. That said, even if you do find a way to solicit without getting sued, you may suffer serious reputation damage in the process.
What are the implications for breaking a non-solicitation agreement?
Breach of a non-solicitation commitment is roughly the same as breaching other contract terms. You can get sued for breach of contract. This can lead to having to pay money damages (plus the cost of defending the lawsuit). In employment agreement non-solicitation situations, it’s possible that your new employer may get dragged into the lawsuit, for a claim like tortious interference with contract. Breach of an agreement to non-solicit can also risk reputational damage, which may hurt future prospects.
What happens to a company if their employee breaches a non-solicitation agreement with a former employer?
These situations can be tricky. The new employer (likely) doesn’t itself have a contractual relationship with the employee’s previous employer. However, that does not mean that the new employer is necessarily free and clear. As a practical matter, sometimes the new employer will cover legal costs for their employees in this type of situation. That can be costly. Also, the previous employer might try to sue the new employer for interfering in their business relationship. This isn’t as strong a claim as suing someone who breached a contract, but it still can be costly to defend.
What voids a non-solicitation agreement?
Non-solicitation agreements must meet certain criteria to remain enforceable. If a court deems the agreement’s restrictions unreasonable or not essential to protecting the former employer’s legitimate business interests, it might declare the agreement void.
Agreements that could be considered unreasonable may include:
- Restrictive covenants that span a long period of time.
- Restrictions that cover a broad range of people or products, especially where the restricted party wasn’t exposed to these through the underlying contractual relationship.
How serious is a non-solicitation clause?
Non-solicitation covenants should not be taken lightly. They are designed to safeguard a company’s customer and employee relationships, which are often vital to its success. Companies often take these relationships very seriously. Breach of a non-solicitation agreement can lead to reputational damage and financial losses.
What is the difference between non-solicitation and non-competition clauses?
Non-solicitation and non-competition are both restrictive covenants in contracts.
Non-solicitation clauses usually restrict a party’s ability to try to win specified employees or customers, while non-compete clauses prevent the restricted party from entering a specific business area altogether. The greater potential for broadness of non-competition restrictions is likely one reason why courts are more skeptical of enforcing them.
Non-solicitation clauses are pretty common, non-competes less so. This is probably partially due to non-competition clauses being limited in a bunch of jurisdictions.