Published on April 7th, 2015 by Alan L. Sklover
“Freedom lies in being bold.”
– Robert Frost
ACTUAL “CASE HISTORIES”: On a daily basis many of our blog visitors submit questions about something more and more employees are facing: Non-Solicitation Agreements. These are agreements – or provisions in other agreements – that say, in effect, “After you leave this job, you cannot solicit business from our customers,” and sometimes also say, “Nor can you solicit our employees to leave our company.” Of course, every non-solicitation agreement is different; There is a wide variety of wording, phrases and details seen in different non-solicitation agreements.
Here is one question we recently received: “If my non-solicitation agreement has no limit on the geography it covers, and no limit on how long it lasts, is it still enforceable?”
Here is another question we received the very same day: “If my non-solicitation agreement forbids me from soliciting my former employer’s potential customers, isn’t that all of the people in the world?”
To try to explain better how non-solicitation agreements work – and don’t work – we decided to devote this newsletter entirely to them.
LESSON TO LEARN: There are basically three kinds of “restrictive covenants” – the legal term for “agreements to limit your future work-related activities – that employees commonly face.
(1) First, “non-compete” agreements, which generally provide “I will not work for a competitor of the company in a certain geographic area for a certain period of time.”
(2) Second, “non-solicitation” agreements, which generally provide “I will not try to reach out and get the business of the company’s clients or customers, or take away its employees.”
(3) Third, “non-disclosure” agreements, which generally provide “I will not divulge or use the company’s confidential information.”
Of these three basic types, “non-solicitation” agreements seem to be growing fastest both in popularity and problems, as non-compete agreements are increasingly viewed with disfavor by Courts, who are reluctant to keep people out of work in their chosen field, and non-disclosure agreements are quite simple: “Don’t share secrets.” Non-solicitation agreements, however, go right to the heart of business: access to, and control of, the customer relation.
Since “knowledge is power,“ and we seek to empower working people, we here deliver the basic knowledge you need to navigate and negotiate for yourself on this important subject:
WHAT YOU CAN DO: Read over this “A to Z of Non-Solicitation Agreements,” and you should find yourself both more comfortable and more capable in dealing with non-solicitation issues, questions and concerns.
1. Introduction to Non-Solicitation Agreements
a. What is a non-solicitation agreement? An agreement, or a part of a larger agreement, that says, one way or the other, “I agree not to solicit the company’s clients and customers for their business, usually for a certain period of time.” Sometimes they also cover (i) employees, (ii) vendors, (iii) prospective clients and customers, and (iv) other business partners or affiliates.
By the way, what an agreement is called at the top of its first page makes no difference; titles are not considered part of an agreement, no matter how much those titles lead the reader to believe otherwise. I have found non-solicitation agreements called, among other things, “Employee Inventions and Trade Secrets Agreement,” “Non-Interference Obligations,” “Post-Employment Covenants,” and even “Unfair Competition Prohibitions.” Don’t be fooled by a title; what is “under the hood” is what counts.
b. Why do employers want employees to sign non-solicitation agreements? Simply put, to safeguard their valuable business relations from being “stolen” (their word, not mine) by departing employees. And, too, although employers may profess to believe in the capitalist system, free enterprise, and fair competition, insisting that employees sign non-solicitation and non-compete agreements surely shows otherwise. Instead, such agreements are presented to employees primarily to prevent free enterprise, fair competition, and true capitalism from being applied to them.
c. What is the difference between a (i) a non-solicitation agreement, and (ii) a non-compete (sometimes called a “non-competition”) agreement? In general terms, a non-compete agreement says, “If I ever leave working here, I agree not to work for a competitor of the company, for a certain period of time in a certain geographic area.”
In general terms, a non-solicitation agreement says, “If I ever leave working here, I agree not to call, write, or otherwise approach the customers of this company to encourage them to do business with me at a different company, for a certain period of time.”
The non-compete is much broader in scope, and could prohibit your working as the CEO or the janitor, or in any other position, for a competing company. The non-solicit is much narrower, and prohibits only your contacting clients and saying, in effect, “Hey, why don’t you give some of your business to my new employer?” Non-competes are much more likely to keep a person out of his or her industry and therefore unemployed. Non-solicitation agreements let you go seek the business of every customer in the world – other than the customers of your former employer.
d. What exactly does “solicit” mean? That is a great question! In fact, it is often the most debated issue in disputes involving non-solicitation agreements. Think of “solicit” as “an affirmative action or concrete step taken to attempt to gain the business of a person or company.” This is very important, because, without your taking any direct action, if a customer approaches you, and gives you his or her business, that is not soliciting. “Soliciting” is an “active” verb, whereas “serving” is a passive verb.
For example, suppose Dolores works in Kelly’s Shoe Store, and has signed a non-solicitation agreement. She can open up her own store, or go to work for call O’Leary’s Shoe Store located down the street. But she cannot call Mr. Kelly’s customers, and say, “Hey, I’m now at O’Leary’s Shoe Store; we have great shoes. Why don’t you come by?” However, if some of Mr. Kelly’s customers just happen to come by O’Leary’s store, Dolores can sell them shoes, because she has not “affirmatively acted” to get their business, but is merely serving them when they “passively” walked in.
By the way, the same thing goes for hiring Kelly’s employees: if Dolores does not call them up and say, “Hey, want a job over here?” she can hire them if they call her, or just walk in the door.
e. When might my employer present me with a non-solicitation agreement to be signed? Any time: (i) before you start the job, (ii) on the first or second day of the job, (iii) during a job, (iv) as a condition to receiving a promotion, raise, bonus or stock award, or (v) at the end of a job, most commonly as part of a severance agreement.
Prevent problems early; and preferably before they happen. Consider our Model Letter Confirming Basic Terms of Job Offer. It shows you “What to Say, and How to Say It.™ To obtain a copy, just [click here.] Delivered by Email – Instantly!
f. Non-solicitation agreements may often be “hidden” and “buried.” They are not always “presented” to employees: It must take great creativity on the part of employers’ legal counsel to find all of the places in which I have found non-solicitation obligations hidden and buried. These have included (i) offer letters, (ii) employee handbooks, (iii) stock option grants, (iv) employment policy manuals, (v) annual bonus awards, (vi) severance agreements, and even (vii) retirement plans.
2. Regarding Non-Solicitation Agreements, Watch Out For . . .
g. Watch out for the wording “solicit or serve.” If your non-solicitation agreement says “I promise not to solicit or serve any of the company’s customers,” or “I promise not to solicit or provide services to” then the agreement is more risk-laden, because “or serve” means that, regardless of the title of the agreement, it also prohibits you from serving customers who just wander into the new store or new business you are working for, even if you have not “reached out” to them to get their business.
Said differently, if “or serve” or “or provide service to” is in the sentence, then it is more like a non-compete agreement than a non-solicitation agreement in how broadly and negatively it will affect your future. As noted above, an agreement’s title often can be misleading, and is never determinative of what its effect on you may be.
h. Note the distinction between “direct and indirect” solicitation. Many non-solicitation agreements prohibit “direct or indirect” solicitation of clients, customers, employees, vendors and the like. “Direct” means that you cannot actively and with intent solicit customers. “Indirectly” means you cannot ask your sister, cousin or camp counselor do so on your behalf, either.
i. Note also the important distinction between “active” and “passive” solicitation. Here is a question for you: Is establishing a website “solicitation” of customers? Most Courts have said that, for the purposes of a non-solicitation agreement, the answer is “No.” However, if on your website you write, “Attention all customers of Kelly’s Shoe Store, I am now working for O’Leary’s Shoe Store. Come and see me at O’Leary’s Shoe Store, and I will take care of you,” then that website statement would be considered a violation of a non-solicitation agreement. Advertising on a billboard on the highway or in a newspaper or magazine would also be permissible “passive” solicitation, and would be permissible, so long as it is appealing to all potential customers, not just your former employer’s customers.
j. Be on the lookout for “liquidated damages.” Little by little, we are seeing more “liquidated damages” clauses being inserted into non-solicitation agreements. These say something like this: “Because proof of loss in such matters can be difficult, if the employee violates his or her non-solicitation obligations, then without the necessity of a suit or proof, the employee will owe the employer $100,000.” If at all possible, and to the extent possible, these are to be negotiated and resisted.
k. Also watch out for “claw backs,” and “forfeitures.” Some non-solicitation agreements state that a violation of its provisions will result in the employer being entitled to “claw back” from the offending former employee, as examples, bonuses paid during the last two years, or the forfeiture of unvested stock or stock options. These penalties generally do meet with judicial approval, and can be quite expensive.
3. Enforceability of Non-Solicitation Agreements
l. Are non-solicitation agreements enforceable? Yes, as a kind of contract, provided that there exist none of the common defenses to contracts, in general, (i) the signature is forged, (ii) the contract violates a law, (iii) you were fooled into signing it, or (iv) you were promised something in return for signing it, and the “something” was never delivered. These and other “common defenses to contracts” are available in all breach-of-contract disputes.
However, Courts do not like to prevent people from making a living without a good reason to do so. To enforce a non-solicitation agreement in most Courts, an employer must show that (a) there exists a clearly written agreement not to solicit signed by the former employee, (b) there is a threat to a legally protectable interest that would result in permanent damage or irreversible injury to the employer’s business, and (c) the hardship upon the employee is outweighed by the harm the employer will likely suffer. These are not easy to establish.
m. No matter how “enforceable” a non-solicitation agreement may be, a Court has the discretion to refuse to enforce it if it will unnecessarily harm the departing employee. In most legal disputes, the facts are more important than the law, because the facts determine which principle of law applies. In the area of restrictive covenants – including non-solicitation agreements, this is even more the case.
In non-solicitation disputes, the number one guiding principle in the law is not “Did the former employee sign the agreement?” but “What is the fairest thing to do?” So, whether or not your particular non-solicitation agreement is enforceable, and to what extent it may be enforced, is up to the Judge of the Court who hears your case and understands your facts.
n. Do employers really “own” the business relations they have with clients, customers, employees, affiliates and the like? The answer is basically “No.” However, business relations are “protectable interests,” and non-solicitation agreements are the way they try to “protect” them from being “taken” by departing employees.
o. Can I claim “coercion” as a defense to a non-solicitation agreement? No, not unless your employer had one of your loved ones hostage, or really had a gun in his or her hand and ordered you to sign it. Being told “Sign this, or you must leave this job” is not considered coercion in the law, even if it sure feels that way to you. The way the law sees it, you can always leave and find a new job, no matter how hard that might be.
However, if you asked for time before signing the non-solicitation agreement for your attorney to explain to you what the non-solicitation agreement meant, and were denied that opportunity, then “I did not know what it meant” is a pretty good legal defense to your employer’s possible attempts to enforce it in Court.
p. It is critical to bear in mind that, like non-compete agreements, non-solicitation agreements are far more often enforced by “Fear,” not by Courts. Just like non-competition agreements, non-solicitation agreements are enforced most often – in fact, almost always – by “fear,” and not by Court proceedings. First, your prospective employer may say, “If I hire you to solicit your former employer’s customers, I may just get sued. You are a great person, but I do not need such headaches and expense.” Second, having a non-solicit might just make you too afraid of getting into a lawsuit to try to get around it. That is quite common. So, in these two ways, it is “fear,” and not Courts, that do most of the enforcing of errant “solicitors.”
q. Be aware that the laws of some states prohibit non-solicitation agreements. A few states in the United States, most notably California, have a particularly “free competition” business and legal culture, and so will refuse, except in most unusual circumstances, to enforce non-solicitation agreements. In almost all states, they are not looked upon favorably unless both (i) there is a good reason to enforce the non-solicitation agreement, what is called a “legitimate business interest,” AND (ii) enforcement will not make a person unemployable in their business field, industry section, or profession. You can pretty easily determine what the laws of your state say about enforceability of non-solicitation agreements simply by searching appropriate words and phrases on the internet.
4. Avoiding Problems Before They Happen
r. Keep proof of your “pre-existing” business relations and contact. If you are coming into a new job with an already substantial “rolodex” of client and customer relations, and presented with a non-solicitation agreement to sign, try to negotiate a “carve-out” of those “pre-existing” relations so that “what you came with, you can leave with.” Otherwise, you could come, stay six months, be terminated, and then effectively lose all of those relations for potential future business dealings for the duration of the restriction. Ouch!
s. NEVER take from your employer a list of its customers: in many states doing so can be labeled a criminal offense, and Judges just hate it. If there is one thing you can do to hurt yourself if you have signed a non-solicitation agreement is to take with you when you leave a job a list of customers when you leave a job. As noted above, in many states this is considered a criminal act. And, whether you have solicited customers or not, if it can be proved that you downloaded a client or customer list – and that is easily proven these days – a Judge is ten times more likely to keep you out of a job than if you did not do so.
5. Navigating and Negotiating Non-Solicitation Agreements
t. Can I ask a prospective employer, “Will I be required to sign a non-solicitation agreement?” Sure, and it may be quite wise to do so, especially if (i) you are in a sales or sales-related role, and (ii) MOST ESPECIALLY if before you begin you new job you already have relations with clients and customers that YOU WANT TO PROTECT if you ever leave.
u. Can I negotiate the terms and provisions of a non-solicitation agreement? Yes, absolutely, and you should if (i) you know how, (ii) do it the right way, and (iii) have the leverage. This newsletter is an attempt, in this simple way, to offer you a measure of each of the three. And, too, you can negotiate, re-negotiate, and re-negotiate, again, when and if the leverage arises.
In my experience, it is easiest to negotiate the terms of a non-solicitation if (i) you have your own “rolodex” of pre-existing customers when offered a new job, because your prospective employer may well want to “borrow” or “steal” them from you. On the other hand it is perhaps most difficult to negotiate a non-solicitation agreement when you are leaving a job, going to a direct competitor, and have been served your employer’s most important clients, because your employer will be worried you may do that same thing to him or her.
In my view, any departing employee whose future career might be hampered by a non-solicitation agreement should at least try to negotiate its scope, its length, and its potential risks.
v. If you are a salesperson, non-solicitation restrictions are, in effect, really non-compete restrictions; if you are an administrator, they don’t really pose any risk. If your profession is sales, your sole job is soliciting customers. In that case, a prohibition against soliciting customers is like a prohibition against engaging in your profession. On the other hand, if you are an administrator, and have no interface at all with customers, and would likely not take a future job that deals with customers or clients, then non-solicitation agreements pose little, if any at all, risk to you. Most people are somewhere in between.
We offer a “Model Letter: Response to Request You Sign a Non-Solicitation Agreement.” It contains the 16 most important modifications to request, and shows you “What to Say, and How to Say It.™ To obtain your copy, just [click here.] Delivered by Email – Instantly!
w. What if your attempts to negotiate a non-solicitation agreement are unsuccessful? What to do if this happens to you depends on many factors, including as examples, (1) your financial circumstances and need for the job, (2) to what degree you would be unable to do your next probable job without having to solicit customers, (3) whether you have a sense that this job may last a long time, and be worth taking the risk entailed. I quite often tell clients, “If you really want the job, think positively, and take it. Later, if ever, the non-solicitation agreement poses a problem, we will do our best to resolve it.” Think about that approach; it might be good for you.
x. You might want to suggest, instead, other suitable limits and protections. Perhaps it would make more sense to be prohibited from soliciting the business of two or three customers that are your employer’s largest accounts than it would to be prohibited to solicit the business of “the company’s clients, former clients, and possible clients, worldwide.”
Likewise, if your employer only sold automobiles, perhaps it would make more sense if you were prohibited from soliciting their customers to purchase cars, but you were permitted to solicit their business for airplanes, rocket ships, locomotives and speed boats, which your employer never sold and has no plans to sell.
Such sensible and suitable limits, protections and safeguards are the essence of good negotiations on these points.
y. You need to be upfront with prospective employers about any non-solicitation agreement you have signed. It is without question almost always poor judgment not to share your non-solicitation agreement with prospective employers if you believe it is possible that your working for them might spur your present employer to object. The time to do so is during the interview process, not after you start working. If you do not share the non-solicitation agreement, and a dispute arises with your former employer, you just might end up losing the new position, and for alleged “cause,” as well as being sued. Ouch!
z. It would be wise to have an experienced employment attorney review your non-solicitation agreement – “word for word, and every punctuation mark.” People should be careful when signing any legal document, especially if their meaning and effect might affect your life in a substantial way. Non-competition agreements are very nuanced documents. Each word, each punctuation mark, and even the order of sections and paragraphs can make a difference. Having an experienced employment attorney who represents employee look it over can’t hurt, and sure could help, whether or not a dispute has arisen.
For individual attention and assistance, Mr. Sklover is available for telephone consultations lasting 30 minutes, 60 minutes, or 2 hours. If you would like to set up a consultation, just [click here.]
SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the bumps in the road. Knowing “What to Say and How to Say It”™ in response to a request you sign a non-solicitation agreement is a crucial part of that “navigating,” and an important part of that knowledge and understanding you need.
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*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.
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Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the state of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear. Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.
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