Negotiating the Legality of Non-Solicitation Agreements

An Overview of Non-Solicitation Agreements

One of the most common post-termination restrictions in the employment context is a non-solicitation agreement. Typically, such agreements are included in a contract upon the hiring of an employee. It prevents the employee from soliciting customers or clients away from company, whether it be during employment or for a period of time after termination of the employment relationship. For example, a non-solicitation agreement might provide that a sales employee may not solicit, contact, or do business with any customer or client of the company for a period of 12 months following the date of termination of employment. Good examples of non-solicitation agreements are those that are used by Pharma, where employees who call on physicians cannot solicit those physicians for a period of time after they leave the employment of their company, whether voluntarily or due to a layoff. These agreements are also common in insurance companies, where agents cannot solicit their existing clients after they are no longer an agent of that insurance company. Likewise, stockbrokers are often prohibited by their employment agreement from soliciting clients of the firm after they leave. Non-solicitation agreements are distinct from non-compete agreements, which are broader and more common in professional service firms, such as law firms . Non-compete agreements typically provide that the employee cannot work for a competitor of the company in the same industry for a period of time after their employment. For example, a law firm non-compete is often 12 months or more which would prevent the employee-lawyer from working at any law firm that does the same type of work that the firm did, at least at a similar level of client. In other words, the non-compete is broader, in that it prohibits the employee from doing any work in their field of endeavor for a competitor, while a non-solicitation agreement prohibits the employee from soliciting clients or customers away from the company. Generally speaking, non-solicitation agreements are enforceable if they are reasonable, meaning if they are not overly restrictive in terms of geographic territory and duration. There are statutory and case law definitions for what is reasonable, but in employment contracts it is typically limited to 12 months. Some employers have sought to argue for longer non-solicit agreements of two years or more, but courts have generally refused to enforce non-solicit agreements of longer than one year, at least in Pennsylvania. Most periods of non-compete or non-solicit agreements are one year.

Determining the Validity of the Non-Solicitation Agreement

Relevant State Law Will Control The Validity Of A Non-Solicitation Agreement
It is not enough that a challenged non-solicitation agreement is reasonable. The agreement also must be properly entered into and otherwise binding. While different states utilize different analyses when determining the enforceability of non-solicitation agreements, virtually every state will analyze the agreement in accordance with the following elements.
Consideration
When two parties enter into a contract, there must be consideration exchanged between the parties to support the contract as an enforceable agreement. For example, if an employee agrees to work for a company for one year in exchange for $80,000, the consideration supporting the agreement is the $80,000 the employer is willing to pay in exchange for the employee’s one year of employment. Isolated from any other consideration, the mere covenant not to compete or refrain from soliciting customers is not sufficient consideration to form a valid contract if not supported by anything else.
In most states, the consideration supporting a non-solicitation agreement must be job-related and include at least one of the following:
• Restriction on the employee’s disclosure of confidential information;
• Restriction on the employee’s use of confidential information;
• Required employee training;
• An increase in pay; or
• A promotion.
Job-related consideration is designed to ensure that the agreement restricts the activities of the employee only to the extent necessary to protect job-related, legitimate business interests of the employer. The key issue with respect to adequate consideration is that the restraint be limited to what is necessary to protect those job-related business interests.
Legitimate Business Interest
In addition to finding adequate consideration, courts generally will examine the non-solicitation agreement to ensure that it is reasonably related in time and geographic scope to the legitimate business interests the agreement is designed to protect. In cases involving competitive activity, this means that the non-solicitation provision should be no broader than necessary to protect the employer’s protectable interests. If the non-solicitation agreement is not based on such protectable interests, it will not be enforced. While there is no bright-line rule concerning exactly what circumstances convert an employer’s business interest into a protectable interest, courts consistently have held that the following circumstances may give rise to protectable interests if the employer can demonstrate that the interests upon which the restrictions are premised are legitimate:
• The employee had or developed customer contacts that the employer is attempting to protect;
• The employee served in a position of trust;
• The employee had access to trade secrets and/or confidential information that the employer is trying to protect;
• The employee was in a position to take advantage of an established business reputation or established clientele that the employer is attempting to protect;
• The employee had access to confidential information, such as marketing or sales methods, that the employer is trying to protect;
Courts generally identify the means used to protect an employer’s interests, rather than the employer’s interests themselves, as the employer’s protectable interests.

Legally Moving Around the Non-Solicitation Agreement

In some cases, it is possible for individuals and businesses to strategically navigate around non-solicitation agreements, even when such clauses are included as part of an employment contract. There are a number of legal strategies that can be employed for this purpose, including effective negotiation, seeking to amend the agreement, or in certain limited circumstances, obtaining prior written consent.
With regard to seeking to amend or negotiate the terms of a non-solicitation agreement, it is important to recognize that the potential limits on post-employment obligations that may urged by California law are unlikely to be available to those under a non-solicitation agreement in another state. Despite this, depending upon the strength of your position, an employer may be flexible to negotiate with you in order to avoid litigation. This is particularly the case when the employer recognizes that an amended or negotiated agreement would be enforceable in California if challenged.
In some limited cases, it may be possible to seek an amendment to a non-solicitation clause from your employer under limited circumstances. These limited circumstances may include instances in which you would otherwise be forced to turn down an offer of employment or if the non-solicitation agreement stands to pose an unreasonable hardship on your livelihood.
To address this concern, some individuals seek an amendment that permits them to solicit clients within a fixed radius that is further away from their place of employment (added geographic scope). Others may seek an amendment that regulates the specific types of clients that may not be solicited (added specific conditions). Depending upon the circumstances, some employers may be open to these amendments and may willingly amend the agreement without forcing you to take legal action.
The last resort for many clients looking to avoid the enforcement of a non-solicitation agreement is to obtain prior written consent from their employer. Unless the company agrees to consent to the proposed arrangement, a lawsuit will typically be necessary. A lawsuit is also recommended if the company provides an evasive response to the request. In addition, it may be beneficial to search for other evidence of the company’s bad faith and/or unreasonable condition or risk. Bad faith and unreasonable condition/risk can serve to invalidate a non-solicitation agreement in some cases.
Seeking preclearance through a lawsuit should not be done lightly. For this reason, it is essential that you consult with a skilled employment attorney or business lawyer who can help you to analyze your particular situation and determine the best strategy for addressing this form of post-employment competition.

Legal Exemptions and Loopholes

In limited circumstances, courts may invalidate or nullify these agreements. Sometimes the most straightforward and logical approach does not fit into the cookie-cutter templates the legal industry has created for these agreements, because non-solicitation clauses do not depend solely on their own strict wording. However, despite these boilerplate templates, arguments against non-solicitation clauses are available for those with the time and budget to explore them. These arguments include: (i) the lack of consideration; (ii) the overbroad provisions; and (iii) expired buy-outs.
A legal loophole is the failure to execute the agreement with proper consideration, whether by failing to attach a promissory note or other consideration to the agreement when executed or by failing to give the parties adequate time and opportunity to examine and revise the agreement with proper legal counsel. By failing to engage in a negotiation process, the parties have negated the consideration for the agreement. A second loophole involves provisions of the agreement that are so overbroad as to include activity that is entirely unrelated to the goals of the parties in executing it. For example, the agreement may track verbatim language from standard non-compete clauses, which would prevent a doctor, for example, from soliciting a real estate agent, even though there is absolutely no chance of a real estate agent competing with the doctor. Finally, an expired buy-out may be sufficient to show that the agreement has expired. Non-solicitation clauses often provide a two-to-five year period of enforcement, but if the company has waived its right to enforce the agreement or failed to assert its rights within the specified time-frame, the employee may no longer be bound by the agreement.

Involving Legal Professionals

When it comes to non-solicitation agreements, their effectiveness often hinges on a myriad of factors. Every industry is impacted by varying degrees and types of competitive threats; the interests of businesses, for instance, in the healthcare field may be vastly different from those of a technology company . These and other factors are why it is always recommended that employers reach out to legal professionals who can review their specific non-solicitation agreements, explain the options available and the risks of pursuit of or potential dispute over these legal documents.

Examples and Case Studies

At the time of this writing, there are no reported appellate decisions in Virginia or surrounding states concerning the enforceability of non-solicitation agreements outside of an employer/employee context. However, a few years ago, a federal district court upheld the enforceability of a non-solicitation agreement entered into between an employee of a company’s subsidiary, and a third-party company that did not employ him.
In Amalgamated Bank v. First Solar, Inc., 2013 U.S. Dist. LEXIS 157340 (E.D.Va.), the plaintiff bank was the secured lender to First Solar, Inc. ("First Solar"), and the defendant First Solar Applied Innovation, LLC ("Applied Innovation"), was a subsidiary of First Solar. The bank had lent money to First Solar for the purpose of servicing its debts and thus had a bankruptcy claim against First Solar. Applied Innovation operated a solar power generation facility that installed solar panels on real property owned by the bank, to which the bank made further loans.
Subsequently, the bank sued First Solar and other defendants to recover on the foreclosure.
Meanwhile, Applied Innovation’s director of operations, who was responsible for maintaining the solar generation facility, resigned from his job and began working for Applied Power Services, LLC ("APS"). APS had entered into an installation agreement with the bank to install solar panels on the same property as the bank and Applied Innovation did. At the time of his resignation from Applied Innovation, the director of operations was also negotiating with APS to become its general manager.
There was a non-solicitation agreement between the director of operations and First Solar in force at the time of the amended complaint. This agreement stated that the director of operations could not, without first obtaining written permission from First Solar, solicit former customers of Applied Innovation, solicit current customers of First Solar, or accept jobs with APS or such others as named First Solar. Further, pursuant to his employment contract with First Solar, the director of operations could not "participate" in the business of installations in Virginia during employment with First Solar, and for one year after his termination.
The bank alleged a post-employment covenant violation by the director of operations, as well as violations by APS and the bank of Virginia’s contract with First Solar and Applied Innovation. The defendants moved to dismiss the counts against them, but the court denied their motion as to the claim against the director of operations.
In ruling on the motion to dismiss, the court first determined that the non-compete agreement was supported by adequate consideration because the covenant was entered during the course of employment. Next, the court applied Virginia’s test for reasonableness of restrictions, which asks (1) whether the restraint is greater than necessary to protect the employer’s legitimate interests; (2) whether the employee was given reasonable protection of his or her rights; and (3) whether it is consistent with the public interest.
Under the first prong of the test, the court held that the restriction on the director of operations was reasonably necessary and protected First Solar’s legitimate interest in ensuring that the director would not be able to work for its competitor, thereby using confidential information that he obtained during his employment with First Solar. This was bolstered by the fact that the restriction was limited to the area in Virginia where First Solar conducted its business.
The court held that under the second prong of the reasonableness analysis, the restriction placed on the director of operations’ abilities to work for one year at APS was reasonable, and restricted only activities that could have hurt First Solar. Thus, although the bank did not have standing to sue for the alleged covenant violation, the court would allow the claim to proceed.

Proactive Measures for Future Non-Solicitation Agreements

One way to better prepare for the negotiating and drafting processes that lead to non-solicitation agreements involve insisting on the inclusion of a fair and reasonable description of what a business’ protected interests really are. This will often require the use of a document (or documents) that define and describe how the protected interests of the business are recognized and defined for the parties. Often, the business will have some method of recognizing (in writing or otherwise) which clients belong to the business (such as, for example, an invoice, an email, or other communications between the sales staff of the business and a given client), and this method can be addressed in the non-solicitation agreement itself.
Other measures that can be taken to better prepare for non-solicitation negotiations involve documenting the negotiations on "cyberspace" (i.e., through the use of emails that, for example, can demonstrate to the dissatisfied employee that he or she knew what the employer’s requested scope of client relationships were, and that he or she expressly agreed to them) . In fact, if the agreement is well-negotiated, the existence of email negotiations may go a long way toward showing both (1) that the employee could have framed his or her relationships with a slightly larger cast of clients (but the employee did not, electing instead to work along the lines that the employer established), and (2) that the employee had a full understanding of the terms of the employer’s request as well as the consequences of violating the employer’s request.
Similarly, should the employee’s negotiation tactics sabotage the success of the non-compete and/or non-solicit (because of the employee’s insistence that he or she not be bound to a short distance from the workplace of former employer), and he or she goes on to open a similar business even after promising not to open that type of business in a certain distance from the former employer, the evidence of the negotiation and language of the ultimate agreement may go a long way toward demonstrating the employee’s violation of the agreement.