What is a Non-Solicitation Agreement?
Non-Solicitation Agreements are used to help employers protect their business interests. More specifically, the purpose of a non-solicitation agreement is to prevent employees from soliciting current clients or coworkers after their employment is terminated. A non-solicitation clause can be part of a non-compete agreement or written into an agreement on its own. This is explored more deeply in the following section which answers the questions, "What is a Non-Compete?" and "What is A Non-Solicitation Agreement?"
Non-solicitation agreements are generally drafted to prevent or delay former employees from starting similar businesses and raiding former colleagues or customers. "A non-solicitation agreement between an employer and employee does not prevent a former employee from working with a former employer’s customers or employees, but merely prevents the employee from doing so in certain situations . With non-solicitation agreements, employees are not prevented from competing with former employers in a general sense of competing in the industry. Therefore, non-solicitation agreements do not always prevent competition." Hamid Behnia, Understanding Non-Compete Agreements. "Non-solicitation clauses are always a fact of life for insurance brokers and other professionals who must cultivate customers and develop personal goodwill in order to succeed. For example, it is not uncommon for a financial advisor at a large brokerage firm to ‘move’ a portion of their book of business to a new firm." Sherry Chris Noseworthy, "No Solicit! How to Interpret Non-Solicitation Clauses in Real Estate".
The Legal Landscape for Non-Solicitation Agreements in New York
In New York, courts will only enforce agreements restraining trade/competition "to the extent and for the period that the agreement is no greater than is required for the protection of the employer and does not impose undue hardhip on the employee." This means that the employer has the burden to establish: (i) the existence of a protectable interest, like the tongue-twister substantial or legitimate business interest; (ii) that the covenant is no greater than necessary to protect the claimed interest(s) against incursion by the former employee; and (iii) the employer’s need for the protection. As a "general rule," New York courts will only enforce a covenant if it is for two years or less.
Covenants restricting the solicitation of employees, customers, prospective customers and suppliers by the former employee will be subject to scrutiny and business justifications will be examined closely. Generally, New York courts have upheld such clauses (even, most recently, in the Symantec case) if they are reasonable in terms of duration, geographic scope and product market scope, and not imposed in order to stifle mere ordinary competition.
Essential Items to Consider Including in a New York Non-Solicitation Agreement
When drafting a non-solicitation agreement, businesses in New York should consider including several key elements to ensure enforceability and to protect their interests in a manner in compliance with New York law. One way of doing this is through crystal clear language that is not overly broad. Addressing the following essential terms will help prevent disputes and foster clear guidelines that will be reasonable in the eyes of a New York court:
Duration. While there is no bright line set forth by New York Courts, the duration of covenants not to compete must be reasonable in duration. Although Courts have enforced non-compete covenants of two (2) years, limitations of one (1) year or less are more frequently upheld as valid.
Geographic Scope. The geographic scope of a restrictive covenant must be reasonable. In most cases, a non-solicitation agreement seeking to restrict a departing employee from soliciting clients or prospective clients of the former employer in the same services or industry within a single state will be upheld. However, restrictions from soliciting clients or employees of a former employer on a national basis are more likely to be voided as overbroad. Moreover, the geographic restriction must be tailor made to the territory where the company does business and where the employee worked. Geographic restrictions are likely to be upheld if they are tailored to cover only the area the employee serviced or worked for the former employer.
Legitimate Business Interest. New York Courts require that the non-solicitation agreement be supported by a legitimate interest of the employer, such as protecting business secrets, customer relationships and goodwill. In addition, New York Courts recognize that a significant investment by a company in a new employee can give rise to a legitimate protectable business interest. Courts may also consider the extent to which the industry is competitive and aggressively competitive of its nature, and the size of the business.
Comprehending Non-Solicitation Agreements versus Non-Compete Agreements
Non-compete agreements and non-solicitation agreements are not the same thing, although the two terms are often used interchangeably. Both agreements restrict an employee’s actions in the future and both are generally disfavored by New York courts. However, a non-solicitation agreement prohibits a former employee from interacting with clients of the employer, while a non-compete agreement prohibits a former employee from working for a competitor of the former employer.
A non-compete agreement should be used when an employer wants to stop an employee from entering into competition with the business in the geographical area where the employee will work and the area where the employer’s customers are located. A non-solicitation agreement is adequate when an employer wants to prevent an employee from brokering business or dealing with an existing customer or client of the employer. Unlike non-compete restrictions, non-solicitation restrictions do not prevent an employee from placing the former employer on notice that he or she intends to serve that former customer or client.
Common Challenges with Enforcing Non-Solicitation Agreements
In New York, non-solicitation agreements are often very difficult to enforce. One reason is that courts frequently reject non-solicitation agreements of former employees in the medical field. This is because courts acknowledge that restrictions on doctors impact patient care. There is also substantial precedent in non-compete litigation from the late 19th and early 20th centuries. More laws protecting an employee’s rights have emerged, not always to the advantage of most employers. Courts generally uphold non-solicitation agreements that are reasonable in scope. For example, it is generally more acceptable for a non-solicitation agreement to restrict an employee’s ability to solicit employees rather than clients or customers. A common approach when drafting a non-solicitation agreement is to limit how long it lasts after separation from employment. Another option is to craft a non-solicitation agreement based on the two-year duration of trade secrets protection under the Uniform Trade Secrets Act.
Cases involving the enforcement of non-solicitation agreements in New York In upholding a non-solicitation agreement for a medspa, the Court of Appeals has considered a number of factors. The case went to trial before a judge without a jury. Certain medical treatments provided by the medspa were regulated by a State Board , but the business itself was not. The court noted that violation of the regulation neither lesser the common law or statutory claim nor barred contractual recovery. However, the court found that it was an important factor justifying the enforceability of the non-solicitation agreement. No doctor or other licensee at the medspa was a party to the agreement. But the non-solicitation agreement was narrowly defined to not restrict the practice of medicine. Moreover, the court found the two-year limitation to not be unreasonably long inasmuch as a constellation of patient and treatment variables might require two years to be significant. The court also rejected the defendant’s argument that the non-solicitation agreement was unenforceable because it was a personal services contract that could not be assigned. Ultimately, the court upheld the non-solicitation agreement even though it created an at will contract for an indefinite duration.
Attorneys who litigate non-solicitation agreements have their work cut out for them. Not only must attorneys anticipate the challenges and create savvy strategy for countering attack on a non-solicitation agreement, the courts will also weigh the social policy implications of such an agreement.
How to Create a Non-Solicitation Agreement: The Essential Steps
Even though non-solicitation agreements are generally a much more palatable "covenant not to compete" for New York employees — especially those who are not privy to trade secrets – employers in New York should still comply with certain best practices in drafting them. First, the language should be simple, clear, and unambiguous. Because even a non-residential employee tends to operate under the impression that any contractual language is, or will be, enforced as written, the clearer your language, the less likely an employee will challenge the enforceability of the non-solicitation agreement. This is especially true in the context of ‘blue pencil analysis.’ It is not uncommon for New York courts to engage in blue pencil analysis, which is a process through which the court will modify a restrictive covenant it finds otherwise overbroad or unenforceable with the hope of rendering it reasonable enough to be enforceable. That said, courts are less inclined to apply blue pencil to non-solicitation agreements because they do not tend to extend beyond the scope of a reasonable one year in metro-NYC/northern suburban areas and two years in the more distant counties upstate. Therefore, businesses should be mindful of the the timeframes used in drafting non-solicit agreements in New York.
Second, the scope of the non-solicit should be reasonable. While this is a fact-specific inquiry, businesses seeking to protect customer relationships should avoid wording that goes so far as to provision about clients who were not even known to the employee until after he or she terminated employment. Such provisions may cause an unwelcome injury into the business’s freedom to use public databases to seek new clients. In addition, to the extent a non-solicit is to protect proprietary information, once again businesses should ensure that such language not be so broad as to include mere access to databases.
Third, while New York courts have expressly stated that a terminating employee cannot simply take an employer’s client list and begin working for others to compete for the same business, care should nonetheless be taken in drafting the non-solicit to expressly identify what information is proprietary, that the list of clients designated is confidential/proprietary information and that the employee has no rights to solicit such clients. And fourth, although a terminating employee generally cannot solicit clients whom the employer did not develop for the terminating employee while employed, the absence of such a provision will make it easier to prove that the prohibitions in the non-solicit are not so broad as to be unreasonable. Lastly, where the employer believes a former employee has violated the non-solicit, an immediate review of the agreement, and consultation with counsel, will yield the best outcome.
Advice for Employees: Knowing Your Legal Rights
Employees should be aware of the legal effect of signing a non-solicitation agreement. The terms and restrictions of the agreement will be enforced against you if they are reasonable, but not if they are unreasonable or excessive. Be particularly careful before you sign any restrictive covenant agreement (particularly in New York and other jurisdictions where non-solicitation agreements are recognized) where you are not provided with something of value in exchange.
Also, if you sign a non-solicitation, non-competition or any other restrictive covenant agreement, be aware that compliance may affect your ability to obtain new employment if the terms are enforceable. You have an obligation not to divulge confidential information, but you should also be aware of any non-solicitation obligations and other terms. Although you must comply with the agreement, you need not give up money, time at your next employer, or information about your new employer in order to comply.
Like any other business contract you have signed in your career, you should give serious consideration to how a non-solicitation agreement will affect your next employment. If you have been impacted by the enforcement of a non-solicitation agreement, you should consult legal counsel immediately to understand your options and rights.
Current Trends and Cases involving Non-Solicitation Agreements in New York
A recent Supreme Court decision found that a restriction on an employee’s ability to solicit customers after his termination was overly broad, and therefore unenforceable. Previously, a non-solicitation agreement required employees after they left a company to provide 90 days’ notice to their employer so that the company could attempt to persuade the customer not to work with the employee. The court found this provision was unreasonable and did not protect a legitimate business interest. In reaching this conclusion, the court underscored that the duration of the non-solicitation period should be no longer than required to protect the employer’s interest in protecting confidential commercial information. A provision requiring notice for 90 days after the employee stopped working did not qualify as a reasonable restraint in time.
As for geographical scope, the court found a restriction of the company’s offices in New York and two surrounding states to be reasonable . However, the employer could not demonstrate that a non-solicitation agreement in respect of its eight offices across the country was a reasonable means of protecting a legitimate business interest. The employer did not show how its confidential information was used by its competitors in different regional markets. The court stated "Meyer [the former employee] is not a product of [employer]. He takes nothing with him other than the considerable skills, knowledge, talents, experience, and market recognition that he developed over the course of his 24 years with [employer], much of which [employer] fostered, encouraged, and compensated him to develop and that he could bring to bear on an employment opportunity." Further, there was a "dearth of evidence" showing that Meyer brought any client data with him to his new firm, or that his new employer was using it to solicit any of the clients with whom he had previously worked.
Given this framework, practices such as continuities of employment through the use of temporary employment agencies or independent contractors are more common.