A nonsolicitation agreement is a type of agreement that typically restricts an individual (usually a former employee) from soliciting either employees or customers of the company where the individual worked.
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Why do employers require nonsolicitation agreements?
Good employees are difficult to find and develop. Thus, after having spent time and resources training a particular employee, a company will have a natural interest to prevent an employee who leaves from soliciting another valuable employee to join the new company. To this end, many companies require managers and professionals to sign nonsolicitation agreement to prevent this type of scenario from happening.
Similarly, an employer might also have an inclination to prevent a former employee from soliciting customers, drawing them away from the business. This situation commonly occurs in sales and professional practices, with both clients and patients.
What does a nonsolicitation agreement do?
A nonsolicitation agreement can prevent many of these scenarios from happening – at least legally. For example, a nonsolicitation agreement might specifically state that an employee “agrees not to directly or indirectly, alone or on behalf of another, provide services to, call upon, solicit, sell, divert, take away, deliver to, accept business or orders, or otherwise deal with the past, present, or prospective customers of the other party to the agreement, or assist anyone else in doing so.” Such a clause would prevent an employee from taking valuable companies with them upon leaving a company.
The governing law of nonsolicit agreements is highly state-specific and can get quite complicated. In Minnesota, in order for any nonsolicitation agreement to be enforceable it must:
- serve a legitimate employer interest;
- be reasonable in scope, duration, and geography; and
- be supported by adequate legal consideration.
Restrictions on solicitation of customers and employees have been deemed to serve the legitimate purpose of protecting the goodwill of the employer’s business and preventing a former employee from unfairly using their former position to the detriment of the employer.
Drawbacks of nonsolicitation agreements
Nonsolicitation agreement, like noncompete agreements, are generally disfavored in law and must be reasonable in terms of both time and scope. In terms of scope and geography, Minnesota courts have gone so far as to uphold nonsolicitation agreements that lack any territorial limit whatsoever, deeming that the restriction to former clients renders the agreement sufficiently narrow. See Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. App. 1993).
A nonsolicitation agreement requires consideration; if the agreement is executed after an employee has begun working, it must be supported by some independent consideration. Properly structured at the beginning of an employment relationship, employers should require the nonsolicitation agreement be part of the job offer and signed as a condition of employment prior to the employee’s first day of work. If the employee has already started working, the employer will likely need to provide the employee with something beyond the mere continuation of employment for the agreement to be enforceable. For example, the employer could provide the employee with a raise, promotion, lump-sum bonus, incentive compensation, access to trade secrets, or any other significant benefit.
Broad Scope vs. The Blue Pencil Doctrine
Even if the court determines that a Minnesota agreement is unreasonable or overly broad as drafted, the court has the power to “blue pencil” or narrow the agreement to make it reasonable. This is called the “blue pencil doctrine.” For example, an otherwise completely valid nonsolicitation agreement that is rendered unenforceable due to a 20 year time period might be reduced to a 2-year time period pursuant to the courts “blue pencil” power. Such an agreement would thereafter be fully enforceable. Minnesota courts have wide latitude to enforce some or all provisions in a Minnesota agreement.
What is a nonsolicitation agreement?
A nonsolicitation agreement is a contract between an employee and employer stating that the employee will not solicit the company’s clients, customers, or employees after leaving the company. These agreements aim to prevent former employees from taking clients, poaching staff, or using confidential information when they go to a competitor.
When are nonsolicitation agreements used?
Nonsolicitation agreements are commonly used in industries where customer relationships are valuable, such as sales and service businesses. Companies may present these agreements upon hiring, as part of an employment contract, in a severance agreement, or anytime during employment. They want to protect client relationships, trade secrets, and key employees.
What can nonsolicitation agreements restrict?
Nonsolicitation agreements restrict former employees from directly or indirectly soliciting former clients, customers, and/or co-workers. This includes contacting them directly, as well as broader marketing efforts targeted at them. These agreements also prohibit using confidential information from the former job while working for a competitor.
How are nonsolicitation agreements enforced?
Enforceability depends on state law. Most states enforce nonsolicitation agreements. But some states only enforce enforce nonsolicitation agreements where there is a legitimate business need, confidential information at stake, and a reasonably limited duration. Courts may modify or void overly broad or unclear agreements.
What happens if a nonsolicitation agreement is violated?
If a valid nonsolicitation agreement is breached, the company can seek legal remedies like an injunction to stop the behavior or sue for damages. Common remedies include cease and desist orders, modifying the contract, voiding all or part of it, and monetary damages.
Should employees sign nonsolicitation agreements?
Employees should carefully review any nonsolicitation agreements and negotiate restrictions if needed. Consult an attorney for questionable clauses. Signing likely provides job security, but may limit future opportunities, especially in sales in a small industry. Consider whether adequate compensation is provided.
How can employers draft lawful nonsolicitation agreements?
Nonsolicitation agreements must be lawful in the state and reasonably tailored to vital business needs. Define terms clearly, include reasonable exceptions, and limit restrictions to key staff and clients. Consult local counsel to ensure agreements are enforceable.
How long do nonsolicitation agreements last?
Nonsolicitation agreements typically last 6 months to two years after employment ends. Longer durations may be unenforceable or modified by courts. The term should be reasonably tailored to the time needed to rebuild client relationships or replace key employees.
Can nonsolicitation agreements restrict any communication?
Yes, nonsolicitation agreements can apply to direct and indirect solicitations. They cannot restrict former co-workers from voluntarily choosing to work together. They cannot restrict relationships regardless of which party (e.g. employee or customer) initiates the contact.
Do nonsolicitation agreements restrict where someone works?
No, nonsolicitation agreements are different from non-compete agreements. A nonsolicitation agreement does not limit what company someone can work for or what industry they work in after leaving. It only restricts soliciting certain clients or employees from the former employer.
Can nonsolicitation agreements cover independent contractors?
Yes, nonsolicitation agreements can be used with independent contractors in addition to standard employees. The contract language would need to be adjusted, but similar restrictions are enforceable if reasonably limited.
What happens if a nonsolicitation agreement is unenforceable?
If a court finds a nonsolicitation agreement is unenforceable, it may void the contract or modify it to be reasonable. The employer may be prohibited from enforcing overbroad restrictions. But employees should still consult counsel before violating an agreement.
When should legal counsel review nonsolicitation agreements?
It’s recommended that both employers and employees have attorneys review nonsolicitation agreements before signing. Local counsel can assess enforceability, propose modifications, explain risks and obligations, and provide strategic advice. Relying on general legal knowledge alone can be insufficient and risky.