When it comes to safeguarding your business, there are various legal tools available to protect your interests. Two essential tools that every business owner should be familiar with are non-solicitation and non-compete agreements. These agreements play a crucial role in protecting your business from solicitation of clients, customers, or employees, as well as preventing competitors from gaining an unfair advantage.
A non-solicitation agreement is a legally binding contract between an employer and an employee. It restricts the employee from directly or indirectly soliciting the employer’s clients, customers, or employees after leaving the company. The purpose of this agreement is to maintain the integrity of the employer’s relationships and protect confidential information from being used by former employees for personal gain or to benefit a competitor.
On the other hand, a non-compete agreement restricts employees from engaging in certain activities that would directly compete with their former employer’s business. This agreement typically includes provisions that prevent employees from working for a competitor or starting a competing business within a specific geographic area and for a specified period of time. Non-compete agreements help businesses maintain their competitive advantage and prevent employees from using the knowledge and experience gained during their employment to compete against their former employer.
Both non-solicitation and non-compete agreements are designed to protect a business’s valuable assets, including its client base, confidential information, trade secrets, and intellectual property. By implementing these agreements, businesses can minimize the risk of losing clients to former employees or competitors, maintain the confidentiality of proprietary information, and preserve their competitive edge in the market.
It’s important to note that the enforceability of non-solicitation and non-compete agreements can vary based on local laws and regulations. It’s crucial to consult with legal professionals who specialize in employment law to ensure that these agreements are drafted properly and comply with applicable legal requirements.
Non-solicitation and non-compete agreements are essential tools for protecting your business from solicitation and unfair competition. By implementing these agreements effectively, you can safeguard your client relationships, preserve confidential information, and maintain your competitive advantage in the marketplace. Seek legal guidance to ensure that your agreements are tailored to your specific business needs and comply with the laws of your jurisdiction.
What Is a Non-Solicitation Agreement?
A non-solicitation agreement is an agreement that is usually signed between a company and an employee, and the employee is agreeing that after they leave, they will not solicit employees of the company, vendors of the company, or customers of the company.
What does that mean exactly? Well, let’s say the employee goes to work for a competitor, and prior to that, the employee signed a non-solicitation agreement. By signing that, the employee agreed the employee will not ask employees from the old company to go to the new company, or vendors from the old company to go to the new company, or customers from the old company to come to the new company.
In other words, an employee is entrusted with the relationships of the employer when the employee comes. And the employer recognizes it would be really harmful to introduce the employee to these relationships, later have the employee leave, and have that employee then solicit those relationships and try to take that away as well. It is hard enough for an employer to lose a good employee, even a not-so-good necessarily. But to then have other relationships solicited and brought over.
Now You Might Be Wondering if the Person Who Signs a Non-solicitation Agreement Doesn’t Solicit, but Someone Else Solicits Them, Is That a Violation?
Let’s play it out. Let’s say, for example, an employee solicitation agreement then goes to the new employer, and one of the vendors from the old employer reaches out and says, “Hey, we would like to serve you instead of your old company.” Or maybe it is a customer of the old company reaches out to the employee and says, “Hey, can we continue to work with you at the new company? Is that okay?” You might be thinking, Well, it should be okay because there was no solicitation by the employee who transferred. But usually solicitation or non-solicitation agreements say it doesn’t matter who initiates the contact. It is not just solicitation. It is any other efforts to take away business from the original company. It would also be any other transactions or engagements with a new company, and typically there is a period of time, like two years, for example.
Are Non-Solicitation Agreements Enforceable?
They generally are, yes. In virtually every state, if not all of them. And you might be saying, “But wait, I heard that non-solicitation agreements are not enforceable in some states, like California, for example.” What you are probably thinking about is a non-compete agreement.
So let’s talk about the difference between a non-solicitation agreement and a non-compete agreement. So let’s set the stage.
What Is the Difference Between a Non-solicitation Agreement and a Non-compete Agreement?
A non-solicitation agreement says a person will not take relationships to a subsequent company. We are talking about the relationships that were introduced, and they won’t be carried over. That is non-solicitation.
By contrast, a non-compete agreement is where a person cannot compete. They cannot actually do business in an area. Typically it is geographically limited. So it might be a 10-mile radius from the former employer or a hundred-mile radius or a hundred-mile radius from any of the former employers’ business locations.
Are Non-Compete Agreements Enforceable?
In many states, they are; in fact, in most states, but not all states. For example, a non-compete agreement between an employer and an employee generally is not enforceable in California. Why did I say between an employer and an employee? Because there can be non-compete agreements between other parties, for example.
Let’s say I start a business. I sell widgets throughout the United States, and I have built a lot of great relationships selling widgets, and maybe I even sell those widgets on infomercials. And then I decide to sell my company to a new buyer, and the buyer says, we will pay you a million dollars for this business, but you need to agree not to compete with us for 10 years. We don’t want you starting a brand new business, competing somewhere else and under a new company. And now all the people who recognize you start to associate that goodwill with the new company. So they have me sign a non-compete that, for 10 years, I will not start a new business that competes with them.
That is enforceable in virtually all States in all circumstances. Why? Because it is from a seller of a business to the business and to the new buyers. That is very different from employer-to-employee non-compete agreements, because with employer and employee, there is a bargaining power differential. In other words, the employer has a lot more bargaining power. The employee has a lot less, whereas, with a buyer and a seller of a company, there is usually much more similar bargaining power. Also, I just think legislatures in states are more concerned about protecting employees who are generally considered more vulnerable and susceptible to being taken advantage of than business owners who are selling their businesses.
Let’s face it. Most people, when they sell their business, they have lawyers involved. They have protection. They know what they are walking into. A lot of times, employees don’t know what they are walking into. They didn’t go to law school, and they might be quite young when becoming an employee. So there are a number of states now that are either outright banning non-compete agreements or having significant restrictions on them.
Right now, in the Minnesota legislature, there is legislation going through that would prohibit non-compete agreements in the employer and employee relationship moving forward. So those that were signed in the past would still be in place, but moving forward, they would be prohibited.
Okay. So non-solicitation agreements that has to do with relationships, they are enforceable. Non-compete agreements that has to do with competition in the marketplace, just the ability to do business, that is viewed with scrutiny by the courts and not enforceable in some states.
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