United States: Non-Solicitation Agreements Really Do Have Teeth

Published in the New Hampshire Business Review

Q: One of the company's salespeople recently resigned to join a competitor. At the start of his employment with the company, he signed a non-solicitation agreement prohibiting him from soliciting the company's customers for a period of time after his employment ends. The competitor just sent an email blast announcing that the salesperson has joined the competitor. A number of the company's customers received the email, contacted the former salesperson, and will be moving their business to the competitor. Can the company do anything?

Yes, non-solicitation agreements really do have teeth, according to a recent decision in a case called Corporate Technologies, Inc. v. Brian Harnett and OnX USA LLC.

A full non-competition agreement (i.e., an agreement prohibiting an employee from working for competitors altogether) can be an onerous imposition, unnecessarily broad, and difficult to enforce. Employers therefore frequently ask employees to sign more limited non-solicitation agreements, which prohibit the employees from soliciting (i.e., enticing or inducing) customers to move their work from the employer to a competitor. Some business people have questioned whether non-solicitation agreements have any real teeth, believing that former employees can circumvent those agreements easily, such as where the competitor solicits the customers, the customers contact the competitor or the former employee directly, and then the employee takes over from there. Not so fast, says the United States First Circuit Court of Appeals.

In the Corporate Technologies case, the employee resigned from the company, the competitor sent an email blast announcing that he had joined the competitor, four-of-five of the employee's largest customers contacted the competitor directly, and the employee took over from there, communicating directly with the customers and putting together proposals and contracts for the customers to work directly with the competitor. The employee and competitor argued that, "because the customers in question initiated contact with [the employee], he was thereafter free to deal with them without being guilty of solicitation." In essence, they argued for a "bright line rule" that solicitation does not occur as long as the customer makes the "initial contact."

The court rejected the argument for a bright line rule.  While acknowledging that the "line between solicitation and acceptance of business is a hazy one" that "may be more metaphysical than real," the court recognized that employees and competitors should not be allowed to exploit this situation to eviscerate the underlying purpose of the non-solicitation agreement.

The rights contained in a non-solicitation agreement "cannot be thwarted by easy evasions, such as piquing customers' curiosity and inciting them to make the initial contact with the employee's new firm." Because "initial contact can easily be manipulated – say, by a targeted announcement ... – a per se rule would deprive the employer of its bargained-for protection" in the agreement.

Instead of adopting a bright line test, the "better view" according to the court is that "the identity of the party making initial contact is just one factor among many [to] consider in drawing the line between solicitation," which violates the agreement, and mere "acceptance" of business from a customer, which does not. The weight given to the initial contact may depend on the nature of the industry involved. For example, where the sales process is complex or the goods or services are customized, the initial contact tends to be removed from the actual sale, rendering the initial contact less significant for purposes of determining if solicitation has occurred than the follow up contact by the salesperson after the initial contact.

In Corporate Technologies, after the competitor sent the email blast and the customers contacted the competitor, the employee conducted telephone calls and meetings with the customers, prepared proposals for certain of the customers, and secured a contract for the competitor with one of the customers. In the court's view, that was solicitation prohibited by the agreement.

The moral of the story for employees and competitors is that non-solicitation agreements cannot be so easily avoided. For example, while the court did "not question the rights of parties to make public announcements of changes in employment, targeted mailings to former customers may cross the line into impermissible solicitation." Also, involvement by the employee to secure the business of customers after they have contacted the competitor may be solicitation just as much as if the employee had directly asked the customers for their business in the first instance. Competitors instead should just announce the employee's new employment with the competitor, have a different person handle all contact with the customers of the former employer to secure their business (without obtaining or using confidential information that the employee acquired from his former employer), and involve the employee (if at all) only to service the customers' accounts after the competitor has firmly secured their business.

The moral of the story for employers seeking to enforce non-solicitation agreements is that these agreements really do have teeth, and employers should seek appropriate relief from the courts to enforce them. Even more importantly, rather than relying solely on non-solicitation agreements, employers should add provisions to their agreements that prohibit employees both from soliciting customers and from doing business with customers. Such agreements avoid the pitfalls faced in the Corporate Technologies case and the problems inherent in enforcing full non-competition agreements, and also strike an appropriate balance between the interests of employers in protecting their businesses and the interests of employees in earning a living.

Cameron G. Shilling is a partner in the Litigation Department and the Employment Law Group at McLane, Graf, Raulerson & Middleton, and is the Chair of the firm's Privacy and Data Security Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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