This is Part II of a three-part blog series on how "restrictive covenants" in contracts affect an employee's rights, or an independent contractor's rights, post-termination. The three most common restrictive covenants are non-compete clauses, non-solicitation clauses, and confidentiality clauses. They are often found in employment contracts, consulting agreements and various other business contracts, such as a sale of a business. In Part I, I addressed the enforceability of "non-compete" clauses.
IN THIS ARTICLE, I will shed light on the enforceability of "non-solicitation" clauses (a.k.a. "non-solicit" agreements). In Part III, "confidentiality" clauses will be discussed. A non-solicit typically prohibits a person from soliciting the clients, customers, employees and others with whom the person has had business dealings under a contract of service, or for services, for another party.
Courts treat these restrictive covenants with more, or less, rigor depending on which one of these three restrictive covenants is at issue, and the particular context in which the restrictive covenant was agreed to; broadly speaking whether it was an employer-employee context, or a commercial context. Courts do not always enforce these restrictive covenants, even if the parties understood what they were signing.
On the spectrum of scrutiny accorded these three restrictive covenants, courts place non-solicitation clauses in between non-compete and confidentiality clauses. Non-compete clauses receive the greatest scrutiny and are subject to the strictest tests since courts are most reluctant to enforce them (see my previous post for an explanation).
Although non-solicitation clauses receive somewhat more leeway than non-compete clauses in all contexts, in the 'employer-employee' context, which for purposes of restrictive covenants includes similar situations, such as a 'contract for services' between an independent contractor and a client company ("employment context"), the courts are more reluctant to enforce them than in a commercial context (addressed later in this article). Generally speaking, it is the imbalance of bargaining power which typifies the employment context that gives courts pause. As such, courts presume that a non-solicit clause in an employment context is unenforceable, unless proven that it is:
A court will likely find that a company does have a legitimate proprietary interest in need of protection where the employee’s knowledge of the specific needs, preferences and idiosyncrasies of a particular customer, and the employee’s knowledge of the manner in which the employer meets those needs, gives the employee an unfair competitive advantage when she goes out in competition with the employer in supplying the same services or products to the same clientele. Courts view this type of knowledge as part of the company's "goodwill" that it has put time, effort and money into building - it has value to the company. In such cases, courts will enforce a non-solicitation clause, assuming #2 and #3 above also are met.
As with non-compete clauses in commercial agreements - such as a sale of a business, or a large transaction where the two parties have similar bargaining power, expertise and access to legal and financial advice (for purposes of restrictive covenants, a "commercial context") - non-solicitation clauses receive much less scrutiny than they would in an employment context. In a commercial context, the courts place greater weight on protecting the freedom of trade and promoting the stability of commercial arrangements.
In a commercial context, a non-solicit clause is presumptively lawful and enforceable unless it can be established on a balance of probabilities that its scope is unreasonable. What is "unreasonable" depends on the specific circumstances. The party asking the court to rule the clause invalid, must prove that the clause goes much further than necessary to protect the other party's legitimate proprietary interests. A non-solicit that restricts competition in general, rather than restricting only what is reasonably necessary to protect a company's "goodwill" that it has built over a long period of time with its customers, and its other trade connections, will be more likely to be struck down.
In both contexts, where there is a breach of a non-solicitation clause that meets the requirements for it to be enforceable, damages may be awarded equal to the value of the lost contract, or lost value, or in some cases an injunction preventing the offending party from engaging in a certain activity may be issued by the court.
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Contracts, Law & More
Understand What You're Signing!
IN THIS ARTICLE, I will shed light on the enforceability of "non-compete" clauses, a.k.a. non-competition agreements. Courts do not always enforce these restrictive covenants, even if the parties understood what they were signing. Of the three restrictive covenants, courts are most reluctant to enforce non-compete clauses; compared to non-solicitation and confidentiality clauses, a stricter test is applied to determine whether a non-compete is enforceable...read more