Non-Competition and Non-Solicitation Clauses

It is common for employers to have employment contracts with employees that have non-competition or non-solicitation clauses. The idea is to protect your business and customer base from being taken by a former employee.  These clauses are either powerful tools or useless ink.

A non-competition clause typically restricts the employee from being involved in a competing business within a certain geographical area for a specific period of time.  A non-solicitation clause is less onerous and typically restricts the former employee from soliciting business from your customers for a certain period of time.  Some employers also use a non-dealing clause, which attempts to prevent the former employee from even accepting business from customers of the employer.

These clauses limit the former employee?s ability to earn income.  Accordingly, the courts have developed guidelines on them and will only enforce them if they are reasonable.

They must be reasonable in terms of scope, time and space.  ?Scope? means the extent of the activity that is restricted. What exactly is the employee not allowed to do?  ?Time? means the length of time that the restrictions are in force and ?space? means the geographical area in which the activity is restricted.

If you go too far in any one of these areas, the courts will not enforce the clause.  The courts will not rewrite the clause to make it less restrictive, it will simply strike out the entire clause. ?Less is More? is the term I use to describe a good restrictive covenant. The less you restrict, the more likely it is that a court will uphold the clause. 

Courts recognize that an employer has a proprietary interest in its customers.  The flipside of that principle is that an employer does not have a proprietary interest in people who are not actual or potential customers.  Accordingly, a clause which prohibits the employee from dealing with people with whom they did no business might be unnecessarily broad and unenforceable.

Many of the cases turn on the fact that the employee had a personal relationship with the clients, making it highly likely that the clients would go with the employee.  In those cases, a clause which limits the employee from seeking out clients with whom the employee had dealings would be sufficient.  Such limited clauses have been held to be valid. 

Non-dealing clauses can be a problem.  Many employees do not know the identity of customers with whom they have not had dealings.  For example, an insurance agent likely only knows the identities of the clients that were served by the agent.  If the agent leaves, how is she supposed to know from whom she cannot accept business?  Is the employer going to provide the departing employee with a customer list so the employee can comply? I highly doubt it!

Recently, the courts have held that a non-competition clause will not be enforced if a non-solicitation clause is sufficient.  A typical non-solicitation clause would prohibit an employee from seeking out your clients, or, more specifically, the clients with whom the employee had business dealings.

The bottom line: don?t be too greedy in your restrictive covenants or you risk having one that is unenforceable.