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Non-Compete and Non-Solicitation Agreements: Which is Better, and How to Make Yours Hold Up in Court

Companies often require new employees to sign non-compete and non-solicitation agreements.  What is the difference between them, how enforceable are they, and is one better than the other?

Non-Compete Agreements

A non-compete agreement prohibits an employee from leaving to go to a competitor, or to start a competing business, for a stated period of time after the employment relationship ends.  

When It Makes Sense

For some positions – senior executives and sales  – this makes sense.  Customer lists, proprietary technology, business strategy and trade secrets that they may possess are at the heart of many businesses.  

When It Doesn’t Make Sense

For many administrative, clerical, customer service or manufacturing employees, there is no particular information that they possess that would severely damage a company.

In addition, there is a growing belief that non-compete agreements are too restrictive and deprive employees of the right to earn a living elsewhere.  Some states such as California have held that non- compete clauses are unenforceable, and further, a former employee may sue their employer who tries to enforce it.  As there is no federal law in this area, it is up to state courts to decide whether the non-compete is enforceable in that state.

How to Create an Enforceable Non-Compete Clause

In general, courts have ruled that non-competes must be reasonable in scope to be enforceable.  Here is a checklist to make it more likely that your non-compete will be upheld:

___ Limit the non-compete’s time period – a one year limit is more likely to be upheld than 5 years.

___ Limit the geographical region that the non-compete applies to.  How large an area is reasonable depends on the industry.  If it is non-physical business this may be moot.

____ Define “competition” narrowly to include only direct competitors and/or starting a new business in the exact field.

Now let’s turn to non-solicitation agreements.

Non-Solicitation Agreements

A non-solicitation agreement is a legal agreement that an employee will not solicit a company’s clients or customers, for their own benefit or for the benefit of a competitor, upon leaving the company.

A non-solicitation agreement may also include a clause that the employee will not try to recruit other employees to leave when the employee leaves the company.

When It Makes Sense

A stand alone non-solicitation agreement protects what is most important – its customer list or pricing formula, for example – while sidestepping the more problematic non-compete agreement.

When It Doesn’t Make Sense

Back to California – the state Supreme Court has held that non-solicitation agreements are unenforceable.  In other states, they are generally enforceable as long as they don’t make it impossible to earn a living.

How to Create an Enforceable Non-Solicitation Clause

Here is a checklist to make your non-solicitation clause more enforceable:

____ You must have a valid business reason, i.e. protecting a valuable customer list, trade secrets, or the mass departure of valuable employees

____ The company must have a “valuable” customer, meaning having spent time, energy, and money establishing its customer database, and it must contain information that isn’t readily available to the general public.  You cannot just put together a list of potential customers that you have never done business with; or a list that is readily available from a Google search.  It must be meaningful.

____ You can’t prevent an employee or customer from leaving voluntarily.  This is, of course, a gray area and one most likely to be exploited by a departing employee.  You would have to prove that the former employee hasn’t solicited your employees or used your client information to get their business.

Which is Better for Your Business?

There are pros and cons to both types of agreements, which is one reason so many businesses just include both.

However, I think that the non-solicitation agreement really goes to the heart of what you are protecting – the company’s customers, trade secrets and valuable employees.  Trying to restrict your former employee’s ability to earn a living, even with a competitor, will become less and less enforceable.  There are exceptions to this, of course, but in general if I had to pick one, I would go with the non-solicitation agreement.  It is not perfect, but covers most of the bases.

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