Posted in Blog, Commercial Litigation, Employment Law by

By Joseph G. Ballstaedt
801-365-1021
[email protected]

Usually, a non-solicitation agreement (or a non-solicit) is a written agreement signed by an employee that prohibits the employee from soliciting—or reaching out to do business with—the employer’s clients and customers after the employment relationship ends. A non-solicit can also refer to an agreement that prohibits an employee from soliciting or enticing an employer’s employees to join a different or competing business. In addition to employees, independent contractors often sign certain types of non-solicits. Although related, non-solicits are different than, but often signed in conjunction with, non-compete agreements (also known as post-employment restrictive covenants or covenants not to compete). They are also often signed in conjunction with nondisclosure agreements and confidentiality agreements.

In Utah, are non-solicitation agreements enforceable? While generally enforceable, some non-solicits may not be, but this depends on the facts and circumstances surrounding each non-solicit. As discussed in more depth below, to be enforceable, a non-solicit must generally attempt to protect the employer’s legitimate business interests, such as the employer’s clients, employees, and trade secrets. A non-solicit usually cannot be used to prevent general competition in a certain industry. Because non-solicits are almost always focused on preventing a former employee from benefitting from a company’s client base and its employees (both of which are almost always legitimate interests that can be protected), non-solicits are much more likely to be enforced than broad non-compete agreements, which often impermissibly attempt to prohibit an employee from engaging in general competition that does not directly harm the employee’s prior employer. So, in short, because a non-solicit usually protects an employer’s legitimate business interests (rather than preventing competition), they are generally unenforceable. But again, this is not always the case.

This article discusses two different types of non-solicits, some legal guidelines that govern whether non-solicits are enforceable, and a few other ideas, principles, and benefits pertaining to non-solicits.

Two Types of Non-Solicits: Client Non-Solicits and Employee Non-Solicits

Generally, there are two types of non-solicitation agreements, which are both discussed below: 1) client non-solicits, which usually prevent an employee from soliciting a former employer’s clients and 2) employee non-solicits, which usually prevent an employee from soliciting a former employer’s employees.

  1. Client Non-Solicits.Most employers invest great time, energy, and resources in developing and maintaining a strong client base, and for that reason, many employers require their employees to agree not to solicit or do business with those clients once the employee moves on to a new job. This interest and motivation for requiring employees to sign client non-solicits makes sense. A significant amount of goodwill often exists between an employee and a customer, and if the employee were able to start or join a competing business and then solicit the former employer’s customers to that new business, the former employee would effectively transfer the employer’s clients to the new business. (While some feel this is healthy business competition, others consider this to be a form of theft.) For instance, a dentist employee may develop hundreds of relationships with patients, and the dentistry company who hires the dentist may require the dentist to sign a non-solicit that states that, if the dentist employee leaves, he or she cannot solicit or do business with the dentistry company’s patients for a certain period of time, perhaps a year or two. This restriction helps keep the patients with the dentistry company. Because the dentist with whom they developed a relationship cannot ask them to come to his or her new dentistry practice, the patients are more inclined to stay put. So, the non-solicit protects the goodwill of the original dentistry company.
  1. Employee Non-Solicits.Similarly, employers invest great time, energy, and resources to acquire and retain good employees. To help keep those employees from leaving, employers often require all their employees to agree not to solicit employees to different or competing businesses—or from otherwise interfering with the employees’ relationship with the employer. Imagine a circumstance where a project manager for a construction company oversees a crew of a dozen or so laborers and then decides to start his or her own construction company. If there were no employee non-solicit in place, the project manager could simply start a new company and ask all the employees he or she used to manage to quit and join the new company. Perhaps he could entice them to come by offering a slight pay increase. This solicitation, if successful, would potentially devastate the former employer’s construction company—or at least create a significant hardship. An employee non-solicit helps protect an employer from such dangers.

Elements of a Valid Non-Solicitation Agreement

In Utah, a non-solicitation agreement is a “restrictive employment covenant.” To be enforceable, such covenants must be (1) supported by consideration, (2) negotiated in good faith, (3) reasonable in location and in time, and (4) necessary to protect the goodwill or other legitimate interests of the business. Related to this last factor, non-solicits are often treated similarly to non-competition agreements, which cannot be designed to prevent general competition and cannot be enforced against an employee engaged in what is called a “common calling.” Each of these factors is discussed briefly below.

  1. Supported by Consideration. Under Utah law, any contract must be based on consideration, a factor that is generally present in most non-solicit agreements. Consideration is a fancy legal way of saying that a benefit is exchanged between the employer and the hired employee. In most cases, the employer agrees to hire an employee and pay a wage or salary in exchange for the employee agreeing to perform certain services and sign an employment agreement. That agreement usually contains the non-solicitation provisions at issue. Yet, even if an employee signs a non-solicit well after being hired, consideration still likely exists—in the form of continued employment. “If you don’t sign this non-solicit,” the employer may state, “you’ll need to find a new job.”
  1. Not Negotiated in Bad Faith. What constitutes bad faith depends on the facts of each case. If an employer intends to fire an employee but has the employee sign a non-solicit and then fires the employee a short time later, that conduct might constitute bad faith. Also, if an employer hires an employee by making promises about the job that are never fulfilled, that also may be bad faith. For instance, the employer may promise to promote the employee to a key position after a few months, and if the promotion never occurs because the employer never intended it to occur, perhaps the non-solicit would be unenforceable based on being negotiated in bad faith.
  1. Reasonable in Location and Time. A non-solicit must be reasonable in the location where the solicitations cannot occur. This location factor is usually more relevant to non-competes that may, for instance, broadly prohibit competition anywhere in the state—or anywhere in the country or even the world. But the fact that a non-solicit is limited to the employer’s clients and employees—and by implication where those clients and employees are located—generally means that the location is no broader than necessary to protect the employer’s interest in those clients and employees.
  • How long can a non-solicit last? Like other factors, this depends on the facts of the case. Although non-competes under current Utah law can only be for a year after the employment relationship ends, non-solicits do not have a hard cap. In the non-compete context, courts have explained that restrictive employment covenants should last only as long as needed for an employer “to consolidate its good will in order to withstand any competition.” Applying this to non-solicits, it may be reasonable and enforceable to prevent a former employee from soliciting clients until a new employee can adequately replace the former employee. For instance, in the dentist example above, the dentistry practice may be able to prohibit a former dentist from soliciting his or her former clients for a period of one year, an amount of time that would allow the dentistry practice to schedule the next six-month checkup and develop a relationship with a different dentist at that practice.
  1. Protecting Legitimate Interests. A court will probably determine that a non-solicit is enforceable only if it is aimed at protecting legitimate business interests. However, like the previous factor, this factor is a bigger issue in analyzing non-competes, which far too often sweep more broadly than is necessary to protect legitimate business interests. Legitimate interests include protecting a company’s trade secrets, its goodwill and relationship with clients, and its investment of time and money into employees. By their very nature, non-solicits seem to be aimed at legitimate interests, not general competition. For instance, a non-solicit signed by an employee dentist would probably be limited to prohibiting the dentist from soliciting the clients and employees of his or her former employer. It would not restrict a dentist from competing generally in the dentistry industry. The employee dentist could provide dentistry services in the dentistry industry at a general, competitive level, but he or she may not be able to benefit from former clients or build his or her practice by recruiting other employees from his former employer.

Also, an employer probably does not, under Utah law, have a legitimate interest in prohibiting certain types of employees from engaging in solicitations. Under Utah law, a non-compete signed by a person engaged in a “common calling” is not enforceable. Some courts have applied this factor to non-solicitation agreements. A common calling is a job that requires an employee to perform services that are not special, unique, or extraordinary. The best example in Utah is a salesman that has little or no knowledge of confidential information, receives little training, and performs tasks that are not unlike the job tasks of other salesman. So, a non-solicit might not be enforceable as against an employee engaged in normal and standard sales jobs, or something similarly normal.

Enforcing Non-Solicitation Agreements

What happens if a former employee violates a non-solicit? Regularly, employers seek help from a court, asking the court to enter an order the prohibits the former employee from continuing to engage in conduct that is a breach of the non-solicit. This type of order from a court is called an injunction. Even if the employer does not seek or obtain an injunction, as part of litigation, the court can enter a judgment against the employee requiring him or her to pay the employer for any damages caused by the solicitations. Usually, these damages are the lost profits of the business. However, these types of losses can be difficult to prove, and courts usually won’t force an employee to pay speculative or uncertain damages.

Also, there may be a provision in the non-solicit agreement that awards attorney fees to the winning party. So, if an employer sues an employee and successfully shows that the employee breached a valid non-solicit and caused damages to the employer, the employer would have a strong case that the employee must pay all the employer’s attorney fees, in addition to other damages such as lost profits. These attorney fee damages may be greater than the lost profits or other damage to the business (and are much easier to prove). Conversely, if the employee either shows that he or she did not breach the non-solicit or cause any damage to the employer through a breach, the employee has a great claim to repayment of any attorney fees spent to defend the employer’s claims.

Deterrent Effect of Non-Solicitation Agreements

A non-solicit agreement has a strong deterrent effect on former employees. They will think twice before engaging in conduct that might harm a former employer, such as attempting to solicit or do business with the former employer’s clients or enticing the former employer’s employees to take a new job. Even if an employer does not ever intend to enforce a non-solicit due to the costs of litigation, it is often a wise provision to include in any employment agreement. The fact that the non-solicit agreement exists may keep the employee in fear of doing anything that could be perceived as a breach of that agreement.

Help with Non-Solicitation Agreements

The information above does not address every aspect or nuance of non-solicitation agreements. It is always helpful to discuss the unique fact and circumstances of your business or employment with an attorney who has experience with non-solicits and their enforcement. I am happy to help and offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at [email protected].

joseph-g-ballstaedt

Joseph G. Ballstaedt
801.365.1021
[email protected]