Non-solicitation provisions must bear relation to employees' activities

Posted on March 23, 2009 by Robert Wood

 

A recurring issue in employee mobility cases is the extent to which a non-solicitation provision in an employment contract is enforceable. Typically, an employment agreement will contain a provision prohibiting post-employment competition, provisions prohibiting post-employment solicitation of customers and/or employees, or both. 

It’s not uncommon for a provision prohibiting solicitation of employees to apply to all of the employer’s employees. However, several Texas cases, including a recent one from the Beaumont Court of Appeals, have held that such provisions are too broad.

In Poole v. U.S. Money Reserve, Inc., No. 09-08-137 CV, 2008 WL 4735602 (Tex. App.—Beaumont Oct. 31, 2008), an employer filed suit against two of its ex-employees for, inter alia, violating their non-solicitation agreements. The agreements at issue prohibited the former employees from soliciting or attempting to take away “any existing or potential clients, customers, suppliers, businesses, and/or accounts of [the employer] . . .”

The trial court enjoined the defendants from soliciting any of the plaintiff’s customers. The plaintiffs then filed an interlocutory appeal, seeking a ruling that the injunction was overly broad.

The court of appeals held that the temporary injunction was void because the injunction order failed to state why injunctive relief was necessary (i.e., it failed to explain why the plaintiff would suffer irreparable harm absent injunctive relief). Under Texas law, a temporary injunction, to be valid, must state why irreparable harm would occur absent injunctive relief. Because the injunction in this case did not do so, the injunction was void.

In addition, the court of appeals held that the temporary injunction was overly broad. Specifically, the court held that a “restrictive covenant is unreasonable unless it bears some relation to the activities of the employee.” Because the non-solicitation provision prohibited the former employees from soliciting all of their former employer’s customers, it was too broad.  The injunction should have been limited to the customers with which the defendants themselves did business.

Moreover, the court of appeals held that the restriction on solicitation of potential clients was overly broad. The plaintiff argued that the defendants had access to its marketing and advertising materials, and that these materials informed the defendants of the identities of plaintiff’s potential customers. But the court held that the totality of evidence showed that the defendants, who were salespersons, were not in fact knowledgeable about the plaintiff’s marketing information. Thus, the restriction s pertaining to potential customers was overly broad.

 

OBSERVATIONS:

1.         For a temporary injunction to be valid, it is not enough for the facts to justify the granting of the requested relief. Rather, the wording of the injunction order must precisely detail why irreparable harm will occur absent the injunction. Failing to comply with this requirement will render the order void.

2.         To maximize the likelihood of enforceability, non-solicitation provisions (as well as non-compete agreements in general) should largely focus on the activities of the employee (e.g., the customers with whom the employee dealt).

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What Does "Solicitation" Mean?

Posted on September 28, 2007 by Robert Wood

Texas non-compete agreements frequently contain non-solicitation provisions, i.e., provisions that prohibit the employee, both during employment, and for a period of time thereafter, from soliciting the employer’s clients, employees, or both.  But whether a particular act or communication constitutes solicitation is not always clear.

A Massachusetts case decided a couple of years ago illustrates the difficulty in making this determination.  In that case, the following provision was at issue:

Nonsolicitation Covenant. For a twelve (12) year period commencing on the date hereof, Seller shall not, directly or indirectly, (a) employ or contact any person who is employed or engaged by the Company or in any manner seek to induce any such person to leave his or her employment or engagement with the Company. (emphasis supplied)

The court summarized the pertinent facts in the case were as follows:

Since selling her stock in January of 2001, Deborah Halpin has not been employed by anyone else or anywhere else, as she has worked at home taking care of her three children.  Subsequent to entering the covenant not to compete, Ms. Halpin has engaged in numerous instances of intentional social contact with several Quaboag employees with whom she is good friends.  Ms. Halpin has known one such employee for over twenty (20) years since they worked together in a racquetball club in Charlton.  The summary judgment record does not contain any evidence that Ms. Halpin's contact involved any business-related conduct or discussions.  In her deposition, Ms. Halpin stated that her communications were strictly personal and social in nature.  In response, the plaintiff points solely to the non-solicitation provision, arguing that it prohibits any and all contact, including social contact. (emphasis supplied)

The plaintiff contended that Halpin had violated the non-solicitation provision by having any contact, even though the contact was purely social in nature.  The court disagreed:

The words "no contact" in the agreement in question were used in the context of a non-solicitation agreement.  The term "solicit" denotes more than simple contact.  It consists of "an attempt to obtain something by persuasion, or to ask for the purpose of receiving."

An examination of the heading, "Nonsolicitation Covenant," contained in the covenant suggests it was intended by the parties to bar only contact of this nature. The non-solicitation provision applies only to conduct of a competitive nature when it appears within the context of an agreement such as the "Covenant Not To Compete."  There is no evidence that the conduct complained of has hampered Quaboag's stability or success in any manner.

If the contract language is read as the plaintiff suggests it means that the defendants were prohibited from engaging in any form of direct or indirect contact or communication, regardless of the nature of such exchanges, with any Quaboag employees for a period of twelve (12) years beginning on January 1, 2001.  Not even in the context of civil restraining orders issued to protect people from domestic violence under G.L. c. 290A is the prohibition of "contact" understood in such a strictly formalistic manner.

Based on the above considerations, there are no facts indicating the Deborah Halpin breached the non-solicitation provision of the covenant not compete.  She worked with Quaboag for approximately eighteen (18) years. As such, she likely established lasting professional and personal ties with employees in the Quaboag community. Ms. Halpin's deposition testimony indicates that as she understood the covenant, she could not contact employees or customers for the purpose of enticing them away from Quaboag or interfering with business operations.  The fact that Ms. Halpin's continued friendships and frequent social encounters could give her a competitive advantage in the future if she engaged in any of solicitation (of which there is no evidence in the record before me) is not enough to demonstrate a breach by Ms. Halpin.

As this case illustrates, courts can be reluctant to forbid employees from engaging in social contact with their friends (some of whom can be former customers or employees) when the contact does not involve soliciting for business.  Of course, social contact can involve solicitation for business—even if no business is actually discussed.  The key for employers is, make it clear in the agreement that you not only want to prohibit business contact, but also social contact.  And then be able to persuade a court that such a restriction has a legitimate business purpose.

Quaboag Transfer, Inc. v. Halpin, 2005 WL 937305 (Mass. Super. 2005).






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Texas Non-Solicitation Agreements Attorney: What Does it Mean to "Solicit"?

Posted on June 13, 2007 by Robert Wood

As all employment lawyers know, courts will enforce non-compete agreements only to the extent necessary to protect an employer’s legitimate interests in restraining competition.  However, courts sometimes view a provision restricting solicitation of customers much differently than a blanket non-compete restriction.

Non-compete agreements typically contain provisions prohibiting an employee from “soliciting or calling on” the employer’s customers after the employee is terminated.  Employers who have been parties to non-compete litigation know that proving solicitation can be difficult (in part, because the customers who have been “stolen” tend to take the side of the former employee).

But what does it mean to “solicit”? A Washington court defined it this way:

“`Solicit’ . . . means: `To appeal to (for something); to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving . . . .’”  By contrast, “[m]erely informing customers of one’s former employer of a change in employment, without more, is not solicitation.”

Thus, under this definition, informing your former employer’s customer that you have changed companies (which allows the customer to suggest continuing to do business with you) arguably does not constitute solicitation.  Conversely, calling the customer and urging him to do business with your new company arguably would.

Of course, there is no guarantee that every court will view solicitation in that way, and every case must be decided on its own merits, but this definition is helpful in understanding the difference between actively soliciting a customer and merely providing him with information.
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