Dorsey’s Analysis of Quirky Question # 188, Enforcing Non-Solicitation Agreements
Quirky Question # 188:
Like many companies, we are in a highly competitive industry. We spend a lot of time training our sales employees to perform their jobs, at a considerable expense to our company. Consequently, we have all of our sales personnel execute a non-compete/non-solicitation agreement at the commencement of their employment.
Several of our employees have joined a company that we recognize is not competitive with ours. But, it sure seems like they are recruiting our other sales people to join them. A number of employees who have been friends for some time have jointly moved to this other company.
Do we have a legitimate claim based on the restrictions contained in the non-solicitation agreement? We have to stop the bleeding. This is especially true right now because our own company has been struggling (layoffs, declining stock price, etc.), so it probably isn’t too difficult to convince our employees that they might have a better future elsewhere. Anything we can do?
Maybe. Maybe not. Sorry for the equivocal response but we’d need more facts to provide you clear guidance. Let’s review a few basics of restrictive covenant law, which we hope will provide you some insights to assist you in analyzing this issue.
First, as you likely know, the law of post-employment restrictive covenants, such as a non-compete or a non-solicit, is dependent on state law. The enforceability of your employment agreements will be heavily influenced by the governing state law. Some states (e.g., California and North Dakota) repudiate restrictive covenants except in extremely limited circumstances. Other states enforce the agreements made by the employer and employee, despite the employees’ lack of bargaining power when the agreement is executed. Some states (approximately 17) have statutes that regulate this area. So, the first task is to determine what state’s law applies.
Second, as a corollary to the preceding point, the governing state law may be determined by the contract, assuming there is a choice-of-law provision in the agreement. But, even when there is a choice-of-law provision, some courts may not elect to enforce it. For example, if the employee lives and works in a state different from the “governing law” state specified in the contract, and if the court concludes that the public policies of the state where the employee works are inconsistent with the state identified in the choice-of-law provision, the court may choose not to enforce the contract provision. Of course, in the absence of any choice-of-law contractual provision, and in a context where the competing states have divergent legal standards, the determination of which state’s law will govern the contract’s interpretation will turn on a number of variables, including, for example: predictability of results; maintenance of interstate order; simplification of the judicial task, advancement of the forum state’s governmental interest; and application of the better rule of law.
Third, equally, if not more important than the determination of which state’s law governs the contract interpretation, is the language of the contract itself. You have pointed out your company requires your sales employees to execute a “non-solicitation agreement.” But, you have not described the language of that agreement. Whether your company has any chance of enforcing the agreement will depend heavily on its language. This can be broken down further into a few Goldilocks-like subparts.
Language Too Narrow: Some “non-solicitation” agreements are limited only to what the name of the restriction implies – soliciting. At times, companies will use a few synonyms for soliciting, such as prohibitions on “inducing,” “convincing,” or “persuading” the ex-employees’ former colleagues to resign their employment, or to join the ex-employees’ new employer. When this type of language is used, courts may elect to enforce the language literally, concluding that the employer chose to use language prohibiting only specific affirmative actions by the outgoing employee. Thus, if the former employee did not initiate the contact (i.e., did not affirmatively reach out to his/her former colleagues), the ensuing interaction between the parties was not proscribed by the employment agreement.
Language Too Broad: In contrast to the prior example, some “non-solicitation” agreements use language that is overbroad, sometimes ridiculously so. For example, some non-solicits list every imaginable type of interaction between the ex-employee and his/her former colleagues, regardless of whether proscription is linked to a legitimate interest of the employer. In these situations, the employer seemingly is prohibiting any interaction, even social interaction between two individuals who may have been friends for a protracted period. This type of language will provide the former employee with some persuasive arguments to challenge the validity of the agreement.
Another example of overbroad non-solicit language is when the employer includes broad prohibitions on activities “related” to soliciting, often prefaced by a “directly or indirectly” descriptor. Here, an employer might use language stating that a departed employee may not “assist in hiring” anyone who is a current employee. What does that mean? If the departed employee advised a former colleague to check out his new employer’s website, has he/she “assisted”? If the former employee advised a former colleague to get a resume in quickly, has he/she assisted? If the ex-employee provided a former colleague with some background insights into the new company, has he/she assisted? If the former employee provided the former colleague with insights into the individuals likely to conduct the interview of the applicant, has he/she assisted? In each of these hypothetical contexts, the so-called non-solicit seemingly encompasses conduct that is utterly innocuous and that an employer would have difficulty linking to a legitimate corporate interest.
Moreover, the problem is complicated when the ex-employee is in a managerial role in the new company, especially a senior role. Is that individual precluded from interviewing a former colleague? From offering an opinion on the applicant’s skill sets? From expressing enthusiasm about the applicant’s personal integrity or other characteristics? What if the applicant considers it important to meet with the individual who is likely to be his/her boss; in other words, interview the interviewer to determine whether this is a company he/she would like to join? Is this type of interaction prohibited?
When the language of the non-solicit is overbroad, for the reasons above or other reasons, another state-law- dependent issue comes into play. Some states do not permit equitable modification of the restrictive covenant. Other states allow courts limited flexibility to modify the contract language (the blue-pencil doctrine), but only if the modification can be achieved by striking offending verbiage without adding or creating other contract language. Still other states simply prohibit any judicial modification of inartfully crafted restrictive covenants, whether non-solicits or non-competes.
Language Just Right: It is possible to draft a non-solicit that passes legal muster (in states where restrictive covenants are not proscribed). In my view, however, there is not a one-size-fits-all approach. The language used must be linked to a legitimate corporate interest that can be easily articulated. This will depend on a host of factors, including the nature of the business, the position occupied by the restricted employee, the time and expense associated with training the employee (and/or his/her replacement), the employee’s access to confidential and proprietary data, and other considerations. Moreover, once appropriate language is drafted, the non-solicit still has to withstand the scrutiny to which any other restrictive covenant is subjected (adequacy of consideration, reasonable in terms of substantive restriction, geographic restriction and temporal restriction).
To summarize some of the key issues for you to explore:
- What state’s law governs?
- Does your contract contain a choice of law provision?
- Is there a conflict between the law of the state where the employee lives and works and the law specified in the contract?
- What is the specific contract language — what conduct is prohibited?
- Is the prohibited language linked to a legitimate interest of your company?
- If the language suffers from being overbroad, what flexibility do the courts in your state have to modify employment agreements?
In addition to these backdrop considerations, there are a few other issues worthy of consideration. One important factor you’ve identified is that your company has been struggling; you referenced the fact that your firm has experienced layoffs, and that the company’s stock price has declined. This raises the question of whether your ex-employees whom you suspect of soliciting your current employees resigned voluntarily or were laid off. While this may not be a dispositive factor in terms of how a court might interpret the non-solicit, it does bear upon the general equities and provide the atmospherics for the court’s analysis. Moreover, this issue highlights another aspect of the contract language. Some restrictive covenants specify that they apply regardless of the reason for the employee’s separation. Other restrictive covenants only apply when the employee resigns voluntarily.
Similarly, are the employees being solicited in jeopardy of losing their positions? Are they on a lay-off list? Might their departments be eliminated? Are any of them on performance improvement plans? Here, too, these background inquiries create atmospherics that could affect a court’s analysis.
Regardless of whether the employees you suspect of soliciting your employees left voluntarily or involuntarily, as you realize, it makes it much easier to persuade someone to leave your employ when a company is struggling. When employees are insecure about their future, when their friends are being laid off, when the opportunities for promotion appear bleak, when wages are flat or declining, the likelihood that employees might depart increases dramatically. When the alternative appears attractive, either by itself, or in comparison to the problems at your own company, the incentives for departure are increased.
Another observation you made in your question is that the employees who first left your company are friends with those who were recruited away. In some ways, this variable has the potential to complicate the argument that some inappropriate or wrongful conduct has occurred, simply because the individuals may have been interacting regularly. Courts recognize that co-workers, especially those with personal friendships, talk to each other. Invariably, topics of conversation include job satisfaction, future employment opportunities, compensation levels, and a host of other job-related subjects. Defining what is a permissible or impermissible subject of discussion in this context is difficult.
Finally, you note that your company and the organization your ex-employees have joined are not competitive. As a result, your non-compete restriction does not come into play. Many courts are loath to convert a “non-solicit” into a de facto “non-compete,” another problem you will have to overcome.
The bottom line is that non-solicitation agreements can be useful post-employment restrictive covenants that help protect a corporation against losing quality employees. Unfortunately, without more data, we cannot provide much insight into the validity or enforceability of the agreements your company is utilizing.
In general, non-solicitation agreements have to be carefully crafted and tailored to protecting the legitimate interests of the company. Far more effective than creating contractual obligations binding employees to a company, however, is creating a corporate environment that employees do not want to leave. As Jim Goodnight, the CEO of SAS, one of the country’s most successful software companies observed in a 2003 “60-Minutes” piece, “You know, I guess that 95 percent of my assets drive out the front gate every evening. It’s my job to bring them back.”
SAS has been extraordinarily successful in achieving its CEO’s vision (the company is often selected as the best company to work for in the U.S.). The ties that bind its employees to the company are not contractual in nature; they are grounded on more meaningful connections between employer and employee. Solve the problems that are confronting your company and we suspect the “bleeding” you referenced will diminish dramatically, if not stop altogether. Your goal should be to make your non-solicitation agreement irrelevant.