Defining Non-Solicitation Agreements
A non-solicitation agreement between an employer and employee provides that, for a certain period of time and within a certain area or territory, the employee will not recruit the employer’s customers and/or existing employee base. Such an agreement serves the purpose of allowing employers to protect their relationships with their customers, clients, vendors, suppliers, other business partners, and current employees from actionable solicitation by their former employees. It may be used where a sale or transfer of the business is contemplated, or more commonly, when an employee separates from employment and the business wants to limit the former employee’s ability to recruit away its employees or customers for a specified period of time .
A non-solicitation agreement differs from a non-compete agreement because it does not have the same level of severity/quality of harm to the employer that a former employee might visit upon his/her employer. While a non-compete agreement can completely cut off the employer from competing with a former employee, a non-solicitation agreement only relegates the former employee to compete via business channels that do not involve solicitation of the employer’s either customers or employees because the former employee is prohibited from doing so. A non-compete agreement, on the other hand, would only prevent an employee from working or becoming involved with a business that directly competes with his/her former employer.
Non-Solicitation Agreements Under Massachusetts Law
In Massachusetts, "non-solicitation" agreements stand apart from non-competition agreements in that they are not subject to the same common law evaluation of reasonableness in time and area. There is, however, a de minimis requirement that, in order to be enforced, such agreements have a reasonable duration and purpose. There is no statutory precedent for non-solicitation agreements. Unlike non-competition agreements, there is no requirement that a non-solicitation agreement be supported by a legitimate business interest. It must merely be supported by consideration and entered into in the various employment contract contexts such as upon the sale of a business, new employment and continued employment.
The Massachusetts Supreme Judicial Court in UMA’s Food Ctr., Inc. v. Angerami, 442 Mass. 367 (2004), helped clarify the law relating to non-solicitation agreements. In Angerami, Angerami, a former employee and manager of UMA’s Food Center, Inc., (UMA) an independent Stop & Shop supermarket, executed a series of agreements with UMA. The language of the various agreements was similar in all regards except the terms of duration.
Under the various agreements, Angerami would only be prohibited from soliciting the current customers of UMA, meaning those customers with whom Angerami had contact, and employees, for a certain period of time, ranging from six months to two years, depending on which agreement was being enforced. Angerami continued to work for UMA for a time despite his entry into the agreements. UMA then terminated Angerami.
Eventually, following the termination of his employment with UMA, Angerami opened his own supermarket directly next door. Angerami approached and solicited several of UMA’s existing customers. Eventually, UMA filed suit against Angerami and moved for a preliminary injunction seeking to enforce the restrictions. The Superior Court, Suffolk County, allowed the motion, but later vacated its order because Angerami had pre-sold his supermarket and engaged in a complete cessation of the supermarket business.
UMA then filed a second motion seeking a preliminary injunction against Angerami. The Superior Court, Norfolk County, allowed the motion and ordered a preliminary injunction, finding the agreement reasonable on its face and in the public interest. The Court of Appeals reversed the decision and held that while it would examine whether some legitimate business purpose was behind the restriction, the Court would not look further.
The SJC granted direct appellate review. In its holding, the Court identified the language of the agreement in question, and stated, "the language is clear enough that it does not need construction." The Court went on to state that the contract was supported by consideration in that the two agreements were entered into in connection with Angerami’s employment as manager, and Angerami also received a special bonus upon the sale of either business. The Court stated that the key issue was whether the non-solicitation agreement relative to customer accounts violated Massachusetts public policy.
The SJC stated, We conclude that, while the public policy underlying restrictive covenants is the protection of the employer’s interest in not having its business and ‘good will’ disrupted, it is counterbalanced here by the public interest in the reduction of trade restrictions resulting from the restraint on free competition. In this case, even if we assume that the business interest that [the former employer, UMA] was trying to protect was significant and the non-solicitation provision was not broader than necessary to accomplish that purpose, nonetheless, there was substantial interference with the ability of the former customers of UMA and of [Angerami] to engage in trade and commerce on equal footing in the marketplace following Angerami’s decision to enter a competing business.
The Court noted that without the non-solicitation agreement, it is unclear how difficult it may have been for Angerami to solicit any existing customer of UMA.
The Court held that the non-solicitation agreement was unenforceable and in violation of public policy due to its effect of restraining free trade and competition. As the Court in Angerami noted, non-solicitation agreements are not the same as non-competition agreements and will be treated accordingly. Non-solicitation agreements will be treated more like traditional business contract disputes, rather than viewed through the strict policy evaluation resident with non-competition agreements. To do otherwise would elevate such disputes to the level of trial court isolationism.
Section 32B of the Massachusetts Uniform Commercial Code provides almost the same protection against overly restrictive contracts. Section 32B provides that "[a]fter an agreement is made, a court or other tribunal may make an order prohibiting the performance of the agreement, if it finds that grounds exist at the time of making the agreement for refusing specific performance or for granting of equitable relief."
Elements of an Enforceable Non-Solicitation Agreement
In order to be valid and enforceable, a non-solicitation agreement must have the following:
- (1) Consideration: As determined by a Massachusetts Appeals Court in 2002, consideration takes the form of a tangible benefit, such as money, stock, or stock options (if paid or granted pursuant to tangible benefit plans). Although a mere suggestion of a material career change, however momentary, is alone not enough to constitute consideration. Consideration also may include continued employment as long as there is a significant change in employment status. This is called "actual and real advancement." The change may be seen in the nature of the work, the responsibilities of the employees or through an entirely new job position. In such circumstances, a non-solicitation agreement may be enforceable even where the employment is at will and the agreement is signed after the change in circumstances.
- (2) Reasonable scope: A non-solicitation agreement must limit the scope of its prohibition to time, duration, and geographic location. This means that solicitations by employees to persons in competition with the company must, for example, only be made within a certain region of the state and not to individuals who reside out of state or who have never worked with the company. Further, in no circumstance, unless expressly agreed to, may the solicitation be for more than two years, which is the maximum period that courts in Massachusetts have upheld non-solicitation clauses. Even so, the applicable period is left to the reasonable discretion of the Massachusetts court.
- (3) Penalties: In the event that the solicitation does occur, the company must have a specified penalty as a consequence. The penalties may include the forfeiture of certain benefits. However, as with many things, some penalties may be necessary while others may be disregarded.
While these are the generally required elements to a non-solicitation agreement in Massachusetts, the courts may at times require additional elements that the parties themselves may not necessarily find relevant.
Upholding Non-Solicitation Agreements
As with other restrictive covenants, the burdens associated with enforcing non-solicitation agreements fall on the employer. Non-solicitation agreements are not favored by the law, and will be enforced in Massachusetts only if the employer could support a finding that the agreement was reasonable in time, scope, and territorial coverage. See Protec, Inc. v. Scott, 451 Mass. 482, 484 (2008); Whitinsville Plaza, Inc. v. Cotran, 376 Mass. 70, 76 (1978). The Massachusetts Appeals Court in Newton Crown Coffee Co., Inc. v. Vitale, 54 Mass. App. Ct. 399, 401 (2002), stated:
If such covenants are to be sustained, it is because circumstances exist which make streets and sidewalks, the ordinary and natural means of communication and the ordinary and natural repositories for economic commerce from which a resident of a former grantor’s territory could draw if he were competing for business.
Employees frequently raise the following defenses against non-solicitation agreements:
- Plaintiff failed to meet its burden regarding the existence of the non-solicitation agreement or its breach.
- Plaintiff cannot prove that the employee had access to trade secrets such that the non-solicitation covenant is necessary for the protection of legitimate business interests.
- The non-solicitation agreement lacks consideration and therefore is invalid.
- The provisions of the non-solicitation agreement are overbroad and therefore unenforceable.
- The non-solicitation agreement has no relationship to a geographic territory.
- Plaintiff has not shown that the non-solicitation agreement, with either its current geographic scope or shorter period of time, is reasonable.
Impact on Employers and Employees
The issues facing Massachusetts employees and employers from these newly indeterminate non-solicitation agreements are profound. Employers must be concerned that their former employees will be free to solicit their clients or employees after 1 year. While the new legislation makes the "reform" prospective only, many employers will have indefinitely unenforceable non-solicitation agreements. Employees will be able to argue that they do not have any binding obligations to refrain from soliciting, and may point to an irrevocable waiver of any and all such non-solicitation obligations as evidence of that fact.
Moreover, in any circumstance where an employer has only some good reason to prohibit solicitation, these new rules seem to assist the employee in resigning her employment to pursue her own interests in competition with those of her former employer. An employee may have the added incentive of being paid her equity or severance to immediately resign (rather than be "lost" under the at-will doctrine to a 2 year non-compete obligation), and some downside risk if the injunction is later determined to be valid . This is most evident where the employee has equity to collect, and sees no other path to compensation without the forced resignations that result in forgoing the prior equity grant. For many recently hired workers, the forcing of a resignation may be the best way to avoid what the employee considers an unreasonable restriction on employment.
In many cases, the employee’s refusal to resign only to "compete" after 1 year will create a perennial battle over the employee’s freedom from the non-solicitation agreement in the coming years in which the employee must succeed in having the non-solicitation agreement declared void. Ultimately, the ability to proceed with competitive conduct will be a war of attrition against the employer; the employer will have to repeatedly prove its business interests are justified by sufficient evidence to support an injunction, and in the process, the employee keeps the former employer tied up in litigation as long as necessary to discourage the employee from breaching the non-solicitation agreement.
Recent Case Law and Examples
Recent case law suggests that a non-solicitation agreement that extends post-termination does not allow a former employee to solicit potentially competitive business after he has left a company for some other employment opportunity. For example, in Recorded Books, Inc. v. Brennan, 112 F. Supp. 3d 91 (D. Mass. 2015), a federal court in Massachusetts evaluated a non-solicitation agreement that prohibited former employees from soliciting "any customer, client, supplier, vendor or other business partner" for a period of twelve months after termination. The complaint alleged that the employee entered into a non-solicitation agreement with his former employer but then "immediately began soliciting and servicing clients on behalf of competitors at his new company, including clients with whom [the former employer] did not have any contractual relationship."
The Court granted to the plaintiff (the employer) a temporary restraining order (TRO) and later permanent injunction against the former employee stopping him from soliciting other companies under the terms of the non-solicitation agreement. There are two reasons why this TRO has been an important warning to employers and employees:
The first reason is that this TRO is one of the few cases in which a TRO was issued against a former employee who actively engaged in competing business violations of a non-solicitation agreement. Under the circumstances of the case, it appears that the real reason the Court granted the TRO was to ensure that the plaintiff had time to uncover the full extent of violations and to protect the integrity of the evidence. However, it is still important that the Court took action to prevent further more harm to the plaintiff’s business from the defendant’s post-employment competitive activities.
The second reason is that the Court ruled that the non-solicitation agreement was enforceable even though it extended for one year post-employment. Although a non-solicitation agreement is not a non-compete and there is no implied reason that it cannot extend for a post-employment term, it is important that employers are aware that courts are still willing to enforce non-solicitation agreements for up to one year post-employment for some of the same reasons that they are more willing to restrict employees from competing with their former employers. As noted previously, courts are more willing to enforce non-solicitation agreements at least for a limited period after employment as a means to safeguard valuable company/business relationships. The enforcement of such agreements may prevent other employers from stealing the company business and interfering with the employer’s business relationships for a period of time that is reasonable under the facts of the individual case. It is important to remember that the prohibition on covenants-not-to-compete extends beyond restrictions on competing businesses and the restriction also includes preventing a former employee from soliciting the company’s clients, customers and business partners.
Creating a Non-Solicitation Agreement
With the importance of non-solicitation agreements in mind, there is a fair amount of art that goes into drafting them. This art comes into play in the context of balancing the employer’s interest in competitively protecting its business with the employee’s interest in being free to pursue a new job and relationships. Some general best practices when drafting a non-solicitation agreement include:
- Narrow the post termination obligations as much as possible. Either time periods should be short or the geographic limitations should be limited. Doing so will ensure that insufficient consideration does not undermine the agreement and it will make it more likely that a court will enforce it.
- Use narrow definitions to particularize who and what are covered by the agreement. An overly broad definition for persons or entities subject to the non-solicitation can render the entire agreement unenforceable.
- Make the agreement easy to read. If it is too lengthy, dense and hard to read, a court may reject the agreement on the basis of being unenforceable.
- Limit the number of agreements contained in the instrument. An employee should not be asked to sign one agreement that regulates his or her medical benefits, retirement plan, sexual harassment policy, and non-solicitation obligations. This is an invitation to have the agreement rejected for undue complexity.
Given the importance of non-solicitation agreements in protecting an employer’s relationship with its clients, customers or patients; intellectual property, trade secrets and information; and competitive position, they should be carefully drafted at the time a candidate is hired. Current employees who have not signed an enforceable non-solicitation agreement should be asked to sign a new one (and must receive fresh consideration for doing so).
Alternatives to Non-Solicitation Agreements
If non-solicitation agreements aren’t possible to enforce in Massachusetts, are there alternatives? Can a customer only agreement be enforced in Massachusetts?
We are frequently approached by clients who want a non-solicitation agreement with their employees. Generally, employers are concerned about employees leaving their business and taking clients/customers with them. An in-depth discussion about non-solicitation of customers agreements and the ins and outs of their enforcement can be found here. Massachusetts laws concerning non-compete covenants has changed but, in most instances, an employer still can require employees to sign a non-solicitation with customers agreement, which prohibits former employees (i.e. If non-competes are possible to enforce in Massachusetts, is there a workaround – some other form of agreement that will both be enforceable in Massachusetts and provide the same protection as a non-compete? In sharp contrast to the prohibition on non-competes in Massachusetts, there are many alternatives to an enforceable non-complete. In addition to a non-solicitation of customers agreement, the current law in Massachusetts appears to still allow for non-solicitation of employees – meaning that an employee can be prohibited from soliciting other employees of the company after they have left. One alternative for an enforceable agreement is a confidentiality / non-disclosure agreement. A confidentiality / non-disclosure agreement does not restrain trade so it does not need to be [narrowly tailored to industry or area] but the agreement must protect a legitimate business interest (e.g. trade secret, etc.). For a discussion of confidentiality / non-compete agreements, click here . Though non-solicitation of customers and non-solicitation of employees agreements may still fall under the new law’s definition of non-compete covenant were either of those entered into after March 8, 2013 those provisions would not be unenforceable if they contain the other new limitations imposed by the act. One alternative available to employers who want to protect their business interests is to have the employees sign confidentiality / non-disclosure agreements. These do not restrain trade therefore do not need to be [reasonably limited to industry or area] but may be enforced so long as they are limited to protect a legitimate business interest. For a discussion about what interests are considered legitimate, click here. There is however, if Massachusetts legislation considers restrictive covenants jobs restraints on proprietary information protection lawful, using either a customer or employee non-solicit as a means of protection may no longer be necessary, litigating enforcing those comes with not only the potential to loss, but also the litigation costs. Why not consider in your business taking another look at your trade secrets? Instead of non-solicits you may decide the greater protection rests in protecting your confidential information and trade secrets. See how this blog Entry discusses what is confidential and a trade secret and the steps you can take to protect both. In the end, the decision for how your business is protected rests with you and your legal team. Where your business and your interests are best protected is where you will likely land. In an era of increased scrutiny of restrictive covenants, Massachusetts businesses should consider other means of protecting their trade secrets and confidential information. Employers with trade secrets can consider focusing on if and how to protect that information. Practical steps to consider when drafting and implementing your trade secret protections are detailed in this recent blog post.