In our last Contract Corner, we discussed the general purposes, issues, and limitations of non-solicitation provisions. In this edition of our series, we review specific provisions that are frequently subject to negotiation with regard to these provisions.
- Term: Typically, the term of a non-solicitation provision lasts for the length of the contract and extends for some period of time thereafter. Like non-competition provisions, the length of time is scrutinized by courts; the longer the period of the restriction, the more scrutiny there will be.
- Solicitation vs. No Hire: In addition to a prohibition on solicitation, many non-solicitation provisions will also include a prohibition on hiring the other party’s employees. When it comes to enforcing a non-solicitation provision, it is much easier to police a no-hire provision. However, including a no-hire provision will draw more scrutiny that will require a showing of a legitimate protectable interest beyond just the stifling of competition to support enforceability.
- Exceptions: Exceptions to the non-solicit and no-hire prohibitions are frequently added to address concerns regarding the provisions. The most common exception excludes hiring based on either general advertising and/or an initial approach by the employee rather than a response to solicitation. A second common exception permits hiring following termination of the employee’s employment. This exception permits an employee who is terminated by the employer to be hired by the other employer despite the non-solicitation provision (this is an important exception when courts consider the anti-competitive aspects of the provision). With regard to employees who voluntarily leave, this exception raises the possibility that it could be used as a subterfuge to avoid the non-solicitation provision by disguising a direct solicitation as a voluntary resignation followed by a hire. Therefore, for voluntary terminations, a provision is frequently added that such employees can be hired only after a period of time (e.g., six months) after a voluntary resignation.
- Covered Employees: A frequently negotiated aspect of non-solicitation provisions is determining the specific employees who are covered by the provision. Non-solicitation provisions that apply to all of a company’s employees can raise enforceability issues. Such broad provisions do not necessarily correlate to confidentiality risks or risks of one party having inside access to the other party’s employees that provide the legitimate business rationale for the provisions. Therefore, the scope of the employees covered is typically limited to those employees who provide services directly to the customer or otherwise have confidential information that, in the hands of the customer, could prove detrimental to the service provider.
- Transition Issues: A final issue to consider is the impact of non-solicitation provisions on transition of services after the termination of a services agreement. To allow for transition of services, it is often important that certain employees continue to provide the services. On the other hand, the service provider will want to retain trained employees, especially experienced managers. Therefore, it is not unusual for the parties to negotiate a separate provision regarding permissible solicitation during a transition that includes limitations and exceptions different from those in the non-solicitation provision that applies during the term of the agreement or when there is no transition.
This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our previous Contract Corner posts on the Sourcing@MorganLewis blog for more on contracts, and be on the lookout for future posts in the series.