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What Is a Nonsolicitation Agreement? | Explore Law Firms and Legal Advice

Recently, there’s been a focus on agreements that limit employees’ ability to leave one job for another such as noncompete and nonsolicitation contracts.

While the Federal Trade Commission has proposed a ban on noncompete contracts, the Department of Justice and other agencies have been looking at another type of restrictive contract: nonsolicitation agreements. Their scrutiny suggests that both employers and employees should also be taking a closer look at these provisions.

Types of Nonsolicitation Agreements: Customers and Employees

There are two types of nonsolicitation agreements. The first category of nonsolicitation agreements describes when one party – either an employee or another company – promises that it won’t pursue a company’s customers, according to Charles Graves, a partner at Wilson, Sonsini, Goodrich & Rosati and adjunct professor at University of California College of the Law, San Francisco.

The second type is when a party promises it won’t go after a company’s employees.

In practice, contracts may include both types of nonsolicitation provisions (and other restrictive covenants). But each has unique consequences and, when challenged, courts take different approaches to their analyses, Graves says.

Application of Customer Nonsolicitation Agreements 

Many employees may assume that a customer nonsolicitation agreement only relates to clients in the same field. But nonsolicitation agreements can apply to any sales pitch to former clients, and they aren’t limited to those on behalf of their former employer’s competitors, Graves says.

For example, if a computer salesperson quits her job to sell office supplies. Under a broadly written nonsolicitation agreement, she might not be able to sell supplies to the former employer’s clients, even though the employer isn’t in the supplies business.

Application of Employee Nonsolicitation Agreements 

Employee nonsolicitation agreements (also referred to as co-worker nonsolicitation agreements) prohibit attempting to hire a company’s employees for another company.

However, these agreements have broader application. Even suggesting someone leave a toxic work environment or ask for a raise may run afoul of a nonsolicitation agreement, Graves says.

Nonsolicitation Agreements Are Distinct From Nondisclosure Requirements

Imagine the following: An employee is under both a nondisclosure agreement and a nonsolicitation agreement when they quit. They don’t take confidential materials when they leave, but, at a new job, they collect information from their former employer’s website to create a customer list.

Is the employee liable to their former employer? Yes, probably.

Many employees mistakenly believe that, since they used publicly available information to find their old employers’ customers, they haven’t breached the nonsolicitation agreement, Graves says.

However, whether or not someone maintained their commitment to protect trade secrets or proprietary information is irrelevant to the nonsolicitation contract. The two agreements have entirely separate bases of liability, he says.

How Courts Review Customer Nonsolicitation Agreements 

Similar to how they evaluate noncompete agreements, courts typically require these contracts to have reasonable restrictions relating to their timeframe, geographic limits and relationship to an employer’s business, Graves says.

Most customer nonsolicitation agreements restrict former employees for one year. Yet when it comes to the geographic limitation, larger companies often assert their customer bases are “national.” Courts typically approve this claim and negate this factor, he says.

Regarding the nexus between the employer’s business and the contract, courts do enforce that requirement (so that a salesperson might be allowed to pitch clients office supplies), but there’s no guarantee.

How Courts Analyze Co-Worker Nonsolicitation Agreements

Courts often fail to articulate why they uphold these agreements, according to Graves.

Some courts draw upon trade secret law as their rationale, but the two lines of law are separate, and they don’t provide any solid justification for combining them. Other courts have upheld co-worker nonsolicitations because these contracts protect companies’ goodwill with their customers.

The real motivation appears to be that they’re a vestige of medieval law when employers could not entice laborers to leave their bosses and work for them. And courts have continued this tradition without evaluating its validity in the current labor marketplace, Graves says.

Nonsolicitation Agreements May Violate Antitrust Statutes

In recent years, the U.S. Department of Justice began bringing criminal charges against some companies, alleging that these defendants broke federal antitrust laws by conspiring with other companies to use “no-poaching” agreements. Some states have initiated similar actions.

To date, federal prosecutors have been losing these cases. The first criminal case relating to a no-poach agreement, United States v. DaVita, was tried in April 2022, and the jury acquitted the defendants. Then, a year later, a court acquitted defendants in another similar case.

While nonsolicitation agreements do not appear to automatically violate antitrust law, and courts are setting a high bar, these agreements could be illegal if companies use them to divide a labor market.

Companies Should Be Scrutinizing Contracts in Light of the DOJ Cases

Many people may think of nonsolicitation agreements as being ancillary to an employment agreement (for example, restricting employees’ actions after they’ve left a company). But what about when companies have a joint venture, so they temporarily share employees and resources? DaVita and the related cases suggest that these collaborations may be more complicated than they have been in the past.

For example, government contractors often provide governmental agencies with staffing – people with specialized expertise or services the agencies don’t normally have, says Dawn Stern, DLA Piper partner and co-chair of the firm’s government contracts practice.

However, given the size of these contracts, government contractors regularly submit joint proposals, pooling their employees for specific contracts, even as they compete with each other for other projects. Therefore, these team members will often include nonsolicitation provisions as part of their joint venture agreements.

In an essay, Stern and colleagues explored how the DaVita court suggested that companies cannot use nonsolicitation agreements to divide up the labor market. However, nonsolicitations may be acceptable in that type of context – because there, the nonsolicitation agreement is part of a larger competitive process, rather than companies’ attempting to limit competition. However, if even companies don’t face criminal charges for such an arrangement, they still might have civil liability for it.

In light of this, companies should no longer be including pro forma nonsolicitation provisions in joint ventures and other collaborative contracts. Instead, they should tailor nonsolicitation provisions to the specific contracts at issue, limiting the type of work, relevant customer and time periods, Stern says.

Companies should also review form contracts since boilerplate agreements that don’t usually receive much review may include problematic provisions, she says.

The Future of Nonsolicitation Agreements

As employers and employees alike should be paying attention, and aware that the provisions’ enforceability may soon change.

For those who still think these restrictive covenants are needed, Graves’ personal view is that they should look to California, which doesn’t allow either form of nonsolicitation agreement but has the world’s fifth-biggest economy, in part, because customers and employees both get to choose what they want.

Sarah Goldberg
Sarah Goldberg

Sarah is a seasoned financial market expert with a decade of experience. She's known for her analytical skills, attention to detail, and ability to communicate complex financial concepts. She holds a Bachelor's degree in Finance, is a licensed financial advisor, and enjoys reading and traveling in her free time.

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