Generally speaking, non-solicitation agreements relate to either customers or employees (with the latter type often called “no-poach” agreements). These types of agreements are most often seen as part of the contracts signed when a business is sold, and the principal employees will not join the buyer or as part of asset purchase agreements where the acquired-from businesses will continue operating. However, non-solicitation agreements are exclusive to business sale/purchase circumstances. Let’s take a look at these different types.

Customer-related non-solicitation agreements

For customer-related non-solicitation agreements, the key obligation is an agreement by one party to not contact or solicit customers of the other party for the purpose of getting the customer to buy from a competing company or otherwise diminish or curtail their business relationship with the other party. One can readily see why this might be an important agreement in the sale of a business. Imagine you buy a small business where there is a strong working relationship with customers by the “key” employee of the selling business. Without a customer non-solicitation agreement, the seller’s key employee can set up a competing business with the buyer, call up his or her former customers, and quickly redirect all of those customers to his or her new business. For obvious reasons, the purpose of buying the business is defeated without a non-solicitation agreement. The same would be true if the key employee of the seller was allowed to call up the customers and just direct them to buy from another competing business.

Are they enforceable?

In some jurisdictions — like California — customer-related non-solicitation agreements are not enforceable under any circumstances. In other jurisdictions, such agreements can be enforced if they are narrowly tailored (like other forms of non-compete agreements). Generally, there must be a short term to the agreement (a year or two), a limited geographic scope and a business purpose limitation. All of these provisions must be reasonable for the circumstances of the sale

Customer-related non-solicitation agreements that are not related to the sale of a business are often not enforceable.

Employee-related non-solicitation agreements

For employee-related non-solicitation agreements, the obligation is not to solicit or induce employees, independent contractors, etc., from terminating employment with the other party. In a business purchase circumstance, this has obvious importance if the key executive employee of the selling business will continue operating and tries to “hire-away” key employees that are transferring to the buyer. Again, the main purpose of the business acquisition/asset purchase can be defeated if employees are hired away to work for a newly created competing business.

Are they enforceable?

In many jurisdictions, employee-related non-solicitation agreements are NOT enforceable. This prohibition is based on several factors. First, employee-related non-solicitation agreements are clear restraints on trade and hinder the free movement of labor, potentially impacting prevailing wages. More importantly, employee-related non-solicitation agreements impose serious impacts on parties — employees — who have not signed the agreement, did not agree to the restrictions, have no method of challenging the agreement and may not even know the agreement exists. All of these violate basic principles of fairness.

To the extent that an employee-related non-solicitation agreement will be considered enforceable, such an agreement will have to be very narrowly tailored and attendant to the sale of a business.

Contact The Business and Merger and Acquisition Attorneys at Revision Legal

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