Non-Solicitation Agreements Explained
In the most basic sense, non-solicitation agreements are contracts that restrict people’s rights to approach or communicate with clients, customers, co-workers, or employees of a business. Through these agreements, employers can prevent former workers from soliciting clients once they leave the company. These agreements typically come into play once a business hires a new employee and has them sign a contract. It is usually this contract that contains the specific terms of a non-solicitation agreement.
Many companies believe that enforcing non-solicitation agreements is vital for their success because when competition runs free , companies can lose business to their rivals very quickly. This can particularly be the case in industries that rely heavily on personal relationships, such as finance, legal work, and entertainment. Even within a company that sells products, an employee could leave and take a handful of key contacts with them, cutting off business from the company and potentially landing it with competitors. More broadly, without non-solicitation agreements, businesses may have difficulty retaining employees, as they could jump ship to your competitors without concern.
The Legal Landscape Under New York Law
The State of New York, unlike many other states, does not have a long history of case law or legislation with regard to non-solicitation agreements. The New York Court of Appeal, the highest appellate court of the state, has yet to render a decision on unenforceability of non-solicitation clauses.
Pursuant to Section 5-701 of New York’s General Obligations Law, contracts that restrain trade or commerce are void and unenforceable, except if: i) it is "in the form of a covenant by [the seller of a business] not to compete in that area of business activity;" or ii) it is "a provision in an agreement between two or more persons for the purchase and sale of a business or an interest therein…so long as the limitation as to time and area therein contained are reasonable."
Employers frequently attempt to contractually prohibit their employees from soliciting clients, customers or vendors after employment. Many employers believe these provisions protect their business interests and confidential and proprietary information. Nonetheless, New York Courts frequently have found non-solicitation clauses either void entirely or partially when: such clauses include a time frame over twelve (12) months; there are no geographical limitations; or when the affected party is an employee, rather than a business – despite the fact that New York law recognizes the contract between the employer and its employee as a business contract.
In GeoMetrix Data Systems, Inc. v. Dyncorp International LLC, the Supreme Court of New York denied a motion to enforce a non-solicitation provision, holding the clause unreasonable such that it was void entirely. The Court, citing to Section 5-701, stated that the non-solicitation clause was "overly broad, serving to completely preclude … [an employee’s] right to engage in their occupation," in violation of New York law. Moreover, the Court held a geographic restriction was unreasonable "because Defendants did not operate all across the globe."
In another case, L & L Wings Incorporated Partnership v. Patel, the Supreme Court of New York denied the plaintiff’s request to extend a temporary restraining order barring the employee from working for a competitor for a period of two months, which constituted a non-compete clause "since it would prevent … [the employee] from being employed in a similar business … for those two months. … [T]he statute requires that [such clause] be reasonable as to time and area." The Court cited to Loughlin v. W. Rock Finishing Co., in which the Appellate Division, and made clear that its "findings on the reasonableness of the time and area restrictions are for the trial court … Where the parties to an agreement are sophisticated, experienced business people, the courts demand that the scope of restrictions must be narrowly tailored to the actual needs of the particular business involved."
While the above cited cases demonstrate that courts will not look favorably on overbroad non-solicitation clauses, New York law remains unclear. It is possible that should the Court of Appeals decide on this issue, the application of Section 5-701 may vary.
Do Non-Solicitation Agreements Hold Up in New York?
Court’s analyze non-solicitation agreements in New York on whether they are "necessary for the employer’s protection and not unreasonably burdensome on the employee." BDO Seidman v. Hirschberg, 93 N.Y.2d 382, 388 (1999).
An employer would have an easier time enforcing a non-solicitation agreement if it is narrowly tailored to protecting the employer’s legitimate interests. For example when the employer is trying to prevent misuse of confidential information or preventing the employee from essentially stripping the company of its human capital. "Courts have consistently upheld non-solicitation by former employees that prevent… solicitation of current employees to leave." Spacey v. M.L. Gerson Co., 08 CIV. 2294(HB), 2008 WL 4467507, at *3 (S.D.N.Y. Oct. 1, 2008) (citing Haphin Realty, Inc. v. Gubbay, 100 A.D.2d 747, 474 N.Y.S.2d 67,69 (1st Dep’t 1984); Mandell v. Shortell, 70 A.D.2d 862, 416 N.Y.S.2d 692, 693-94 (1st Dep’t 1979).
"In analyzing the enforceability of restrictive covenants, New York courts view them in the context of the relationship of the parties, balancing between the needs of the employer to protect its business interests and the needs of the employee to earn a livelihood." BDO, 93 N.Y.2d at 388; American Broadcasting Cos. v. Wolfson, 74 N.Y.2d 392, 400 (1989). Courts seek to balance the employers stated need for protection with the nature and duration of the restriction. BDO, 93 N.Y.2d at 389; American Broadcasting, 74 N.Y.2d at 400. An employer’s needs and "public policy" are generally viewed through the process of an employer’s business. Spacey, 2008 WL 4467507 at *4 (quoting Marine Midland Bank v. Murkoff, 102 A.D.2d 984, 979, 479 N.Y.S.2d 190 (2d Dep’t 1984)); see also North Atlantic Instruments, Inc. v. Haber, 188 F.3d 38, 50 (2d Cir. 1999); Heine v. Helfand, 10 Misc.3d 746, 746, 800 N.Y.S.2d 493, 494 (N.Y.Sup. 2005).
Factors Affecting Enforceability
When determining whether or not a non-solicitation agreement is enforceable in the New York courts, the key factors to take into consideration are reasonableness, duration, and geographic scope.
Reasonableness:
A non-solicitation agreement must be reasonable in order to be enforceable. If the employee can demonstrate that the non-solicitation agreement is restrictive of their opportunities to earn a living, it will likely not be enforceable. However, it can be argued that doing business with a former employer’s clients instead of seeking out new business from different clients has become a common practice in many industries. Courts do not like when the terms of a non-solicit agreement keep an individual from doing something that is widely deemed as reasonable business practice. Despite the sometimes-high threshold for what is reasonable, it is still possible for a non-solicit agreement to be enforced if it is broad enough in scope so that the agreement does not prevent an employee from doing what would otherwise be known as a reasonable business practice.
Duration:
The duration of a non-solicitation agreement is another important factor to be considered by a court in order to determine if it is enforceable. Courts look favorably upon agreements with a shorter duration than longer duration. Even popular non-solicit periods of six months and one year are sometimes found unenforceable against former employees. Different courts throughout the State have different approaches when determining the enforceability of a non-solicit agreement with regards to duration.
Geographic Scope:
The scope of a non-solicit agreement is arguably the most important factor a court will take into consideration when making a determination as to its enforceability. Similar to the findings when analyzing a non-compete agreement, courts are skeptical of non-solicit agreements if they feel that the geographic scope is broader than the recruiter’s territory or sales area. Non-compete agreements are slightly different in the sense that courts tend to view those as serving a legitimate purpose when they reach as far as an area that is outside of that individual’s territory but is not competitively sensitive.
Recent Court Decisions and Examples
Non-solicit agreements, like non-competes, have been long fodder for legal challenges and litigation. These covenants have generally been subject to the same legal analysis as their better-known cousins, the non-compete.
In response to this trend, the New York State Legislature, through passage of N.Y. Gen. Oblig. Law 5-331, has changed the playing field. Effective January 1, 2016, an employer that chooses to enter into an agreement with an employee that restricts the employee’s ability to compete or solicit clients of the company is required to provide the employee with: (1) advice to consult with an attorney before signing the agreement; (2) a fifteen (15) business day period within which the employee may revoke the agreement; and (3) a written statement that sets forth the nature of the agreement, and specifies the time period and geographic area subject to it. Additionally, the law provides that any non-compete entered into between an employer and its employee on or after June 1, 2016, will not be enforceable if the employee earns less than the median average in New York state. For 2016, that amount is $75,344, which means that the vast majority of employees in the state of New York are exempt from these types of restrictive covenants. However, if paid on a salary basis, only the amount earned personally by the employee counts, not income generated by the employer through the work of the employee.
While this issue is still developing, there are some leading New York cases on the matter. In a case involving a former employer suing her independent contractor recruit, the New York Appellate Division held that a non-solicitation agreement between a former employer and a former employee is enforceable if reflected by a well-drafted agreement that protects the business interests of the employer. Oben v. Deniz , 59 A.D.3d 616 (N.Y. App. Div. 2009). In this case, the former employee had recruited former clients of her employer to his new firm in violation of the non-solicitation agreement. The appeals court ruled that "the business interests of the [employer] were reasonable protected by the 18-month duration of the no-solicitation clause, which allows [the employer] to re-establish its business and reputation." Id. at p. 619. Accordingly, the court affirmed the lower court’s decision to grant the plaintiff’s request for a preliminary injunction against the former employee.
While the Oben court did not explicitly outline its traditional blue pencil analysis, we can assume that the court applied the same test used in competition cases — whether the scope of the covenant is greater than necessary to protect the legitimate interests of the employer.
In Retirement Plan for Employees of the City of New York v. Dweck, 181 Misc. 2d 364 (N.Y. Sup. Ct. 1999), the court analyzed a five-year female employee non-solicitation agreement but declined to enforce the covenant because the restrictions were deemed too broad to be reasonable. The five year restriction statewide (about 20% of the geographic area of the state) was deemed too inclusive. The first line of the opinion offers guidance: "The courts of New York will not enforce restrictive covenants unless there is a genuine need for protection against the unscrupulous." Thus, if the employer could demonstrate that the employee in fact developed confidential information and that it needed to be protected against the employee using that information, the covenant might have been enforced. It distinguished the long duration of this restriction but indicated that a 12 month restriction is reasonable. The court declined to "guess" at a reasonable amount.
What Employers and Employees Should Know
For employers, the following best practices should apply when drafting non-solicitation agreements:
• Tailor the restrictions to your legitimate and protectable interests. You are more likely to succeed in the enforcement of the agreement if it is limited to the employee’s geographic territory/responsibilities and duration of employment with the employer.
• Avoid "covenants not to compete" in a non-solicitation agreement. If you have legitimate interests that warrant a restriction on an employee’s competitive activities, have a separate covenant not to compete.
• Clearly identify your customers, clients, accounts or employees. Clearly defining this information in the agreement will enable you to quickly pick out who has been solicited at any given time.
• Use standard or consistent contract language. Your employees will interpret the parameters of each agreement the same way if they have the same basic language/form.
• Ensure that your employees have knowledge of the terms of each agreement. This means giving your employees a copy of the agreement and resending a copy in the event you hire a new employee who has followed the former employee to a new company. This will help you enforce your rights post-employment.
When an employee is asked to enter into a non-solicitation agreement, he or she should consider the following:
• What should I ask for in return for signing a non-solicitation agreement? According to New York law, non-solicitation restrictions are considered to be "no greater than are necessary to protect the employer’s legitimate interests." If you are offered such an agreement, consider asking for something greater than you are receiving. This is especially true if a prospective employer asks you to enter into a non-solicitation agreement as a condition of employment. What is in it for me?
• How long is my term of employment? Often, the period of restriction and the duration of your employment go hand in hand. The longer your term of employment, the longer the period of restriction. If you are asked to enter into a non-solicitation agreement, consider whether the term of restriction is appropriate. In addition, it is advisable to amend your employment agreement to extend the cap on your term of employment.
Alternatives and Additional Safeguards
As indicated above, New York will not enforce most non-solicitation agreements or provisions. Therefore, businesses can consider the following alternatives and additional protective measures:
*A non-compete prohibiting competition in the same industry or line of business is enforceable in New York if the employer has a legitimate reason for imposing the restriction, such as protecting its customer relationships, secret information or goodwill.
*An agreement prohibiting a former employee from doing business with the employer’s customers, clients or potential customers is also enforceable, but only if it is limited to the type of business the former employee was engaged in during employment and if it does not preclude the former employee from working anywhere in his/her industry. (Be aware that even this type of non-solicitation agreement is at risk of being challenged under New York law) .
*Confidentiality or proprietary information agreements – used to protect confidential information about internal business operations, trade secrets, development efforts or research – are enforceable in New York. These agreements may also be used to restrict a former employee’s ability to tell or share information after the employment ends with the employer’s customers, clients or potential customers.
*(Note: Federal privacy laws may also apply depending on the type of information an employer seeks to protect through a non-solicitation provision or agreement.)
Finally, as a last measure, a non-solicitation provision can be coupled with other types of restrictive covenants. For example, a combination of a non-solicitation provision and a non-compete agreement is typically more likely to be upheld than either agreement alone.