What is a No-Solicitation Agreement?
Non-Solicitation agreements are restrictive covenants or employment agreements that restrict an individual’s ability to solicit a current employer’s customers or employees. Generally, non-solicitation agreements will prevent some or all forms of direct contact with the customers or employees. For example, a non-solicitation agreement may prevent an individual from requesting and communicating information to a customer while a former employee of a previous company . The purpose of the non-solicitation is to protect the company’s goodwill after an employee has left the company.
These non-solicitation agreements differ from a non-compete agreement. Non-compete agreements may prevent an employee from competing with their former employer. Non-solicitation agreements only restrict activities to prevent the solicitation of employees and/or customers. Non-compete agreements are typically broader in scope and may prohibit any reasonable business action by the former employee.
Legal Context in Washington State
One of the points of confusion is whether the agreement is enforceable in Washington. Although non-solicitation agreements are enforceable in Washington State between a (former) employee and an employer with some limitations as described below, the answer is not clear and the case law is sparse.
Washington courts have upheld non-solicitation agreements as an exception to Washington’s "general policy against contractual restraints on trade." See Demopolis v. Bafus, 179 P.3d 11, 17 (Wash. App. 2008) (citing Pioneer Indus. Corp. v. Home Indus. Corp., 152 P.2d 314 (Wash. 1944)). In fact, Washington courts will uphold a non-solicitation agreement so long as it is "reasonable under the circumstances," Barrie School v. Liko, 96 Wash. App. 316, 328, 979 P.2d 874, 881 (1999), and does not violate the Washington Consumer Protection Act. See Wash. Rev. Code § 19.86 et. seq.; see also Barrie School, 979 P.2d at 882 (holding that there was insufficient evidence to support the trial court’s finding that the restraint had an anticompetitive effect in the public marketplace). To determine reasonableness, courts should consider the "particular facts and circumstances" of each case. Paccar, Inc. v. Commercial Bank, 19 Wash. App. 1, 15, 573 P.2d 1346 (1978).
Recent legislative action may also indicate that non-solicitation agreements should not be considered reasonable where they specify a time period of greater than eighteen months. On March 25, 2019, the Washington legislature passed a bill amending Wash. Rev. Code § 49.62. The bill states that non-competition agreements are void and unenforceable if they are "longer than that necessary to protect the employer’s business interests [of] . . . disclosing trade secrets or sensitive confidential information, or inducing clients or customers to reduce or cease doing business with the employer." Id. On May 8, 2019, after the legislature passed the bill, Governor Inslee signed the bill into law, making it effective as of January 1, 2020. Id. The bills initial approval has caused speculation that all non-compete agreements, including non-solicitation agreements, with a term of longer than 18 months are unreasonable. While this may be true, the law specifies only non-competition agreements, not non-solicitation agreements or other forms of restrictive covenants. Thus, at this point in time, it is unclear whether the newly amended statute applies to non-solicitation agreements.
Essential Elements of a Non-Solicitation Agreement
Like all contracts, a non-solicitation agreement encompasses many key components that will be of utmost importance to ensure that you properly protect your business and employees from solicitation by current and former employees.
Scope: First, consider the scope of activity you are trying to prevent. If you have a concern about "secret" client lists, then that will be fairly easy to articulate. One simple way to do this is to say, "You agree not to solicit any of the clients you worked with or were given access to as an employee (or independent contractor) of this company." But scope can cover a lot of ground. For example, scope could mean "soliciting or doing business with a customer in the area." Because the scope of your non-solicitation agreement can mean so many things, it is important to be as specific as possible.
Time Restrictions: If you have taken the time to lay out the goals of your non-solicitation, you will likely also need to include time restrictions. For example, "for a period of six months after the termination of this Agreement."
Geographic Limitations: Sometimes, depending on your business, you might not want a former employee competing in the same town as you. Or, maybe you need it to extend to the city. This limitation should be stated clearly, but not overreaching. Some examples are a 50-mile radius, a certain county, a certain city, etc. It is important not to overreach with this clause, as courts could view this as overly restrictive.
Entrenchment and Barriers
In corporate employment agreements, as well as in some civil cases, non-solicitation agreements are oft enforced against employees. In Washington State, the standard for enforcement varies. In fact, the state supreme court has held that "there is no definite policy in this state against restraint of trade or prohibition of competition in employment contracts so long as the restraint is reasonable as to time and territory . . . ." Hansten v. City of Shelton, 120 Wn. App. 895, 898, 849 P.2d 6 (1993). On the other hand, Washington has also held that "'[c]ovenanted restraint of trade should be tested by a rule of reason, and be enforced only to the extent it is no greater than necessary for the protection of the covenantee.’ . . . [but] ‘for purposes of evaluating the enforceability of a covenant’. . . a court may not engage in a ‘fact-specific’ inquiry." Suchan v. Cowles Pub’g Co., 248 P.3d 991 (Table), 2011 WL 5290677 *4 (Wn. App.’); 18 see also. Reed & Northorp, Inc. v. Retirement Capital Funding, Inc., 310 F.Supp. 2d 1144, 1151-52 (W.D. Wash. 2003). In practice, however, courts will often hold some employer provisions as unenforceable or overbroad. In Allen Paper & Twine Co., Inc. v. Eagle Paper Ltd., 109 Wn. App. 75, 78, 34 P.3d 836 (2001), the court examined the reasonableness of a five-year restriction. The court found that the five-year ban on solicitation of any customer was overbroad. The court stated that the covenant would apply even to the "[f]ew customers that Plaintiff sold to that were not its active customers at the time that [the defendant] left Plaintiff" and did not deal directly with the defendant, and thus held that it was an "excessive restraint." Id. One area of practice where non-solicitation agreements might come up is in the context of an independent contractor, who may work with the business yet not directly employ the ex-employer’s full-time employees. See, e.g., In re M&M Snack Foods Corp., 7 B.R. 576, 579 (Bankr.E.D.Pa.1984) (emphasizing that clients and customers of a business are protectable interests of the business, and stating that the "essence of the business" is "potentially lucrative connections with clients and customers"). Relying on property law, the Washington courts have defined a principal as a "legally cognizable interest which may be the subject of a trade secret exclusive to the owner." Joeatchin v. Parke, Davis & Co., 233 Cal.App.2d 833, 843, 44 Cal.Rptr. 647 (1965); see Artistic Fashions, Inc. v. Quatzi, Inc., 674 F.Supp. 1050, 1053-54 (E.D.N.Y.1987); 17 C.J.S. Contracts § 410 (2004) ("A contract with a customer or other person to continue business in the future may constitute a property right enforceable by an injunction, provided the contract is reasonable and valid and is terminated by any wrongful act on the part of the defendant, in violation of the contract and to the plaintiff’s detriment."). As such, according to the Washington courts, a client or customer list developed over a period of years at great expense is entitled to protection from appropriation by another, even though the list was neither intended to nor actually done in secret." Allen Paper & Twine Co., Inc., 109 Wn. App. at 78. Larger businesses may find it hard to exclude potential employees or contractors based on such agreements. Nevertheless, while a business may be legally able to draft a broad non-solicitation agreement, the courts may treat them as overreaching and hold them invalid.
Advantages for Employers and Employees
Benefits for both Employers and Employees – Protecting Business Interests, and Career Mobility Issues
A non-solicitation agreement can be a useful agreement for both parties involved. For business, it provides a modicum of protection against your former employees enticing your clients/customers to follow them. Also, it allows you to hire and employ employees without worrying whether another company is going to be able to swoop in and hire them away from you .
For an employee, if you stay within the same industry, it gives you the assurance that you will be able to collect commissions and bonuses after you leave without wondering after every sale whether someone is going to challenge your right to collect.
A non-solicitation agreement can also provide you with peace of mind in starting your own business, purchase of a competitor or investment in another company. If you are in a very competitive industry with numerous rivals and a culture of risk, it would be safer to have a clean record that only one other business exists to compete against you, and neither of you is recruiting away others’ employees.
Illustrations and Precedents
Notable non-solicitation agreement case law includes Knight Packing Co. v. Roberson, a 2015 decision from the Eastern District of Washington. In that case, a heat treater employee went to work for a competitor and took a former employer’s records with him. The former employer sued him for breach of fiduciary duty and misappropriation of trade secrets. It also asked the court for an injunction that would prevent the new employer from hiring the former employee. However, the court sided with the new employer and the new employee.
The court pointed out that the noncompetition contract was not an unreasonable restraint on the former employee’s right to work. Contract agreements that are not unreasonable will not be considered invalid under public policy. Also, recent Washington law states that public policy includes protecting a party’s right to work. Because there was no evidence that the new employee solicited clients, the restraint of trade did not violate public policy.
In Thompson v. Am. Tobacco Co., a 2013 case in the 5th Circuit Court of Appeals, a plaintiff was prohibited from working for any company that sold, developed or manufactured smokeless tobacco products when her noncompetition agreement expired. Her employer also brought a lawsuit in Washington against her. Another Washington company subsequently hired the plaintiff, and the defendant employer brought a lawsuit. Ultimately, the employer lost because Washington courts are reluctant to enforce noncompetition agreements that have proven to be overly broad.
Best Practices in Drafting Non-Solicitation Agreements
Employers looking to draft a non-solicitation agreement for an employee or contractor should assume the duty to protect their business is more extensive in Washington State than in other jurisdictions. It is imperative to consult your employment lawyer to discuss the parameters of a non-solicitation.
First, the employer should select the appropriate classification for the parties. The proper classification can be complicated by Washington’s strong statutory prohibition on independent contractor misclassification and, typically, a company obtains a larger scope of non-solicitation protection from employees than from contractors. But while independent contractors cannot be misclassified, they may require non-solicitation (and non-competitor) protection that goes beyond what employees need. One option is a "contractor services agreement" that defines the relationship as independent, while providing appropriately restrained protection for both parties.
Second, Washington State prohibits non-compete agreements for non-compete sales representatives. Washington has a deeper, more expansive, policy of protecting employees than most states. For example, Washington courts have struck down an agreement because it was not labelled a non-competition agreement, even though it contained all of the same prohibitions. So, if a sale representative tries to avoid the legal protections of a non-compete by labelling the agreement a non-solicitation, the agreement still will be invalidated in Washington. Washington Revised Code § 49.62.030.
Third, an employer should carefully define the parameters of the non-solicitation agreement to ensure clarity of purpose and scope. The wording of the agreement matters for non-solicitation agreements , by requiring the employee to obtain written consent before soliciting a customer with whom the employee had contact while employed (or working with the employer as a contractor), an employer can extend the protection of a non-solicitation agreement beyond 18 months and more broadly. An example is: "During the term of this Agreement [or the Employment Term, as applicable], or for 18 months thereafter, [Employee Name] shall not solicit [Insert number] customers with which [Employee Name] had direct or indirect dealings while employed by [Employer Name], or with which [Employee Name] had contact in person or by phone or other means while employed by [Employer Name]. For purposes of this Agreement, to "solicit" shall mean to directly or indirectly facilitate or pursue a business opportunity with a customer, including, but not limited to, the use of email or social media."
Fourth, it matters when an agreement is signed, and in close cases, it may even matter who signs the agreement. I have seen a number of cases in Washington where agreements were signed after the employee began working, but a court found the new agreement to be un-enforceable based on the circumstances. Many companies hold an orientation session and require the employee to sign all agreements at that time.
Fifth, the two most important contractual clauses in a non-solicitation agreement are the choice of law and venue clauses. A Washington court will apply Washington law to the non-solicitation if (a) the agreement was signed in Washington, (b) the employee resides in Washington, or (c) the company is headquartered in Washington. Even for a single, Washington-based agreement, a Washington court will apply Washington law to the non-solicitation agreement and enforce it under Washington law, which may be uniformly more employee-friendly as compared to other US states.