An Overview of Non-Solicitation Agreements
Non-Solicitation Agreements are a common type of restrictive Covenant in Employment Agreements. Non-Solicitation Agreements prohibit prior employees from contacting their former employers’ customers or clients to solicit business either for themselves or for anyone else.
Roughly speaking, a Non-Solicitation Agreement works like this: an employee signs a contract containing a promise not to do something anymore (in this case to not solicit former customers or contacts of the former employer). If the employee breaks that promise by, for example, soliciting the former client of his former employer for the purpose of engaging in business, he will be in breach of the non-solicitation clause that he signed and the former employer will be entitled to an award of damages against the former employee .
The parties can agree on what damages are going to be caused in the event of a breach, but that agreed upon amount must be a reasonable approximation of the likely harm anticipated from the breach. There must also be an actual correlation between the breach of the non-solicitation agreement and the resulting harm. That is, if a former employee was terminated and a new customer came to his old employer as a result of his solicitation of the new customer, that former employee cannot be held liable for breaching the non-solicitation agreement if the new customer, in fact, never did any business with the former employer as a result of the breach.
A covenants not to solicit clause is a common addition to an employment agreement that will be enforced under the correct circumstances. However, if it is too broad or contains language that is too ambiguous, it will be rendered unenforceable by a court.
Applicable Law in New York
In New York, restrictive covenants are analyzed under a reasonableness standard based on the totality of the circumstances of the factual situation. New York courts have historically been more skeptical of non-compete and non-solicitation agreements, tending to enforce them only in extreme circumstances. New York is noted for its particular hostility toward covenants not to compete. Courts in New York "do not look kindly" on them and do not enforce them "unless . . . there is an absence of any other means to attain [the employer’s] purpose."
In examining the enforceability of these restrictions, New York state courts apply a balancing test, weighing the employer’s legitimate interests in protecting its business against the hardship the restriction will impose on the employee and the public interest in limiting the restriction’s expansiveness.
Several New York statutes also impact the enforcement of restrictive covenants. For example, section 6801 of New York’s General Business Law (GBL) prohibits an employer from seeking or receiving information about the previous or current services of a prospective employee or from soliciting the former employer of an employee being hired. An employer who receives information or hires a prospective employee in violation of the statute may not attempt to enforce a non-compete or non-solicitation agreement against the employee. Section 6801 is similar to the California law prohibiting employers from hiring employees away from other employers, which has resulted in a rule of per se unenforceability of non-compete agreements. While New York courts have not expressly held that a violation of this statute would result in per se unenforceability of a non-solicitation agreement, the overlap between section 6801 and Section 16600 supports this conclusion. Section 226-a of the GBL mandates that any contract requiring any employee to refrain from disclosing the amount of his or her wages to other employees shall be null and void.
New York has also enacted a statute that nullifies non-compete agreements made by domestic workers. New York’s Labor Law Section 196-d makes a "non-compete agreement" negotiated at the time of hiring with a domestic worker illegal as contrary to public policy. Courts in New York have defined a "non-compete agreement" to include any contract or clause that prohibits employees from obtaining employment after termination of their employment relationships.
Standards for Enforceability
The analysis conducted by New York courts to determine the enforceability of a non-solicitation covenant (like the one considered in Crescent Elec. Supply Co. v. D’Amato), involves "balancing the employer’s interest in protecting itself from competition by former Employee-defendants against, on the other hand, Employee’s interests and the interest of the general public in free competition" (see BDO Seidman v. Hirshberg).
New York courts apply the following criteria to determine if a restrictive covenant is likely to be enforceable:
For an agreement to be enforceable, it must be "reasonable in time and area and not harmful to the general public." The area of restraint includes any geographic location in which the employer does business at the time of the employee’s termination. The covenants also must be "no greater than necessary to protect the legitimate interests of the employer." If the employee can demonstrate that the agreement is "overly broad," the court may refuse to enforce the covenant (see BDO Seidman v. Hirshberg). Thus, for example, the court may decline to enforce a provision that prohibits an employee from soliciting employees of the employer anywhere in the world.
In addition, if the employee is "an at-will employee, the trial court may decline to enforce a non-compete provision that is patently unreasonable" (Acordia of New Jersey, Inc. v. Ingram).
Frequent Obstacles to Enforceability
Enforcing a Non-Solicitation Agreement within the Realm of New York Employment Law Presents Certain Challenges. Typical Defense Arguments Employed by Employees are as Follows:
- First Steps: The employer has not sufficiently established a protectable interest.
- Scope of the Restriction: The geographical reach of the restriction is too broad.
- Scope of the Restriction: The restriction is too broad as to the type of services and products.
- Scope of the Restriction: The timeframe is too long.
- Scope of the Restriction: There was unclean hands or inequitable conduct in connection with the restriction.
- Scope of the Restriction: The restriction unfairly hampers the plaintiff in reaching certain customers and effectively makes the defendant the only employee available to service the plaintiff’s productions or products because the plaintiff sold only through its employees and not outside salespeople.
- Scope of the Restriction: The scope is unenforceable because the plaintiff is a leading competitor in this market and the agreement has the effect of allowing the plaintiff to monopolize that market.
Recent Jurisprudence
The New York State Supreme Court decision in BDO Seidman v. Hirshberg recognized covenants not to compete as valid and enforceable under New York law. Significantly, the Hirshberg decision also upheld an employer’s right to restrict soliciting customers and employees after the employee left employment even if there was no express non-solicitation clause in the employee’s contract. Moreover, with the court adopting a three-part test for determining the enforceability of non-compete and non-solicitation restrictions, the court established a new standard for such agreements which focused on the legitimate interests of the employer and the extent of restriction on the employee.
To focus the courts more specifically on the interests and the inconvenience to the employer in enforcing the non-compete, New York courts have referred to the reasoning in A-P Facilities, Inc. v. Porcarelli et al. In A-P Facilities, a facilities management company sued two senior employees for violating their non-compete agreements by making arrangements with their clients to continue working at the same facility after resigning and quitting A-P. The New York Supreme Court refused to enjoin the former employees from providing the services to the removed clientele because the court viewed the financial losses as insufficient and the harm to A-P’s business as relatively slight by comparison to the effect of depriving the former employees of their livelihood and their ability to work in their field for the duration of their non-competes.
Without explicit language or even a specific clause addressing the subject, New York courts have interpreted existing non-compete provisions as precluding former employees from soliciting former co-employees. In Rohling v. LSC Assoc. LLC an office-clerk signed an employment agreement in which he agreed to refrain from disclosing any confidential information. During his employment with New York Silver, Co. LLC ("Silver"), Rohling was "occasionally exposed to (and assisted in preparing) chemical samples that, in turn, were submitted to [the plaintiff] in the normal course of business." The industry custom practiced by New York Silver and its competitors required employees to sign non-disclosure agreements as a means of protecting chemical formulas which label the products in an identifiable manner. Under this custom, Rohling’s employment agreement was understood to prohibit solicitation of other New York Silver employees . Rohling chose to leave his position with the company to join the LSC Associates LLC ("LSC") and recruited three of the four laboratory managers whom he had supervised at New York Silver in his new position. The Supreme Court of New York ruled the non-compete was valid and enforceable although the language did not mention the soliciting of other employees. The court reasoned that since Rohling breached the agreement by working with his former co-employees to establish LSC, the absence of specified terms was immaterial.
The Supreme Court also evaluated the situations presented in Diamonds, Inc. v. Yadidi and New Heights Academy Charter School v. School Solutions Services, LLC. In Diamonds, plaintiff Diamonds, Inc. provided consulting services for the diamond and jewelry industries nationwide, which included both retail and wholesale services. One such bridal division client, Stanley Jewelers sent two senior executives to New York to train and develop the Diamonds consulting program and its use of Diamonds’ proprietary computer system Diamond X. Diamonds claimed that after the two executives returned to New Heights Academy Charter School to train their staff, notwithstanding their pre-employment agreement with Stars, they induced Stanley to bring its bridal division business to Stars and not Diamonds. Diamonds sued for breach of the non-solicitation clause of the consulting agreement between Diamonds and the consultants. The United States District Court for the Southern District of New York held that the non-solicitation agreement was enforceable despite being general, because it only restricted the solicitation of Diamonds clients who were introduced to New Heights Academy Charter School while they were still under contract with Diamonds.
The American Bank Note decision from the Supreme Court of New York has been cited by other courts in New York State with respect to the enforceability of a covenant not to compete. The opinion from New York Justice Faber sets forth the protective language that a New York court may find necessary to render a non-compete or non-solicitation enforceable. The court discussed the two types of legitimate interests: inter-company and intra-company. The American Bank Note decision widely is regarded as having set forth the standard which New York will apply in evaluating the legitimacy of a covenant. New York courts now look to the greater degree of effort expended by the employer to protect the interests associated with a particular noncompete.
Employer Tips
We have outlined considerations that are essential for the drafting of non-solicitation agreements that will be enforceable and tips that employers may find helpful when drafting a non-solicitation agreement. Employers can maximize their chances of drafting an agreement that is likely to be found enforceable by New York state courts by: (1) ensuring that such agreement is no broader than necessary to protect its legitimate interests; (2) focusing on protecting customer contacts, rather than wide-ranging protections that might extend to third-party vendors, suppliers, etc.; (3) avoiding making purely incidental contact with customers a basis for enforcement; (4) ensuring that the time period of the restriction is no more than 6 months (and that a longer period can be justified); (5) reviewing the non-solicitation agreement with employees before they start their employment; (6) reviewing the agreement with the employee again if he/she has had interaction with customers before or after his/her employment begins; (7) building protections against solicitation into other agreements; and (8) continually reviewing existing non-solicitation agreements to ensure that they are up to date.
Concluding Thoughts
In conclusion, the enforceability of non-solicitation agreements in New York will always depend largely upon the particular facts and circumstances of each case. As discussed above, courts will not enforce a non-solicitation provision broadly and will only enforce a non-solicitation provision that either identifies the former employee’s specific customers and clients or is limited in scope, such as only prohibiting the former employee from soliciting other employees to leave their jobs or from soliciting a particular person or subset of people . That said, non-solicitation agreements are generally enforceable in New York as long as they are properly tailored to protect the interests of the employer. Failure to follow the rules that have been laid out by New York courts, however, can lead to an unenforceable individual non-solicitation agreement or a blanket prohibition against employee non-solicitation under an employee handbook. Accordingly, you should always consider seeking legal guidance when drafting non-solicitation agreements or employee handbooks, which can help avoid the aforementioned pitfalls.