Keys To Non-Solicitation Agreements In California

What Is A Non-Solicitation Agreement?

Non-solicitation agreements, also known as a non-solicitation of customer contracts, are not quite the same thing as non-compete agreements. A non-solicitation agreement prohibits your former employee from using the list of clients and customers that they built while working for your business in order to entice them to work with them now that they have their own business. These types of agreements are only enforceable for a limited amount of time (in California , no more than one year) and only if they are reasonably limited concerning the term and trade area. If the non-solicitation agreement is too broad, it can potentially end up doing more good than harm and may be invalidated.
Your non-solicitation agreement should be quite clear on the language. When properly drafted, your agreement will explicitly state that the employee will not encourage any of the clients to work elsewhere or leave your company. The primary reason companies utilize non-solicitation agreements is that they want to retain their clients when their employees decide to leave.

Applicable Law In California

Non-solicitation agreements in California must comply with the state’s laws and regulations regarding the enforceability of contractual restrictions in employment agreements. These laws and regulations greatly diminish the extent to which employers can bind employees to maintain confidentiality and choose not to compete with their former employers. While generally California employers can terminate employees "at-will," neither state law nor California courts permit the enforcement of non-compete provisions against employees. There is no provision in the California Business and Professions Code that allows private employers to prohibit their employees from competing through non-compete provisions – i.e., California prohibits non-solicitation at the time of offer, when employees are hired and thereafter on an ongoing basis.
California’s Business and Professions Code Sections 16600 through 16607 expressly invalidate contracts or agreements whereby anyone is precluded from engaging in a lawful profession, trade, or business. The remedies for violation of any of these provisions include a cause of action for damages or for injunctive relief, or both. Violations of Sections 16600 and 16601 can be enforced under Sections 16602 and 17203 by (1) profits earned from the sale of a product competing with a former employer or (2) for damages pursuant to the amount of money that would be sufficient to prevent further future violations. As to time restrictions, a contract may provide for non-competition through the extent of the period wherein confidential information or trade secrets are used by an employee. Invalid as to time restriction would be any contract whereby a former employee competes against a prior employer indefinitely. Further, Sections 16601 and 16602 only apply to contracts pertaining to (1) partnerships, inclusive of joint venture (16600) partnership dissolutions (16601), or the dissociation of a partner (16602), and (2) the sale of a business or its assets (16600).

Enforceability Of Non-Solicitation Provisions

Business owners should be aware – even in California, courts are willing to enforce non-solicitation clauses against former employees. But California employers face a unique challenge that those from other states do not as it relates to enforcing these clauses. In California, the employer, and not the employee, has the burden of proving the circumstances which justify the enforcement of the contract, and that includes the reasonableness of the restraint. And California courts will only enforce them if the circumstances justifying it also pass the reasonableness threshold.
Most companies use some type of non-solicitation clause in their employment agreements. These provisions provide that for a certain period of time following termination of employment, the employee agrees not to interfere with certain aspects of their employer’s business. Non-solicitation agreements may address solicitation of customers and have the effect of so-called anti-piracy, that is, preventing a former employee from poaching an employer’s clients or customers. Another type of non-solicitation clause addresses current or former employees, restricting their right to recruit or solicit co-workers to join the former employee.
California has addressed the issue of non-solicitation agreements with several important decisions over the year. The general rule for non-solicitation agreements is that they "must be narrowly drawn to protect the employer’s legitimate business interests." (Dowell v. Biosense Webster Inc., 179 Cal. App. 4th 564 (2008).
As discussed previously, generally these agreements are disfavored in California, unless they are reasonably tailored to protect the employer’s legitimate business interests (Dowell v. Biosense Webster, Inc. (2008) 179 Cal.App.4th 564, 579). As a starting point, California prohibits any agreement that restrains a former employee from engaging in a lawful profession, trade, or business. (Bus. & Prof. Code Section 16600). However, there are several statutory exceptions to this rule, including in pertinent part, in addition to trade secrets, the protection of trade secrets, where the employer has a protectable business interest. (Bus. & Prof. Code Section 16601 and 16602).
To be enforceable under these exceptions, the court must find that the agreement does not impermissibly limit competition with a former employee’s former employer. (DT Residential, a SoCal v. RealData Leads, (2016) 2 Cal.App.5th 374). Broad prohibitions that preclude an employee from working in any capacity for any business that competes with the employer are not valid and will not be enforced. See, e.g., Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564 (2008) (non-compete clause that applied to employee who developed or sold products, and therefore broadly prohibited the employee from working with any competitor was invalid on its face); Edwards v. Arthur Andersen, LLP, 44 Cal. 4th 937, 964-965 (2008) (prohibiting employees from working for any entity that competes with former employer invalid and unenforceable). Rather, they must be sufficiently tailored.

Typical Terms And Provisions

As outlined below, various restrictions are commonly found within non-solicitation agreements, including the definition of what "employees" and/or "contractors" applies, the duration and geographic scope of the agreement, various "nonsolicitation" restrictions, the prohibition of "raiding" or "poaching" current employees, and the inclusion of a time-limited "interim advisory clause."
Definition of Employees and/or Contractors:
Historically, non-solicitation agreements frequently defined "employees" to include independent contractors. The trend, however, is to exclude independent contractors from non-solicitation agreements unless the employer has a legitimate business interest in prohibiting the solicitation of its independent contractors.
Geographic Scope:
Industry employers have the burden of proving that the geographic scope of a non-solicitation agreement is reasonable. Challenges to the geographic scope of even the most common industries include "burdensome travel" by employees or contractors outside the confines of the geographic territory set forth in a non-solicitation agreement.
Duration:
Generally, the duration of a non-solicitation agreement has been at least one year, but there has recently been a significant push to enforce non-solicitation agreements of two years or longer. Whether two-year non-solicitation agreements are enforceable in California (or in any jurisdiction) requires careful consideration of various factors.
Nonsolicitation Restrictions:
As a threshold matter, upon termination of employment, how long can a former employee or contractor have contact with a customer before being restricted from soliciting that customer pursuant to a non-solicitation agreement?
In addition, after the non-solicitation term expires, can former employees, contractors or affiliates communicate with targeted former customers without breaching a nonsolicitation agreement?

Potential Legal Issues

Another potential pitfall arises when an employee is possibly soliciting a former employer’s clients, but the employer hasn’t actually issued to the former employee a cease-and-desist letter. A formal request that an individual cease solicitation or communication to a former employer’s clients can mitigate the latter’s risk of litigation related to a non-solicitation agreement. The existence of a cease-and-desist letter can constitute circumstantial evidence of prior, contractual obligations (see Why Does It Matter? above), and noncompliance can be used in court as evidence of that former employee’s knowledge of such responsibilities.
Another potential challenge to an employer’s right to enforce a non-solicitation agreement occurs when the former employee works for or with a company that is independent of the former employer’s business. Non-solicitation agreements are legitiate when they protect the legitimate business interests of the former employer. Such interests include, for example, a former employer’s trade secrets, confidential information, financial investment/relationships with clients, and specialized training for employees. But a non-solicitation agreement may not always be enforced if it inhibits fair competition. An employer may have a non-solicitation clause in their California employment contract with employees , but that provision might not be enforceable if a former employee is competing against the former employer, but is not expressly soliciting its clients for his or her new employer. There is a legal distinction in California between a "non-solicitation" and "non-competition" agreement (see the discussion in this guide regarding Non-Competition Agreements and their Limited Legality in California). Inquiring whether a former employee is or is not soliciting clients is an important consideration for California employers.
California courts have invalidated provisions from non-compete agreements deemed overly broad and in violation of the statutory prohibition against covenants not to compete. The California Court of Appeal held in AMN Healthcare Services Inc. v. Aya Healthcare Services Inc. that an employer’s ability to sue for unfair competition under California Business and Professional Code Section 17200 was not imposed on employees to refrain from competing with their employer. Rather, Business and Professions Code Section 17200 is meant as consumer protection legislation aimed at the public at large. An action for unfair competition can be maintained for acts that are unlawful, unfair, or fraudulent in nature and such acts can be filed as independent causes of action.

Recent Cases And Court Rulings

California courts have had their share of experience interpreting and enforcing non-solicitation agreements over the past few years. While some courts have shown a willingness to enforce these agreements, other courts have dealt them potent blows, causing many practitioners to rethink their approach to drafting non-solicitation agreements.
In Pioneer Electronics (USA), Inc. v. Dorel Industries, Inc., 2010 U.S. App. LEXIS 15031 (9th Cir. July 20, 2012), the Ninth Circuit was faced with two non-solicitation agreements: an employment agreement and a settlement agreement. The employee was an executive of a consumer electronics company who had entered into the employment agreement with his employer and subsequently left the company to work for a competitor. The employment agreement prohibited the employee from working for a competitor where the employee "directly or indirectly induce[d] or attempt[ed] to induce the business relations, including but not limited to, customers or suppliers" of the company. The court held that this type of non-solicitation agreement is a non-compete agreement that violated California law, and therefore could not be enforced even notwithstanding the fact that the employee agreed to it. Interestingly, the enforcement of this agreement violated fundamental policy of California, and therefore could not be enforced even though the agreement was entered into while the employer had its principal place of business in a foreign country. Id. at *15. Another interesting wrinkle in this decision was that, while the court found that the employee had breached the employment agreement as a matter of law, it went on to find a genuine issue of fact as to whether the violation was wilful and deliberate so as to justify rescission. The court apparently thought that the language "directly or indirectly" was ambiguous and that the ambiguity was not resolved by the employer’s subsequent handbook provisions which clarified the scope of the non-solicitation provision such that the employee could not have been wilfully and deliberately violating it, as a matter of law.
In contrast, the California Court of Appeal recently dealt a blow to a company in Tuxis Technologies Company v. Mark Henry, 2012 Cal. App. LEXIS 356 (June 29, 2012). The court determined that the language in the employee’s non-solicitation covenant was not broad enough to prevent the employee from soliciting former customers and former employees. The agreement prohibited the employee from "soliciting, inducing, or otherwise attempting to cause any employee, consultant … of [the employer] to leave or terminate his, her, or its employment or engagement with [the employer] in order to become an employee, independent contractor, or consultant of any other person or entity." It was here that the court said the language was simply not broad enough. The court held that it was not necessary to consider the public policy issue of enforcing a non-compete when the non-solicit agreement was not written broadly enough to prevent the employee from taking prospective customers and employees. The court then added that the delineating the scope of a non-solicit agreement could be accomplished without violating California public policy, by making in applicable to former customers and former employees.
Further highlighting the importance of well-drafted non-solicit agreements, are the facts of another case decided this year involving an employee who worked for a competing company. In MicroTechnologies L.L.C. v. Dunn, 2012 U.S. Dist. LEXIS 90138 (July 2, 2012), the employee was an officer and shared holder in his employer’s corporation. Prior to his employment the employee signed a shareholder agreement that prohibited him from soliciting his employer’s customers for three years after he left its employ. His employer later revised his shareholder agreement to prohibit the employee from soliciting his employer’s employees as well. The California federal district court held that to the extent the employee’s use of his employer’s confidential information was a consideration when the employee shared the shareholder agreements to his new employer, his new employer derived no competitive advantage. The import of this case is that if an employee is going to join a competitor of the employer, the employee should not be able to successfully avoid his non-solicitation obligations simply by changing employers.

Drafting Techniques For Compliance

It is essential for employers to draft non-solicitation agreements with an eye towards compliance with California law. Employers should craft these agreements carefully to avoid the pitfalls of overbroad or overly restrictive language. This section offers guidance on how to do that.
Employers should use clear and precise language when defining what specifically is encompassed by the agreement. Vague definitions may be struck down by a court as unenforceable. For example, a case involving a non-solicitation agreement at the heart of Fitzell v. Ceres Media Am., L.P. illustrates this point. In that case, the court invalidated a section of the agreement that sought to prevent the former employee from soliciting any employees that currently worked for the company. The court found that this provision was overbroad because it could have been interpreted to cover more employees than those who reported directly to the employee in question. Employers should also ensure that agreements are drafted carefully so as to have the smallest possible geographic scope necessary to protect company interests. While California law does not invalidate agreements with overbroad geographic scope, courts have repeatedly warned against them.
The duration of the restrictions is another area that should be carefully drafted. Employers should work with their counsel to decide if they need to include a specific limitation in the temporal scope of the agreement. California courts have affirmed the legality of non-solicitation agreements with broad temporal scope but have noted such agreements should generally last no longer than two years. California law does not require that these agreements have a fixed duration.
Finally, while California law is not as stringent as other jurisdictions on the issue of consideration required to support the agreement, it is still wise to include specific consideration provided to the employee under the agreement. Helpful considerations can be things like additional salary or other direct or indirect compensation.

Alternatives To Non-Solicitation Provisions

Beginning in the early 1980’s, California courts began to hold that some non-solicitation agreements were unenforceable.
For example, in Golden v. California Emergency Services Authority, 159 Cal.App.3d 315 (1984), the California Court of Appeal held a provision which stated that an employee could not accept a position with a competitor when he/she left employment with his/her former employer was unenforceable in California. According to the court, this "restraint on a former employee’s right to accept employment with another employer is unreasonable."
Thereafter, California courts continued to issue rulings holding various forms of non-solicitation agreements to be void. There are, however, some legal and practical sound alternatives to non-solicitation agreements.
Confidentiality Agreements If an employee is privy to confidential information, then an employer may want to consider implementing confidentiality restrictions.
The rationale for allowing these sorts of restrictions is that employers need to protect their legitimate business interests. Just as non-solicitation agreements were held to be void by our courts for being overbroad restraints in many situations, confidentiality agreements are a more reasonable way to ensure that proprietary and confidential information remains confidential and secret.
For example, an employee who works as a sales representative for a retail furniture store is given access to the stores’ customer list . She has been with the store for 5 years and the owner has termed her an indispensable asset to the company. The owner, who has sold furniture his whole life, has yet to put his business records into a computerized database.
By requiring her to sign a confidentiality agreement, the sales representative is contracted as being prohibited from disclosing the firm’s customer list to a competitor or using it for her own purposes.
Intellectual Property (IP) Protections If an employer has proprietary or patented information, then non-compete covenants should not be used to restrain employees from taking similar employment. In fact, the Trade Secrets Act, Pub. L. No. 96-483, 94 Stat. 1589, 18 U.S.C. Sec. 1831 et.seq. provides for damages for the misappropriation of trade secrets. The protection exists beyond the employment relationship, so that an employee-owner, assignee, licensee, or others may misappropriate trade secrets after employment.
Employers may also consider making sure that they have the necessary protections in their trade secrets agreement. It is suggested that the agreement cover the following:

• A definition of the trade secrets.
• The protection level of the trade secret.
• The duration of the trade secret.
• How trade secrets will be returned to the owner.
• How trade secrets may be used.
• That trade secret information may not be disclosed to others without the prior written consent of the owner.

Some states also have anti-piracy statutes which include remedies for the misappropriation of trade secrets.