What are Non-Solicitation Agreements?
Non-solicitation agreements are contracts between an employer and employee (or business partner, etc.), in which the employee agrees not to solicit the employer’s customers or clients after they no longer work for that employer. The language in these agreements varies, but the essential agreement is generally the same.
Depending on the line of business, these provisions can be very important to the ability of a company to keep going. This is particularly true in service businesses such as law firms, insurance agencies, etc., in which the relationship with the client may depend directly upon the person providing that service to the client. The ability to keep the client, and continue to collect fees from that client , depends upon the agreement of the employee not to "take" their former clients.
These provisions also incidentally prevent the former employee from using customer and client information that she has learned while employed for the employer. For example, in the case of a law firm, client confidences, etc. are protected by attorney-client privilege under Massachusetts law, and an employee’s agreement with a law firm to protect those confidences is enforceable after termination of employment.
In the typical case of non-solicitation agreements, the employee’s consent is given in the form of a signed contract, in which the employee agrees that upon leaving the company that he or she will not intentionally solicit to move to another company the customers, clients and business contacts he or she had while in employment by the employer.
Massachusetts Legal Framework
In Massachusetts, there is no specific statute governing non-solicitation agreements. However, these agreements must comply with the common law standard for restrictive covenants which is codified at G.L. c. 93, § 42A.
The case law sets the standard for the enforceability of restrictive covenants in Massachusetts. An employer seeking to enforce a non-solicitation agreement must show that it has a legitimate business interest to protect by enforcing the restriction. See McGowan v. Fidelity-Employer’s Ins. Co., 404 Mass. App. Ct. 120, 126-127 (2016).
To determine whether a non-solicitation agreement is enforceable, Massachusetts courts examine whether it is protectable under common law. For a covenant not to solicit, a company can rely on its interest in the "protection of confidential and proprietary information or customer relationships." See Work ‘N Gear Mktg. LLC v. Douglass, 480 Mass. 463, 478 (2018). Some customer relationship covenants are enforceable in Massachusetts even if the customer relationships are not based on goodwill. The court will still enforce customer relationship covenants that protect "the employer’s investment in customer relationships" and prohibit the solicitation of certain protected customers for a specified period or distance. See Afghan American Army Servs. Corp. v. Haji Zahir, 484 Mass. 431, 440(2019).
By contrast, the Massachusetts Trade Secrets Act ("M.G.L. c. 93H") protects trade secrets, defined as "all forms and types of financial, business, scientific, technical, economic, or engineering information…provided that the owner thereof has taken reasonable measures to protect its secrecy." M.G.L. c. 93H § 1.
Massachusetts law bars any contract that requires a Massachusetts employee, as a condition of employment or continued employment, to do one of the following: (a) agree to a non-compete provision; (b) agree to a non-solicitation provision or (c) wear a tracking device. G.L. c. 149, § 24L.
Massachusetts law prohibits non-compete agreements with low wage employees. A non-compete agreement is considered to be with a low-wage employee if the employee earns less than 130% of the Massachusetts minimum wage. G.L. c. 149, § 24L(a)(iii).
Employers should be aware that Massachusetts law now prohibits non-compete agreements and post-employment non-solicitation agreements with low wage employees which means that such agreements will not be enforceable going forward.
The Standard of Enforceability, Burden of Proof
Massachusetts courts generally apply a three-step analysis when determining the validity of non-solicitation agreements: (1) whether the agreement is supported by consideration; (2) whether it is reasonable in scope; and (3) whether it is necessary to protect the employer’s legitimate interests. Poker Tours, Inc. v. Plummer, Civil Action No. 04-10841-MEL, 2005 WL 1412372 (D. Mass. June 21, 2005); Corporate Tech, LLC v. Richard, Civil Action No. 17-11685-LTS, 2017 WL 6041734 (D. Mass. Dec. 6, 2017).
To satisfy the first step of the analysis, Massachusetts courts find that no additional consideration is required if the agreement benefits the employer and is made at the time of hiring. Therefore, if an employee signs a non-solicitation agreement in exchange for employment, the consideration element is satisfied. See Trainor, Paving MVPs, Inc. v. Bilewicz, Civil Action No. 13-11349-RGS, Order on Motion to Dismiss, at 3 (D. Mass. August 27, 2013) ("An agreement that is entered into ‘at the inception of a relationship’ is enforceable as consideration is provided by the promise of employment in return for compliance with the terms of the agreement.").
The reasonableness analysis requires the court to consider three factors: (1) temporal duration; (2) geographic reach; and (3) the scope of prohibited activities. For a covenant not to compete, Massachusetts courts generally consider eleven months and five months governing post-termination and during employment, respectively, to be reasonable in duration. See Career Placement, Inc. v. Lanham, Civil No. 11-10536-RGS, 2011 WL 4710888 at 3 (D. Mass. Oct. 5, 2011). The geographic scope of a non-solicitation agreement in Massachusetts generally has been found to be reasonable if limited to the area where an employee actually worked or in areas where the employer has business operations. See Corporate Tech, LLC v. Richard, Civil Action No. 17-11685-LTS, 2017 WL 6041734 (D. Mass. Dec. 6, 2017); SuperValu, Inc. v. Pamida, Inc., 211 F.Supp.2d 1150, 1167 (D. Minn. 2002) (general geographic range of ten miles was reasonable), aff’d mem. 358 F.3d 559 (8th Cir. 2004); Sunbelt Rentals, Inc. v. Head & Enright, LLC, Civil No. 06-1738, 2007 WL 103229 (E.D.Mo. Jan. 10, 2007) (geographic radius of 60 miles was reasonable). As for scope of prohibited conduct, a Massachusetts court recently upheld a seven-year ban on contacting a customer where the customer had been personally procured. Trade Secret Indus., LLC v. Liodice, 2017 WL 3727311, at 4 (D. Mass. Aug. 28, 2017). Massachusetts courts also have upheld non-compete agreements prohibiting solicitation of an employer’s clients, but not prohibiting solicitation of an employer’s employees. Winograd v. Tibbetts, 48 Mass.App.Ct. 665, 668-669, 722 N.E.2d 966 (Mass.App.Ct. 2000); Trainor, Paving MVPs, Inc. v. Bilewicz, Civil Action No. 13-11349-RGS, Order on Motion to Dismiss, at 3 (D. Mass. August 27, 2013).
The third prong requires the employer to demonstrate that the non-solicitation agreement is no greater than necessary to protect its legitimate interests. The employer bears the burden of proof on this prong. Common Fin. Group, LLC v. Mills, 2011 WL 1235916 (D. Mass. April 5, 2011). In a case analyzing non-solicitation agreements, the First Circuit held that a court should consider the following factors: (1) whether the employee was privy to the employer’s confidential information; (2) the employer’s need for protection; and (3) whether any special training was given to the employee. Levesque v. Zipcar, Inc., 99 F.Supp.3d 451, 459-460 (D. Mass. 2015).
Recent Cases and Precedent
Recent court decisions have further clarified the enforceability of non-solicitation agreements in Massachusetts. In OneBeacon Am. Ins. Co. v. Steadfast Ins. Co., 440 Mass. 806 (2004) the Supreme Judicial Court of Massachusetts held that the insurance company OneBeacon’s non-solicitation agreement with its insured Steadfast was enforceable against an individual employee who left his position with OneBeacon. In this case, the court stated that "the non-solicitation agreement was supported by consideration: an agreement to withhold termination of an existing employment contract." At the same time, the court noted that the agreement was void against a competing employee who left OneBeacon for a new position, and so did not bind the former employee to refrain from soliciting the policyholder’s business.
Another relevant case is Knight v. Wholesale Auto Wholesale, Inc., 437 Mass. 488 (2002). In this 2002 decision, the Supreme Judicial Court found that a non-solicitation agreement signed by an employee upon hire "lacks the necessary consideration to be enforceable." The court reasoned that at-will employment "is itself no promise of anything." However, in Fidelity Mgmt. & Research Co. v. Dauterman, 38 Mass.L.Rptr. 334 (2019), the Supreme Judicial Court cited this decision in a later case which found an agreement to be valid under Massachusetts law where one party had provided a benefit to the other party as consideration, even where the agreement came in the context of an at-will employment situation.
Finally, the Massachusetts Appeals Court held in Ocean Spray Cranberries, Inc. v. Pepsico, Inc., 361 F.Supp.2d 70, 73-74 (D.Mass.2005) that "it is a violation of public policy to enforce a noncompetition agreement, even if it would otherwise be enforceable, as a de facto noncompetition agreement," when that agreement merely does not explicitly label itself as a non-compete, but has the same effect.
One example of such an agreement is set forth in Naylor v. Case W. Reserve Univ., 8 F.Supp.2d 711, 714 (N.D.Ohio 1998), which cited a Pennsylvania case that found enforceable an agreement prohibiting an employee from "soliciting" or "accepting" business from company clients, if the companies also prohibit "soliciting" or "recruiting" the company’s employees. Here, the court stated, "the agreement at issue here is exactly the type of arrangement the Commonwealth did not intend to preclude by enacting section 727. In fact, the plain language of that section indicates to that intent." The United States Customhouse Brokers Ass’n v. Sweeney, 720 F.Supp. 114, 119 (E.D.N.Y.1989) agrees, stating, "an agreement is not rendered legally insufficient by virtue of an express agreement to forgo competitive activities subject to a due period of time, so long as the agreement has a reasonable exaction time period and is not overbroad in its application to other customers." As such, Massachusetts courts also look to other states when analyzing whether agreements qualify as non-competes.
Things To Consider For Employers and Employees
Employers would be wise to consider some best practice guidelines for drafting a non-solicitation agreement, and then should consistently apply those guidelines to all employees who are being asked to agree to a restrictive covenant. Among the most important guidelines to implement is to customize the agreement for the particular employee so that it does not impact the employee’s ability to work or earn a living. This reaffirms to employees that the employer respects their rights as free agents and at the same time demonstrates that the employer cares enough to take the time to ensure that they can continue to earn a living even after they are separated from the employment relationship.
Where feasible, the employer should limit the scope of the non-solicitation agreement to the employees and/or contractors who have had material business relationships with the employer during his/her term of employment. This helps to ensure that the non-solicitation agreement will not constitute a stroke agreement since a non-solicitation agreement that applies to the entire workforce (or far too many employees) could be deemed by a court to constitute a stroke agreement.
However , some employers may want a non-solicitation agreement to cover a broader scope than permissible without a legitimate business interest buttressing the scope. One way for an employer to minimize the risk of a court deeming the non-solicitation agreement to constitute a stroke agreement is to include — if consistent with current Massachusetts law — a non-compete agreement alongside the non-solicitation agreement. This may well make the non-solicitation agreement enforceable though the non-compete agreement is not and further provides the employer with the opportunity to obtain injunctive relief.
Both employers and employees should also consider whether a declining or stepped-down restrictive covenant would be a desirable option. The former would allow an employer to not enforce the non-solicitation restriction during certain periods or at all when the employer is itself leaving the industry. The latter would restrict the employee from soliciting customers and/or co-workers during progressively longer periods of time following the end of employment with the former employer.
With regard to non-solicitation agreements between employers, such agreements must contain adequate consideration in order to be enforceable. This is especially true when the post-employment restrictions are not limited in time or geographic scope. Seemingly reasonable and customary considerations provided to an employee have been deemed to be inadequate to support a post-employment restriction covering non-solicitation of employees where the employer failed to restrict the agreements to a limited time period. Careful consideration of adequate consideration is especially important for non-solicitation agreements due to case law in Massachusetts which weighs heavily on the side of protecting employees and allowing them to earn a living.
How To Attack or Defend An Agreement
There are three primary avenues available to challenge a non-solicitation agreement in court. These include seeking (1) a declaratory judgment that the agreement is unenforceable, (2) a temporary restraining order or preliminary injunction against its enforcement and/or (3) an order vacating a preliminary injunction issued in favor of the employer. As the plaintiff, you have the burden of proving there is no legitimate business interest justifying the agreement, that the agreement is overbroad as to time or geography and that the restrictions are not necessary to prevent the target of the agreement from engaging in competition with your employer.
On the other hand, there are also various ways in which a non-solicitation agreement can be challenged or defended. As the defendant, you could challenge the complaint and move to dismiss the action, or you could file an answer denying the allegations and asserting affirmative defenses. You could also file a counterclaim and ask the court to injunctive relief against enforcement of the non-solicitation agreement, and seek permanent injunctive relief after the final adjudication of the merits of the action. You could also – as indicated above – seek a declaratory judgment that the non-solicitation agreement is unenforceable, request a temporary restraining order or preliminary injunction that prohibits the employer from enforcing the provision, or an order vacating a preliminary injunction issued in favor of your employer.
Alternatives To Non-Solicitation Agreements
There are a number of other types of agreements and strategies that businesses may be able to employ, instead of non-solicitation agreements, to help protect themselves. Absent non-solicitation agreements, businesses can utilize "customer non-compete" agreements (e.g., an agreement that the employee will not work with that customer following the employment period), customer lists, non-recruitment or non-hire agreements, non-competition and non-disclosure agreements, confidentiality agreements, and employment agreements that broadly define "confidential information." For example, if I hired you at "Giant Tech," your employment agreement may say "I understand and agree that I will not disclose Giant Tech’s Confidential Information after the employment period ends, or I will not work with Giant Tech’s customers after the employment period ends." But, because Massachusetts courts have held that such agreements are disfavored, it may be difficult to enforce many of the strategies suggested in the paragraph above.
A Look Ahead: Non-Solicitation Agreements In The Future
The landscape for non-solicitation agreements in Massachusetts may be evolving, particularly if the legislature votes on a proposed statute. A bill currently before the Massachusetts legislature would make all non-compete and non-solicitation of employee – or "employee no-hire" – agreements unenforceable after the termination of employment. Whereas currently most companies write their agreements to expire 6-12 months from the date of termination, the proposed bill would wipe out such time limits. Instead, the proposal essentially provides that no post-employment restrictions would be enforceable at all.
If that proposal does not become law, there seems to be a trend by which Massachusetts Courts would enforce employee non-competes or non-solicits only for a period of 6 months or perhaps even 6 weeks. There certainly appears to be a concentration of cases enforcing employee non-competes for periods of 6 months. In addition, some cases, especially in the advisory industry, have refused to enforce a non-solicit against an outgoing employee . One example of an area where Massachusetts Courts have been amenable to invalidating a non-solicit is in the high-pressure or high turnover industry. A case I litigated recently involved a financial services company that had a constant need to either replace advisers or recruit more of them to keep the advisors busy. The Court found the company was only protecting its interests in competing with the employee under the guise of protecting customer relationships or goodwill. This very well may set the tone for other industries with similar business models. The issue of how much good will must be protected to justify the scope of a non-solicit or non-compete agreement is really a question of a company’s business practices with respect to its sales force and how they interact with the clients. If they are the ones who have the closest contact with the clients, then the courts will be inclined to follow the client relationship law.
If your company currently has non-compete or non-solicit agreements with employees, you should consult with experienced counsel in case the proposed bill is enacted or the tide is changing with respect to enforcement of non-competes.
