Starting a business takes a great deal of time and energy, and often involves the development of intangible assets such as goodwill within an industry or the development of well-trained employees. While these assets are less concrete than a company’s tangible assets such as liquid capital or equipment, a business can still hold a property interest in them. Employers can be vulnerable to employees leaving a business and taking their intellectual property, clients, or other employees to a competitor or starting a competing business. The use of restrictive covenants such as noncompete or nonsolicitation clauses may be used to protect a business from being “raided” by former employees for proprietary information, clients, or employees.
A non-solicitation agreement is an agreement between an employer and employee limiting who the employee may solicit after the employment relationship is terminated. The agreement may seek to prevent the former employee from soliciting either a company’s clients or other employees. Courts often view agreements that seek to limit a person’s ability to work or engage in common business practices skeptically, and the validity of non-compete agreements in California is currently unclear. The California Supreme Court recently held that noncompete clauses are per se invalid under California law, but was silent on the issue on nonsolicitation agreements. There are many issues that a court may analyze in determining the validity of the clause, including the reasonableness of the agreement and the object it is trying to protect.
What is “solicitation?”
Assuming that nonsolicitation agreements are enforceable, a question arises as to what constitutes “solicitation” under the agreement. On one hand, if a former employee of a business directly approaches a client or current employee in an attempt to induce them to bring them on as an employee or client of a new venture such actions would clearly be in violation of a nonsolictation clause that seeks to prohibit such actions. A more complicated issue arises if a current employee approaches a former employee who has started or is involved with a competing business. The answer to whether this scenario would constitute solicitation goes back to the default attorney answer that clients tend to dislike so much – “it depends.” There are many factors that come into play when determining the legality of such conduct. For example, it is relevant whether:
- The employee is under an employment contract
- The employee is actually an independent contractor
- The employee was induced to reach out to the former employee
- If the employee is violating other provisions of his or her employment contract, such as client nonsolicitation clauses or confidentiality agreements
A California appellate decision addressed the issue in Loral Corp v. Moyes, in which the court determined that passively accepting job applications from employees of a former employer is not prohibited, even if directly soliciting them would be. Recent case law was called the ongoing validity of Loral into question, however, and the overall enforceability of such clauses remains to be determined.
Protect your business with well-drafted employment agreement
The first step to protecting yourself from unscrupulous or dissatisfied former employees from taking your employees or clients is using a well-drafted employment agreement. While the legal status of the enforceability of restrictive covenants in California may be in question, it is still a good practice to include such clauses in your contracts. Even if one provision is deemed invalid, this does not invalidate the entire contract, and using such clauses also can signify to employees that you are serious about protecting your business from attempts at solicitation. Sometimes the threat of litigation can keep a former employee from engaging in legally questionable conduct.
 Loral Corp v Moyes, (1985) 174 CA3d 268