Defining a Non-Solicitation Agreement
Employers often use non-solicitation agreements as part of a larger contract of employment. A "non-solicitation agreement" means an agreement between an employee and his/her employer that the employee will not solicit the employer’s customers and/or employees to leave the employer and/or enter into competition with it. These agreements do not necessarily have to be in the form of a separate document but can be included in an employment contract.
Employers may include a provision which states that the employee agrees not to solicit any customers, vendors, and/or clients during the term of employment , and for various periods of time thereafter. Employers may also include a provision which states that the employee agrees not to solicit their employer’s employees to terminate their employment or join a competitor for various periods of time for similar reasons.
Non-solicitation agreements are meant to protect an employer from an employee who might otherwise lure away valuable employees or clients upon leaving the company. Because these agreements are part of the contract of employment, courts are reluctant to enforce the non-solicitation provisions if the employee consents to the agreement under economic duress, or if the court finds the covenant to be overly broad and therefore unenforceable.
Colorado’s Position on Non-Solicitation Agreements
The Colorado Uniform Trade Secrets Act is the most commonly used law governing non-solicitation agreements. In Colorado, a covenant not to compete, which includes a non-solicitation of customer provision, will be deemed reasonable in time and territory when (a) it serves a legitimate purpose; (b) it protects a legitimate interest of the employer; (c) the burden on the employee does not outweigh the employer’s need to protect its interest; and (d) the restraint restricts the employee no more than necessary to protect the employer’s interest. The operative words here are "no more than necessary."
The only other form of non-solicitation agreement that is frequently used in Colorado is one that prohibits recruiting (or hiring away) the employer’s employees during and after the term of employment. There are no Colorado statutes or case law addressing these types of covenants, so Colorado courts will not enforce them unless an employer can demonstrate irreparable harm. That means that in order for any non-solicitation agreement to be enforceable by a Colorado court, the request for enforcement has to be accompanied by evidence of "irreparable harm." Case law in Colorado addressing specific types of non-solicitation agreements is sparse.
Key Components of a Non-Solicitation Agreement
Generally, a non-solicitation agreement contains three fundamental elements:
Duration: One of the most difficult aspects of a non-solicitation agreement is duration. Your agreement’s duration should coincide with your legitimate business interests, which means that it must mirror the time needed for you to train a new employee. If you can demonstrate in court that you legitimately need to protect your business interests for one year, then that is the correct length for your non-solicitation agreement. If, however, you cannot demonstrate that, the court will not enforce the provision of a non-solicitation agreement that is too long.
Geographical Scope: A non-solicitation agreement seeks to enforce a reasonable geographical distance in which you will not pursue your former customers. Much like duration, a non-solicitation agreement only protects the business interests as they pertain to a geographical area that you can demonstrate is necessary to protect your business. A court is more likely to enforce a non-solicitation agreement for Colorado than it would be to enforce one against someone who has moved to another state to continue working with your old clients. As such, if your agreement applies to a 30-mile radius from your old store and a court finds that radius to be reasonable, it will likely be upheld.
Type of Activities Restricted: Your non-solicitation agreement will prevent a former employee from pursuing three types of activities: soliciting former customers, soliciting former employees, soliciting former clients. The type of activity to which the agreement pertains is vital for determining if an agreement is enforceable or not. If your business sells landscapes, for example, it is less likely the court would find a non-compete agreement to be reasonable if it precludes your former employee from selling other outdoor-related products, such as furniture or holiday decorations.
Benefits of Non-Solicitation Provisions for Employers
Non-solicitation agreements help Colorado employers to protect their valuable client relationships. These clients, which include prospective clients and supplier/independent contractor relationships (barring certain exceptions), are often the lifeblood of a business. Restricting employees from soliciting relations away from the employer seeks to maintain the stability of these relationships for the long-term.
Furthermore, restricting an employee from soliciting the employer’s clients after the employee’s relationship with the employer has ended promotes the investment the employer has made in nurturing those relationships, especially when hiring and cultivating salespeople and independent contractors is both time- and capital-intensive.
Additionally, these agreements can also protect an employer’s intellectual property and trade secrets. When competitors can rapidly fill their ranks with highly skilled employees, protecting what makes a business competitive and unique is key. Non-solicitation clauses can restrain employees from sharing trade secrets through their knowledge of an employer’s business with a new employer.
Notably, non-solicitation clauses do not apply to former employees who join a competing employer as a result of mass layoffs, mass plant closing, or migration of a business operation within the scope of the federal Worker Adjustment Retraining and Notification Act. For Colorado companies considering whether to avoid the costs of litigation disputes, or just to limit exposure to a dispute by eliminating a former employee’s viable claim, these provisions may be beneficial as well.
Disadvantages and Controversies
Numerous controversies swirl around non-solicitation agreements in Colorado, particularly regarding their actual impact on employees. Non-solicitation agreements typically follow the employee into subsequent jobs with other companies. They can also perpetuate wealth inequality by preventing talented employees from continuing to maximize their skills in the most lucrative environments.
Disputes over the enforceability, scope and application of non-solicitation agreements can be costly for employers. Fragile non-solicitation agreements (commonly referred to as non-solicitation clauses or non-solicit clauses) can become the focus of legal battles. This negative focus detracts from the time and attention demanded by the company’s strategic initiatives .
Even parties apparently benefitting from non-solicitation agreements may be targeted for down-the-road litigation. A company believing an individual employee to be a significant contributor to the company’s success may be anxious to act if it learns that the employee is contemplating a change in employment status. The employee may believe differently. He or she may not believe a non-solicit clause is triggered by a resignation that is solely for reasons entirely unrelated to the current employer. The former employer may still act on its belief that its business will be irreparably damaged if the employee continues to engage in a talent search. The end result may be a legal battle over the enforceability and applicability of the non-solicit clause.
How to Properly Draft an Agreement
While non-solicitation agreements are generally permissible in Colorado, the terms of the agreement must comply with Colorado law. In general, the non-solicitation agreement must be "closely tailored" to protect a legitimate employer interest and no broader than necessary in time and scope to protect the employer’s interests. A non-solicitation agreement must not be just a "restraint of competition," but must have an appropriate fit between the interest being protected and the restraint being imposed. Colorado courts have created guidelines for drafters as follows:
• the restraint should not last for more than two years unless there is a good reason;
• the restraint should be limited to the territory where the employee worked and/or had significant customer contact;
• the restraint should be limited to the products, services, or types of clients that the employee sold, marketed, or solicited while employed; and
• the restraint should be clear and express.
Just because the restraint is for a period of two years does not render it presumptively invalid. Whether the restraint is unreasonable or not depends on the circumstances of each case. A non-solicitation agreement that is two years in length was upheld in one recent Colorado case. That case involved a former employee who started to compete with the former employer in earnest about six months after leaving his employment. As a result of that fact pattern, the court found that two years was not unreasonably long.
The language used in the non-solicitation agreement also matters. As mentioned above, a restraint on trade will not be enforced if it merely represents a restraint on competition. Courts are often loath to enforce non-solicitation agreements that do not clearly outline the nature and extent of the restraint. This concern extends to the scope of the non-solicitation agreement. The more specific a non-solicitation agreement is about which customers, clients, and employees are protected by the agreement, the more likely the agreement will be upheld by the courts. More specific language also lessens the risk of having the non-solicitation agreement deemed overly broad.
Cases and Trends
When it comes to non-solicitation agreements, Colorado’s courts are focused on the reason for the agreement and the protection of that interest. For example, the Colorado Court of Appeals in Morgan v. Jim Cochrane Agencies, Inc., 199 P3d 758 (Colo. App. 2008) clarified that an agreement not to "solicit" customers could be a non-competition or a non-solicitation agreement depending entirely upon the motivation behind the agreement. While the focus in Morgan was whether an agreement constituted a restrictive covenant or not, the focus on the motivation of the contract no matter the type of restrictive covenant is present in other cases as well. For example, in Spectra Communications Group, Ltd. v. Eyekraft, Inc. , 257 P3d 1194 (Colo. App. 2010) the Colorado Court of Appeals struck down a sale of business agreement which contained a combination of non-compete and non-solicit contractual agreements because the former owner of the business had no protectable interest at the time of the sale. In Memory Innovations, Inc. v. RS Medical, 281 P.3d 1171 (Colo. App. 2012), the Colorado Court of Appeals struck down a non-competition agreement as unenforceable because of a lack of reasonable notice to the employee of the terms of the restrictive covenant. Courts seem to be focused on whether a non-solicitation or non-compete contract is truly needed to protect the employer and there can be consequences of not just including non-compete and non-solicitation agreements, but also of not notifying the employee of the agreement in a clear manner. Without changing the law, these cases show the current focus of the Colorado Courts on restrictive covenants and how an employer needs to draft them.