Welcome to Part 2 of our three-part series on employment-related restrictive covenants! In Part 1, we discussed non-compete agreements; here we will address non-solicitation agreements. While we are creating these posts as part of a series, we have written them so they can be read on their own. Accordingly, for those of you who tuned in to Part 1, you may notice that some information is repeated here because it applies to both types of covenants.
A non-solicitation agreement serves some of the same purposes as a non-compete agreement in the sense that it restricts certain behaviors by insiders, particularly post-employment. A non-solicitation agreement, however, does not prohibit these insiders (or former insiders) from entering your industry; it simply provides that they cannot poach your employees, customers, and/or vendors in the course of doing so.
As discussed in Part 1 of this series, Virginia closely scrutinizes all forms of restrictive covenants and generally disfavors them. To be enforceable in Virginia, the Virginia Supreme Court has held that a restrictive covenant must (i) not be greater than is necessary to protect a legitimate business interest; (ii) must not excessively restrict an employee’s ability to earn a living; and (iii) must not violate Virginia public policy. As with non-compete agreements, the courts consider three factors in determining whether an agreement meets this test: the agreement’s (i) duration; (ii) geographic scope; and (iii) scope of purpose.
The case law regarding the duration of restrictive covenants is similar to that for non-compete and non-solicit agreements. That is, agreements of one year or less are almost always considered reasonable, agreements as long as two years are fairly routinely upheld if reasonable under the circumstances (which can include, for example, the amount of cost or effort required to identify, hire, and train an employee, or to identify and engage a customer), and agreements of three years or longer are subject to high scrutiny, although there are examples of such being upheld. As with non-compete agreements, the key is to avoid a cookie-cutter agreement and instead ensure that your agreement is tailored to your company’s individual circumstances and needs. Such agreements are much more likely to be found enforceable.
Regarding geographic scope, the analysis of the applicable territory for a non-solicitation agreement has historically centered on the territory in which the former employee has had contact or nexus with the company’s employees or customers. For example, even if you do business in Hawaii, unless your Virginia employee has some contact or nexus with Hawaii customers, he or she would not generally be prohibited from soliciting them. By contrast, a highly positioned executive, with expansive knowledge of the company’s entire customer base, could conceivably be subject to a blanket non-solicitation agreement covering all customers. As with duration, the defined scope must be individually crafted to be reasonable under the circumstances.
The purpose of a non-solicitation agreement is, obviously, to prevent your former employees from soliciting certain individuals that are key to your company. The word “solicit” is, however, important. At least as pertains to agreements prohibiting solicitation of customers, Virginia law prohibits restrictive covenants that “restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate contact with or solicit the customer or client.”
In addition to the foregoing statutory limitation, a 2020 decision from the Fairfax County Circuit Court seems to further restrict the permissible scope of purpose. As part of its analysis in reaching a decision to rule a non-solicitation agreement unenforceable and overbroad, the court cited the fact that the agreement prohibited solicitation of covered employees and contractors even if those workers were solicited for purposes unrelated to the former employer’s business needs. In other words, because the agreement prohibited soliciting the former employee from soliciting workers for any purpose, rather than only for competitive purposes, the non-solicitation agreement was invalidated. In so doing, the court not only limited the permissible scope of purpose, but took an expansive view of public policy, finding the agreement against public policy as it would permit an employer to “hoard” employees in an example of what the court called “anti-competitive and monopolistic practices.”
Finally, as with all contractual agreements, a non-solicitation agreement must be supported by adequate consideration. For example, making a job offer contingent upon agreement to a non-solicitation agreement would represent sufficient quid pro quo to constitute consideration. However, requiring a current employee to execute such an agreement, without any additional benefit or remuneration to the employee, would likely fail the test.
As demonstrated by the foregoing, non-solicit agreements must be carefully drawn to ensure enforceability in Virginia. However, such agreements do still enjoy two advantages over non-compete agreements: (1) they are not subject to the Virginia statute that renders non-competition agreements unenforceable as they pertain to certain so-called “low-wage workers”, including both employees and independent contractors; and (2) they are generally more likely to be found enforceable even outside of those statutory restraints, as they are not considered to represent the same degree of restraint on trade (i.e., the worker’s ability to earn a living).
Accordingly, a business seeking to protect itself from the post-employment actions of its workers should carefully consider which type of restrictive covenant best suits its purposes, and ensure that whichever agreement it selects is precisely drafted to ensure enforceability. If you have any questions regarding non-solicitation agreements (or any other potential restrictive covenants), the team at Way Law is here to help!