Non-Solicit Clause

Written by: Patrick Shaunessy

21 minute read

What is a non-solicit clause?

A non-solicit clause (sometimes referred to as a non-solicitation clause) is a contractual provision that establishes one party’s (the grantor) promise to refrain from soliciting (or poaching) another party’s (the beneficiary) customers, clients, employees, vendors, business partners, etc. (each a stakeholder). In general, when a non-solicit clause appears in a contract, it is because the grantor possesses (or will possess) insider knowledge about, among other things, the beneficiary’s stakeholders. The purpose of the non-solicit clause is to prevent the grantor from using this knowledge to undermine the commercial interests of the beneficiary. Although distinct from the non-compete clause, the non-solicit clause also effectively limits the degree to which the grantor can compete with the beneficiary. An employer, for example, might add a non-solicit clause to its employment contracts to prevent its employees (usually after they’ve left the employer to work elsewhere) from (i) poaching customers or (ii) inducing other employees to come work for a competing business. Similarly, in the M&A context, a purchaser might add a non-solicit clause to a purchase agreement (or ask the seller to sign a separate non-solicitation agreement) to prevent the seller from stealing customers and other key stakeholders from the acquired business, thereby helping to secure its value for a given period after closing.

Why does the non-solicit clause matter?

Like other restrictive covenants, non-solicit clauses can be controversial. On the one hand, the law recognizes that employers, purchasers, and other beneficiaries have legitimate interests that can and should be protected from persons who are in a unique position to undermine them. On the other hand, barring a person from securing business from certain customers or benefiting from the services of employees or other third parties, even for a relatively short period of time, can be a significant professional and/or commercial setback. A balance therefore has to be struck between protecting these legitimate interests and preventing unreasonable restraints of trade; a balance that tends to lean more toward the latter than the former. This is especially true in the employment context where employers often have tremendous bargaining power over individual employees. As such, with the exception of executives and others in significant positions of trust, the law’s tolerance, if any, for restraints on employees’ professional activities is generally minimal. Because of this, employers must contend with the perennial risk that courts may side with employees in disputes over the enforceability of non-solicit clauses, thereby depriving these employers of the protection they’d hoped to obtain from them.

To avoid this outcome, employers and other beneficiaries should take care when drafting their non-solicit clauses to ensure that they are reasonable, since this is often a key consideration in determining their enforceability. While the reasonableness of a given non-solicit clause must be evaluated on a case-by-case basis, some factors that tend to support this position include: (i) using clear and specific language to identify the relevant stakeholders; (ii) limiting the duration; and (iii) keeping the class of stakeholders to a minimum (that is, just enough to protect the legitimate interest(s) of the beneficiary). In addition, because the law pertaining to restrictive covenants (including non-solicit clauses) can change, beneficiaries should consider reviewing the non-solicit clauses in their contracts regularly to evaluate whether their enforceability may be affected by any change in law.

How do you review the non-solicit clause in contracts?

As the examples below illustrate, non-solicit clauses may be found in sections that are clearly labelled as “Non-Solicit”, “Non-Solicitation”, etc., in which case they will be relatively easy to find. In other cases, however, such as examples 3 and 15 below, they may not be labelled at all; or, as is the case with example 9 below, non-solicitation language may be buried in the middle of a seemingly unrelated section, requiring careful review to spot.

After locating all the non-solicit language in each agreement, key things to focus on when reviewing these provisions include:

  1. Who is restricted. The class of restricted persons will, of course, include the grantor. However, the clause may also prohibit the grantor’s subsidiaries, affiliates, directors, officers, agents, etc. from soliciting the beneficiary’s stakeholders. Often, the clause will make this clear, including through the use of defined terms such as “Affiliates” or “Representatives” (see, for instance, examples 3 and 4 below). Be sure to check the definition(s) of any such term(s) to ensure that the full class of persons covered by the non-solicit clause is ascertained.
  2. Applicable stakeholders. The non-solicit clause may apply only to a particular kind of stakeholder (examples 2, 5 and 8 below, for instance, apply only to employees) or it may apply to a broad range of stakeholders (see, for instance, examples 13 and 15 below). Factors that influence the range of applicable stakeholders include the nature of the agreement and the protection that the beneficiary hopes to secure through the clause. Note as well that the class of applicable stakeholders may not be restricted to stakeholders of the beneficiary only; it may also include, for example, stakeholders of the beneficiary’s affiliates. Regardless of whether the clause applies to many different stakeholders or a particular type of stakeholder, it is important to consider whether the scope is reasonable. Example 2, for instance, prohibits solicitation of “any senior scientist, member of senior management or any other individual who is or was employed by Seller or its Affiliates”. Although the scope here is relatively narrow, having both current and former employees of Seller or its Affiliates as part of the class of employees that the grantor cannot solicit could potentially be considered too restrictive and may therefore affect the enforceability of the clause.
  3. Exceptions. Non-solicit clauses may include specific exceptions to the general limitations they impose. These exceptions are typically included for practical purposes and to ensure the clause is not overly restrictive. Examples 2, 3 and 4 below, for instance, all have exceptions for hiring activities that are not specifically aimed at employees covered by the clause. In these examples, the purpose of the non-solicit clause is to prevent the grantor from approaching employees of the beneficiary to offer them employment elsewhere; however, if the grantor was also prevented from hiring an employee of the beneficiary who responded to an advertisement for an open position that was aimed at the general public, the clause could potentially be considered too restrictive.
  4. Duration. Most non-solicit clauses have limited duration. In commercial agreements, the clause will generally apply for the term of the agreement and may survive for a number of months or years thereafter (see, for instance, examples 2, 5 and 6 below). Non-solicit clauses in employment agreements often remain valid for up to one year (and typically no more than two years) following the termination of employment. In purchase agreements, the clause will typically remain in force for a specified period following the closing date of the transaction (or alternatively the effective date of the agreement). Where the duration is expressed as a defined term - see, for instance, “Restricted Period” in example 12 below and “Noncompete Period” in example 13 below - be sure to check the definition of any such term to confirm the period over which the non-solicit clause applies.
  5. Geographic restrictions. The scope of non-solicit clauses may also be limited to a particular geographic area. Section 7.3(2) of example 5, below, for instance, prevents Parent from offering employment in Canada to certain employees of the Fund Manager. Like other aspects of the non-solicit clause, it is important to consider the specificity and reasonableness of any such geographic restriction.

As with the review of any contractual provision, it’s also important to be aware of other provisions that may affect the interpretation of non-solicit clauses. Defined terms, for example, were mentioned in points 1 and 4 above. The term clause (and also the renewal clause) provides important information about the term of the agreement, which may be relevant to the duration of a non-solicit clause. Finally, as mentioned above, enforceability is an issue that regularly affects non-solicit clauses. The enforceability of these clauses typically depends on both the facts and circumstances of each contract as well as applicable law. The governing law section states which jurisdiction’s laws apply to the agreement, and that information can help parties evaluate potential issues with the enforceability of a given non-solicit clause.

Software that uses AI to identify and extract non-solicit clauses (as well as other terms that may affect their interpretation) can accelerate the work of finding these provisions and enable a more comprehensive review than can otherwise be done manually.

Examples of the non-solicit clause

Below are some examples of non-solicit clauses from different kinds of agreements. While these examples do not necessarily cover the full range of non-solicit clauses one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract. Where an example includes broader contextual language, the non-solicit clause is highlighted in bold.

Example 1: From an Executive Employment Agreement

4.2. Non-Solicit. The Executive agrees that, during any Severance Period, he shall not solicit for employment (or assist with such solicitation) any employee or former employee of the Company. The restrictions set forth in the foregoing sentence apply to the solicitation of any person who is or, within one (1) year before the termination of the Executive’s employment by the Company, was an employee of the Company. Additionally, the Executive agrees, during any Severance Period, not to solicit (or assist with such solicitation) any customer or client of the Company, if such solicitation or assistance could reasonably be expected to result in diversion of revenues from the business of the Company. For the purpose of the restrictions set forth in the foregoing sentence, the terms “customer” and “client” include any person, private entity or governmental entity (or employee or agent thereof), within or outside the United States of America, with whom the Company does or has done business within the one (1) year preceding the termination of the Executive’s employment by the Company. Any provision of this Section 4.2 to the contrary notwithstanding, in no event shall the Executive’s service to Smedsrud, Inc. or to CAEP, LLC (as such businesses are conducted as of the date hereof) be construed to constitute a breach of the terms of this Section.

Example 2: From a Service Agreement

ARTICLE XVI – NON-SOLICITATION.

16.1 Buyer Group hereby agrees that during the Term and for twelve (12) months thereafter, neither Buyer nor its Affiliates shall directly or indirectly seek to employ any senior scientist, member of senior management or any other individual who is or was employed by Seller or its Affiliates. Nothing herein shall prohibit Buyer Group or their Affiliates from soliciting for employment, hiring or employing any person who responds to an advertisement in periodicals of general circulation or newspapers that is not directed to solicit Seller employees.

Example 3: From an Asset Purchase Agreement

(m) The Sellers agrees that they will not, and they will cause their respective officers, directors, employees, agents, representatives and Affiliates (each a “Seller Representative”) not to, whether on the Sellers’ or such Seller Representative’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly (i) encourage any Corporate Employee (other than any Excluded Employee) or System Hotel Employee not to accept any offer of employment made by the Buyer or any of its Affiliates pursuant to Section 6.9 above or make any offer of employment to any Corporate Employee (other than any Excluded Employee) or System Hotel Employee; or (ii) during the one year period following the Closing Date, solicit or encourage any Transferred Employee to cease work with the Buyer or any of its Affiliates. Notwithstanding the foregoing, the restrictions set forth in this Section 6.9(m) will not prohibit the Sellers nor any Seller Representatives from: (A) advertising employment opportunities in any general solicitation not targeted at Corporate Employees, including national newspaper, trade journal or other publication in a major metropolitan area or any third-party Internet website posting, or negotiating with, offering employment to or employing any Person contacted through such medium, (B) participating in any third-party hiring fair or similar event open to the public or (C) negotiating with, offering employment to or employing any Person contacted through such medium.

Example 4: From a Non-Disclosure Agreement

  1. Without the prior consent of the Company, neither the Counterparty nor its Representatives will initiate contact with any employee of the Company with respect to the Opportunity. The Counterparty agrees that, for a period of one year from the Effective Date of this Agreement, it will not, and will not permit any controlled Representative, acting on behalf of the Counterparty or its subsidiaries, to whom it has provided any Confidential Information to, directly or indirectly, solicit for employment or hire any employee of the Company with whom the Counterparty has had contact or who became known to the Counterparty in connection with consideration of the Opportunity; provided that the foregoing shall not prohibit general employment advertisements and other similar employment solicitations that are not targeted at employees of the Company.

Example 5: From a Distribution Agreement

7.3 Non-Solicitation by Insurer Group

(1) During the term of this Agreement and for a period of two (2) years following its termination, Parent shall not, without the prior written consent of Fund Manager, directly or indirectly, solicit to retain or hire, any of Fund Manager’s portfolio managers/analysts (i) who are employees of Fund Manager or (ii) who are separately designated in writing by Fund Manager as of the date this Agreement is amended and restated. Parent will cause its Affiliates to comply with this provision.

(2) During the term of this Agreement and for a period of two (2) years following its termination, Parent shall not, without the prior written consent of Fund Manager, directly or indirectly, solicit for employment, in Canada, any manager or executive of Fund Manager, in a head office, staff or wholesaling function who are connected to this Agreement and the Administrative Services Agreement, Parent will cause its Affiliates to comply with this provision.

7.4 Permitted Solicitation

Sections 7.2 and 7.3 do not apply to generalized, non-targeted solicitations through (i) the publication of an advertisement or other public announcement or (ii) the use of a recruiting or employment agency to whom the name of an individual employed or engaged by a Party has not been provided by the Party using the recruiting or employment agency.

Example 6: From a Production and Supply Agreement

  1. Non-Solicitation Obligations. While this Agreement is in effect and continuing until two (2) years thereafter, Customer further agrees that neither Customer nor any of its affiliates or any of their respective officers, directors or employees shall: directly or indirectly, personally or through others, encourage, induce, attempt to induce, solicit or attempt to solicit any supplier or manufacturer contractor of Supplier or any employee or consultant of Supplier or any of its affiliates to leave his or her employment with or discontinue its, his or her engagement with Supplier or any of its affiliates or to become a supplier, manufacturer, employee, consultant or other contractor of Customer.

Example 7: From a License and Distribution Agreement

  1. NON-SOLICITATION. During the term of this Agreement, and for two years following its termination, expiration, or non-renewal, Subscriber shall not, whether or not for monetary benefit, without the written permission of Licensor or any of its affiliates (collectively, the “Companies”): (a) engage or employ any employee, director, officer, agent, or independent contractor of the Companies; (b) encourage or solicit any employee, agent or independent contractor of the Companies to terminate or modify his, her or its employment, engagement or business relationship with the Companies; or (c) pay money to or provide gifts, or other benefits, monetary or otherwise, to any employees, directors, officers, agents, or independent contractor, unless the value of said gifts or benefits is of de minimus value.

Example 8: From a Distribution Agreement

17.0 HIRING OF PERSONNEL

17.01 During the Term and for the period of six (6) months following termination or expiry of this Agreement, without the prior written consent of the other party, neither party shall recruit or hire any personnel of the other party.

Example 9: From a Coinsurance Agreement

Section 21.10 Treatment of Confidential Information. The Parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated hereby, the Parties will keep confidential and will not use or disclose the other Party’s Confidential Information or the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority; provided, however, that the Reinsurer may disclose Confidential Information to its Representatives in connection with the exercise of its rights under Article XII; provided, further, that either party may disclose, with the other party’s written consent, Confidential Information to any person other than its Representatives who agrees to (i) hold such Confidential Information in strict confidence as if such person were a party to this Agreement and (ii) use such Confidential Information solely for the limited purpose of evaluating a potential purchase, merger or Change of Control of such Party. Without limiting the generality of the foregoing, neither the Reinsurer nor any Affiliates of the Reinsurer shall utilize any Confidential Information regarding Policyholders for the purpose of soliciting Policyholders for the sale of any insurance policies or other products or services. The parties agree that any violation or threatened violation of this Section 21.10 may cause irreparable injury to a party and that, in addition to any other remedies that may be available, each party shall be entitled to seek injunctive relief against the threatened breach of the provisions of this Section 21.10, or a continuation of any such breach by the other party or any person provided with Confidential Information, specific performance and other such relief to redress such breach together with damages and reasonable counsel fees and expenses to enforce its rights hereunder.

Example 10: From an Employment Agreement

4.2 No Solicitation. Executive shall not directly or indirectly solicit or take away, or attempt to solicit or take away, any person then employed by Company for purposes of employment by or any consulting relationship with Executive or any other person, firm, corporation, partnership, limited liability company or other entity during the term of this Agreement.

Example 11: From a Unanimous Shareholders Agreement

17.3 NON-SOLICITATION OBLIGATION OF STRATEGIC PARTNERS AND THE FOUNDING SHAREHOLDER.

Each Strategic Partner and the Founding Shareholder covenants and agrees that, while it is a Shareholder and for the one year period immediately following it ceasing to be a Shareholder, either directly or indirectly through Affiliates or Subsidiaries, it shall not, directly or indirectly, either individually or in partnership or in conjunction in any way with any person or persons, whether as principal, agent, consultant, shareholder, guarantor, creditor or in any other manner whatsoever offer employment to or endeavour to entice away from the Corporation or its Subsidiaries or Affiliates, any person employed (or retained as a consultant) by the Corporation or its Subsidiaries or Affiliates as at the date of such Strategic Partner or Founding Shareholder ceasing to be a Shareholder, or who was so employed or retained at any time during the previous one-year period or interfere in any way with the relationship between any such employee (or consultant) and the Corporation, its Affiliates or Subsidiaries. Provided, however, that the provisions of this Section 17.3 shall not apply to newspaper and other generally available or disseminated recruiting activities conducted by a Strategic Partner or the Founding Shareholder; provided that they do not expressly address or direct any such recruiting activities at the employees or consultants of the Corporation (or of the Subsidiaries or Affiliates thereof). The Strategic Partners and the Founding Shareholder have or will have specific knowledge of the affairs of the Corporation, its Affiliates and Subsidiaries and their business. Therefore, such Shareholders hereby acknowledge and agree that all covenants, provisions and restrictions contained in this Section 17.3 are reasonable and valid in the circumstances of this Agreement, and all defences to the strict enforcement thereof by the Corporation (and its Affiliates and Subsidiaries, in respect to which the Corporation is contracting herein as agent) on the basis that such covenants, provisions and restrictions are not reasonable or valid or otherwise against public policy are hereby waived. Notwithstanding the foregoing, the parties hereto covenant and agree that the restrictive covenants set forth in this Section 17.3 apply only to the business group(s) within the affiliated organization of each Strategic Partner that work directly with the Corporation, and do not apply generally to any Strategic Partner, its Affiliates and Subsidiaries and in the case of VentureCo, shall apply only to VentureCo and shall not apply to its unitholders or to any entity in which VentureCo holds an equity investment.

Example 12: From an Asset Purchase Agreement

6.10 Agreement Not to Solicit. During the Restricted Period, Seller shall not (i) directly or indirectly attempt to hire away any then-current employee of Buyer or any of its affiliates or to persuade any such employee to leave employment with Buyer or any of its affiliates or (ii) directly or indirectly solicit, divert, or take away, or attempt to solicit, divert or take away, the business of any Person with whom Buyer or the Product Line has established or is actively seeking to establish a business or customer relationship.

Example 13: From an Executive Employment Agreement

9(b) Non-Solicitation. During the Noncompete Period, Executive will not directly or indirectly (i) induce or attempt to induce any employee or independent contractor of any Related Company to leave the employ or contracting relationship with such entity, or in any way interfere with the relationship between any such entity and any employee or full-time independent contractor thereof, or (ii) induce or attempt to induce any customer, supplier or other business relation of any Related Company to cease doing business with such entity or in any way interfere with the relationship between any such customer, supplier or other business relation and such entity. By initialing in the space provided below, Executive acknowledges that Executive has read carefully and had the opportunity to consult with legal counsel regarding the provisions of this Section 9(b).

Example 14: From an Executive Employment Agreement

  1. Non-Competition and Non-Solicitation.

During the Term and for a period of one year following the date of termination of Employee’s employment with the Company and/or the termination of this Agreement, for any reason and whether voluntary or involuntary: (a) the Employee shall not in the United States or in any country in which the Company shall then be doing business, directly or indirectly, enter the employ of, or render any services to, any person, firm or corporation engaged in any business that is competitive with the business of the Company or of any of its subsidiaries or affiliates of which the Employee may become an employee or officer during the Term; Employee shall not engage in such business on Employee’s own account; and Employee shall not become interested in any such business, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or any other relationship or capacity; provided, however, that nothing contained in this Section 10 shall be deemed to prohibit the Employee from acquiring, solely as an investment, shares of capital stock of any public corporation; (b) neither the Employee nor any Affiliate of the Employee shall solicit or utilize, or assist any person in any way to solicit or utilize, the services, directly or indirectly, of any of the Company’s directors, key advisors, officers or employees (collectively, “Associates of the Company”). This non-solicitation and non-utilization provision shall not apply to Associates of the Company who have previously terminated their relationship with the Company. The above covenants will apply to the Employee, regardless of the circumstances under which the employment ends or this Agreement is terminated.

Example 15: From a Franchise Agreement

(f) Franchisee shall not attempt to obtain any unfair advantage or head start either during the term of this Agreement or thereafter by soliciting or attempting to induce any customer, employee, supplier, contractor, agent, distributor, licensee or franchisee of Franchisor to divert his or her business, employment or contract to Franchisee or any other competitive business, by the use of information derived from Franchisee’s knowledge of and association and experience with the franchised business and the Franchisor system during the term hereof, and Franchisee acknowledges that all such information and the customer lists constitute confidential information and are trade secrets belonging to the Franchisor system, and that any unauthorized retention, disclosure or use of personal information or data may be a violation of Franchisor’s policies and statements regarding data privacy, collection, disclosure, use and retention which Franchisee subscribed to, used, displayed and participated in giving while a franchisee operating the franchised business. The covenants of this paragraph shall also extend to cover and bind each director, officer and principal of Franchisee who has in any capacity affixed his or her signature to this Agreement.