February 08, 2018

Non-Solicitation-of-Employee Agreements Are Not Non-Competes—Except When They Are

6 min

Employers commonly include prohibitions against post-employment soliciting of customers and employees in employment agreements. Most states simply treat prohibitions against soliciting customers like non-compete agreements—they are generally unenforceable unless narrowly tailored.[1]  Other states go beyond the non-compete analysis and apply additional factors to determine whether a customer non-solicit is enforceable.[2]

When it comes to non-solicits of employees, it’s commonly thought that they are easier to enforce than full-blown non-compete restrictions—but are they? The answer lies in state law, and states approach the issue differently.

Manitowoc Co., Inc. v. Lanning

The Wisconsin Supreme Court recently weighed in on this question in Manitowoc Co., Inc. v. Lanning, No. 2015AP1530, 2018 Wisc. LEXIS 12 (Wis. Jan. 19, 2018).  Lanning’s employment agreement prohibited him, for two years after termination of his employment, from directly or indirectly soliciting, inducing, or encouraging any employee of Manitowoc to terminate his or her employment with Manitowoc, or accept employment with a competitor, supplier, or customer. Lanning quit to become the director of engineering for SANY America, one of Manitowoc’s direct competitors.

Manitowoc sued Lanning, alleging that he had violated his non-solicit by communicating with a number of Manitowoc employees about employment prospects at SANY and recruiting another Manitowoc employee at lunch.

The initial question before the Wisconsin Supreme Court was whether the non-solicitation of employees provision was governed by Wis. Stat. § 103.465. Here’s where it gets interesting.

Section 103.465 states:

A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.

On its face, the statute does not address restrictions against soliciting employees. The first sentence references a “covenant . . . not to compete.”  But the court said that the plain meaning of the statute does not limit its applicability to the “textbook example” of a covenant not to compete; rather, the court explained, the statute was intended to apply more broadly to agreements that placed restraints on trade—like a restriction on soliciting employees, which limits an employee’s ability to participate in free market competition by limiting his or her access to the talent pool. Thus, Lanning’s non-solicit was in effect a non-compete agreement subject to Section 103.465 that was unenforceable because it was overbroad (not limited geographically or by category of employee) and not sufficiently tailored to address only Manitowoc’s protectable interests.

Where Employee Non-Solicits May Be Treated as Non-Compete Agreements . . .

Wisconsin is not alone.

New YorkPenton Learning Sys. LLC v. Defense Strategies Institute Group, 2014 LEXIS 3622 (N.Y. Sup. Ct. July 28, 2014) involved an employee non-solicit between a conference producer and its former employees. The Court held that “the same standards governing the enforceability of non-compete provisions apply” to the enforceability of an employee non-solicit. Similarly, in Lazer Inc. v. Kesselring, 823 N.Y.S. 2d 834 (N.Y. Sup. Ct. 2005), the Court noted that “a covenant not to solicit former employees is a species, albeit a limited one, of a covenant not to compete” and refused to enforce it because it failed to serve any legitimate business interest of the employer.

Georgia:  In Cox v. Altus Healthcare and Hospice Inc., 706 S.E.2d 660 (Ga. Ct. App.), the Court applied the standard used to evaluate non-compete provisions to an employee non-solicit, striking down the employee non-solicit for its prohibition on even unsolicited contact, as the restriction on unsolicited contact was more than necessary to protect the legitimate interests of the employer.

Texas:  In Cooper Valves, LLC v. ValvTechnologies, Inc., 531 S.W.3d 254 (Tex. App. 2017), the Court evaluated the employee non-solicit under the standard applied to other non-compete provisions and held that an employee non-solicit was unenforceable for its failure to contain geographic or time limitations, and to specify the categories of employees who were “off limits.”

Virginia:  In Mantech Itn’l Corp. v. Analex Corp., 75 Va. Cir. 354 (2008), the Court evaluated the enforceability of an employee non-solicit between Mantech and a former management employee. On a demurrer, the Court held that an employee non-solicit is properly evaluated under the same standard as a non-compete provision and, thus, would be enforceable only if the employee non-solicit is narrowly drawn to protect legitimate business interests, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy. In Mantech, the employee non-solicit under review was deemed unenforceable for being overly broad in its use of “solicit or induce” to describe the scope of prohibited conduct.

. . . Except When They Are Not

And although some states treat employee non-solicit agreements like non-compete agreements, other states do not:

California:  Cal. Bus. & Prof. Code § 16600 provides that covenants not to compete are generally unenforceable, even if narrowly drafted, unless as otherwise provided in the statute itself. But in Sunbelt Rentals v. Victor, 2014 WL 492634 (N.D. Cal. Feb. 5, 2014), the Court rejected the argument that an employee non-solicit was unenforceable as a restraint of trade subject to § 16600.

Colorado:  C.R.S. § 8-2-113 provides that “any covenant not to compete which restricts the right of any person to receive compensation for performance . . . of labor . . . shall be void,” subject to limited exceptions. In Phoenix Capital Inc. v. Dowell, 176 P. 3d 835 (Colo. App. 2007), the Court held that the investment bank’s employee non-solicit agreement with its former senior portfolio analyst was enforceable, despite the fact that the accompanying noncompetition provision was invalid.

Louisiana:  In CDI Corp. v. Hough, 9 So. 3d 2009 (La. Ct. App. 2009), the Court evaluated the enforceability of an employee non-solicit between an engineering company and its former vice president of operations. The Court, acknowledging that La. R.S. 23:921 prohibits agreements that restrain the lawful exercise of trade, held that an employee non-solicit is not governed by La. R.S. 23:921 because it does not prohibit the employee from exercising his trade, but instead merely restricts those who can be recruited to the employee’s new company.

What Is an Employer to Do?

When contemplating an employee non-solicit, ask yourself:  When the judge says, “Why do you need to prohibit this former employee from soliciting your other employees,” what will you say? What specific business interest are you protecting? How did you limit the restriction geographically and otherwise to show its reasonableness? It’s prudent for you and your lawyer to anticipate these questions wherever you’re doing business—particularly if you are in one of those states that treats employee non-solicits like non-competes.

Danielle Lawrence, Law Clerk, assisted with the preparation of this blog.

[1] See, e.g., Graham v. Cirocco, 31 Kan. App. 2d 563, 572 (2003); Century Business Services, Inc. v. Urban, 179 Ohio App. 3d 111, 117–18 (Ohio App. 8 Dist. Nov. 6, 2008); SafeWorks, LLC v. Max Access, Inc., No. H-08-2860, 2009 WL 959969 (Tex. Apr. 9, 2009).

[2] See Clark’s Sales & Servs., Inc. vs. Smith, 4 N.E.3d 772, 782 (Ind. Ct. App. 2014) (non-solicitation prohibition enforced to protect current customers, generally not past customers); Montel Aetnastak, Inc. v. Miessen, 998 F. Supp. 2d 694, 717 (N.D. Ill. 2014) (Illinois courts are reluctant to prohibit soliciting customers whom former employees never had contact with while employed).