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Non-Solicitation Clauses in NDAs
Practical Law Legal Update w-001-4019 (Approx. 3 pages)
Non-Solicitation Clauses in NDAs
by Practical Law
| Published on 05 Feb 2016 • USA (National/Federal) |
This Legal Update addresses the use of non-solicitation (non-poaching) clauses in confidentiality or non-disclosure agreements (NDAs) entered into between parties discussing or exploring a potential business transaction. It highlights issues that counsel should consider to determine when non-solicitation clauses are appropriate and how to draft clauses that are not overly restrictive or anticompetitive.
Non-solicitation clauses are restrictive covenants that are often included in nondisclosure agreements (NDAs) among commercial businesses during preliminary discussions about potential transactions. They are more commonly used when the parties to the NDA are competitors, and where one or both parties insist on including a non-solicitation clause to prevent the other party from:
- Soliciting or offering employment to the discloser's employees ("poaching").
- Using the discloser's confidential information (for example, names of customers and suppliers) to divert business away from the disclosing party.
However, non-solicitation clauses are not always appropriate in these situations. They may be commercially over-reaching, and overly restrictive non-solicitation clauses may be unenforceable if they have an anticompetitive impact on the market (see Practice Note, Non-Solicitation and No-Poach Agreements).
When drafting or negotiating an NDA that includes a non-solicitation clause, counsel should determine whether the clause is appropriate by considering whether it is necessary to protect the parties' legitimate business interests. If including a non-solicitation clause, counsel should draft each aspect of the clause as narrowly as possible to protect the disclosing party or parties' interests by considering the following:
- Mutual vs. unilateral clause. Non-solicitation clauses are often drafted unilaterally to protect the disclosing party. But mutual non-solicitation clauses may be appropriate in certain situations involving competitors. However, the parties should be aware that a mutual obligation has a greater anticompetitive effect and is more likely to be challenged by antitrust agencies or private parties. Mutual obligations are also more likely to be characterized as per se illegal if not necessary to a procompetitive collaboration.
- Term. The term should be reasonable and appropriate to the facts and circumstances of the proposed transaction, including the parties' relative positions, their industries, the type of deal, and its scope. Selecting a shorter term limits the anticompetitive effects and helps to support enforceability.
- Scope of restricted parties. Parties should consider relevant commercial and contractual facts and circumstances when negotiating the scope of the entities and persons subject to the non-solicitation restriction (for example, whether to include affiliates and subsidiaries or just the contractual party). A narrower provision is easier to comply with and less competitively sensitive.
- Definition of protected employees. This definition is fact- and circumstance-specific and may be formulated in a variety of ways ranging from specifically named employees to all employees of the disclosing party. Many disclosing parties try to protect all of their employees, but to support enforceability the disclosing party should consider limiting this protection as much as possible (for example, to key executives and employees that the recipient had contact with during the negotiation process). Recipients should attempt to exclude employees of the disclosing party that the recipient does not know or employees that the recipient knew and interacted with before any discussions regarding the potential transaction took place.
- Definition of protected customers and suppliers. To support enforceability, the disclosing party should consider whether a customer and supplier non-solicitation is necessary to protect its legitimate business interests. This determination depends on a variety of factors, including:
- the number of customers and suppliers in the relevant industry and geographical territory; and
- the likelihood that the confidential information can be used by the recipient to divert business away from the disclosing party.
- Definition of restricted activity and exceptions. Blanket non-solicitation obligations of customers and suppliers and outright prohibitions against hiring employees (no-hires) have a greater anticompetitive impact than more narrowly drafted restrictions. To support enforceability the parties should consider including exceptions for certain types of activities. For example:
- in an employee non-solicitation provision, allowing general solicitations to the media, solicitations using a third-party recruiter, and employee-initiated approaches; and
- in a customer and supplier non-solicitation, including exceptions permitting solicitation of protected customers and suppliers that are in existing relationships with the recipient or its affiliates. An exception permitting solicitation in the ordinary course of business also significantly decreases the potential anticompetitive effect of a customer and supplier non-solicitation.
In all cases, the parties should endeavor to draft clearly and unambiguously to support the enforceability of the clause.
For a sample non-solicitation clause with important drafting and negotiation tips, see Standard Clauses, Confidentiality Agreement: Non-Solicitation Clause. For more on confidentiality and nondisclosure agreements, see Confidentiality and Nondisclosure Agreements Toolkit.