Except in California, placement and staffing firms routinely require that their employees sign noncompetition and/or nonsolicitation agreements. Moreover, there are few, if any, industries that litigate over these agreements more frequently than the placement and staffing industry. Placement and staffing firms regularly sue former employees who have gone to work for competitors fearing that they will steal clients. Do the firms succeed in these lawsuits?
Before answering that question, some background information about noncompetition and nonsolicitation agreements is in order. A noncompetition agreement prohibits a former employee from working for a competitor or starting a competitive company. Usually, the prohibition is one year, perhaps two. Noncompetition agreements almost always have a geographic restriction, sometimes expressed in terms of a specified mile radius around the firm’s place of business.
By contrast, a nonsolicitation agreement prohibits the former employee from soliciting or, in some cases, doing business with clients of the firm. Good nonsolicitation agreements only prohibit the former employee from soliciting or doing business with those clients of the staffing firm with which he or she had contact or dealings.
In the typical staffing industry case involving a noncompetition or nonsolicitation agreement, the staffing firm files suit after it learns that the former employee has gone to work for a competitor and has begun soliciting the firm’s clients. The staffing firm also files an emergency motion, usually called a motion for preliminary injunction, asking the court to order the employee either to temporarily stop working for the competitor (if there is a noncompetition agreement) or temporarily stop soliciting or accepting business from the firm’s clients (if the firm is seeking to enforce only a nonsolicitation agreement). If granted, the injunction typically remains in place while the lawsuit is pending.
In many of these cases, the preliminary injunction motion is the most important event in the case. The judge who decides the motion must decide whether the plaintiff (i.e., the staffing company) has proven that it is likely to succeed in the case. To prove likelihood of success, the plaintiff must show that the noncompetition or nonsolicitation agreement is enforceable and that the defendant (i.e., the former employee) has breached the agreement. Cases often, but not always, settle after the motion is decided.
So do staffing firms typically prevail in these suits and, specifically, do judges grant their motions for preliminary injunction? Unfortunately, the answer is, “it depends.” The outcome of a legal dispute is determined by the facts of the case. However, law dictates which facts are relevant. State law governs the enforcement of noncompetition and nonsolicitation agreements and the law varies, sometimes significantly, from one state to the next. Even where facts are identical, a noncompetition or nonsolicitation agreement may be enforceable in one state and not another.
Generally speaking, however, except in California, a court will enforce a noncompetition or nonsolicitation agreement only if the employer can show three things:
First, enforcement of the agreement will protect the employer’s business interests. The first business interest that justifies enforcement of employee noncompetition and nonsolicitation agreements is the protection of customer goodwill. To demonstrate that enforcement is necessary to protect goodwill, the staffing firm must show that any goodwill it has with its customers belongs to the firm and not the employee. Often, staffing firms emphasize that their employees develop close relationships with clients, but at the firm’s expense. The firm also must show that unless the court grants the injunction, the former employee will solicit or do business with the firm’s clients. The best evidence, especially for enforcement of a nonsolicitation agreement, is that the former employee already has begun soliciting the firm’s clients. In general, staffing companies are most successful when they seek to enforce a nonsolicitation agreement in order to protect goodwill and they have evidence that the employee already has begun soliciting clients. Staffing firms are less successful when seeking to enforce noncompetition agreements to protect goodwill.
Courts also will enforce noncompetition or nonsolicitation agreements to prevent former employees from using or disclosing the employer’s confidential information. Whether the staffing firm has confidential information may be difficult to prove, but some courts accept that information about clients, their preferences, and the like can constitute confidential information. In the staffing industry cases, protecting goodwill rather than confidential information is usually the most successful strategy.
Second, the restrictions contained in the noncompete are reasonable. Generally, courts will enforce a noncompetition or nonsolicitation agreement only if the staffing firm can demonstrate that the length of the restriction is reasonably related to the employer’s interest in protecting its confidential information or customer goodwill. A year, for example, is generally considered a reasonable restriction. To enforce a noncompetition agreement (but not a nonsolicitation agreement for the most part), courts also require that the geographic restriction be reasonable. For example, if a sales associate worked and developed relationships with clients only in two states, a geographic restriction broader than those two states might be considered unreasonable.
In some states, courts will rewrite noncompetition and nonsolicitation agreements that contain unreasonable provisions. Thus, a judge may reduce the duration of a noncompetition or nonsolicitation agreement from two years to one year or reduce the geographic reach of a noncompetition agreement from a twenty-five mile radius around the employer’s place of business to a ten mile radius. In other states, however, courts will not rewrite unreasonable noncompetition or nonsolicitation agreements, but simply refuse to enforce them.
Third, the staffing firm provided something of value to the employee in exchange for signing the noncompetition or nonsolicitation agreement. Employees often sign noncompetition and nonsolicitation agreements when they first begin working at a job. The “something of value” provided by the firm in exchange for the agreement is the job. But if the employee does not sign the agreement until she or he has been employed for six months or a year, is “continued employment” a sufficient something of value? In most states, yes. In some states, a noncompetition or nonsolicitation agreement signed after the start of employment is only enforceable if the employer provides some additional value (e.g., a pay raise) other than continued employment.
There are other factors that impact whether a noncompetition or nonsolicitation agreement is enforceable. Courts in most states will not enforce a noncompetition or nonsolicitation agreement if the firm failed to pay the employee all that she or he is owed. In a few states, courts will not enforce a noncompetition or nonsolicitation agreement if the employer terminated the employee without cause. In one state, a noncompetition or nonsolicitation agreement is unenforceable if the employee’s duties and compensation materially changed after the employee signed the agreement.
Whether a staffing firm is considering bringing suit against a former employee or hiring a competitor’s former employee, consulting legal counsel in the state with experience in this area of the law should be a top priority.