Do Non-Solicitation Clauses Pose Conflicts of Interest?

I would sincerely like to ask my professional services readers, and particularly those in the legal profession, for some help. I’m not being snarky or sardonic this time, this is a genuine request for perspective.

Professional services firms commonly have several clauses affecting relationships with their employees and subcontractors. The list includes non-competes, intellectual property restrictions—and non-solicitation clauses. It’s this last one I want to focus on.

Most such clauses boil down to something like “as long as you work here and for X time after you leave (typically up to two years) thou shalt not approach a client (or future client, or anything vaguely resembling one who ever breathed the same air as you) with the intent of selling work ‘similar’ to what you did for us.”

Or, in simpler terms: hands off–that client belongs to the company, not you, and we’ll sue if you try to steal ‘our’ client from us by doing what we hired you to do.

As you can tell, there is something that rubs me the wrong way about this. Yet I also have a feeling I’m missing something. Most things in life exist for a reason. I may be missing a big fat reason on this one.

Here are the arguments against such clauses, as I see them.

• Firms requiring this clause position their clients as property to be bartered over. The phrase “who owns the client” has to be somewhat offensive to the putatively owned client.

• There is an inherent conflict of interest with the principle of client service. Say an ex-employee or subcontractor develops a better product, at a lower price, offering greater value, and meeting a need clearly expressed by a client of the existing firm. Non-solicitation clauses mean the employing firm is preventing their client—to whom they are presumably devoted to giving great service—from even hearing of the potential better deal. This is a “dog in the manger” strategy. It may not be legal restraint of trade, but isn’t it a violation of basic client service principles?

But, what’s the other side? What’s the social rationale for non-solicitation clauses? Can someone offer an explanation of how they are, on balance, in the best interests of client, employer and employee together in the long run?

Thanks in advance for any enlightenment; I look forward to the dialogue.

  • Shaula

    HBS Working Knowledge has an interesting article by Carmen Nobel that reminded me of this post: Non-competes Push Talent Away. (Passing along in case you haven’t seen it.)

  • Dan R. Adams Jr (Esq.)

    You have a valid point
    and it seems everyone has jumped in to reiterate your point; however, they did
    not answer your question. I will attempt to do so.

    NDAs and Noncompetes
    stop unscrupulous individuals (either working on their own or under the
    direction of a competitor) and companies from going into a company, learning
    its secrets (pricing, procedures, client lists, and other confidential
    materials) and stealing them. All of you guys (including the author) are only
    imagining a scenario where the honest employee creates so much value and has so
    much bootstrapping ability that he decides to go on his own in which doing so
    would benefit the clients and the market in general. But there are other
    scenarios to consider. For instance where a competitor or would-be competitor
    seeking to enter your market space gets into buyout or merger talks with you
    only so they can gain information about your employees and clients; and then kills
    the deal and starts poaching them? Believe it or not, THIS HAPPENS! It sounds
    like a James Bond scenario but Corporate Espionage is a very real risk.

    Even outside a
    merger/buyout scenario companies will send employees and others into their
    competitors to learn and steal what they can. NDAs and Non-competes provide an extra
    layer of protection against this practice and unfortunately there is no way to
    discern between a good and bad actor.

    Do NDA and
    Non-compete laws need to be addressed? Probably. Does it hurt the marketability of a good
    faith employee and the clients? Sometimes. But as in all things, bad actors
    tend to spoil it for the good ones. Also, many states put limits on how broad
    these restrictions can be so this mitigates what would otherwise be a restriction of trade or profession.

    If you are an employer
    and do not have a good NDA and Non-compete you are ripe for the taking whether
    it be your employees, clients, or intellectual property.

    ps…
    I also recommend to my clients that they have strong Non-Disparagement
    Agreements with their employees, contractors, and vendors. The internet can be
    an ugly and “unfair” place.
    Excellent topic!

    • Dan

      I apologize for the formatting. I don’t know what happened.