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.
Non-Compete clauses, in my opinion, never consider the client. Further, my sense is that virtually all sales organizations consider themselves first with the client residing somewhere in second place, a close second in the better organizations and a distant second in the rest. The clue is in the title on the business card. Who do we think the representative is representing? I adore these new titles like Relationship Manager which seem to me to be just another nonsensical attempt to hide the truth that the seller thinks of him/herself first. Now I don’t think that’s a bad thing. It’s just human nature and if we all admit it our transactions have a shot at becoming much more honest.
Charlie,
I believe in the social rationale.
I may be naive but my idea is that I do my best to create such a great working environment that the best people simply don’t want to leave. They enjoy the work they do, and enjoy the company in which they do it.
About 1/3 down at
http://www.employee-retention-hq.com/
there is an interesting comparison on what employees want in order to stay and what managers believe employees want. Money is #5, yet managers believe it’s #1.
So, instead of having expensive contracts drawn up, I would spend that money on bettering the culture: Flex hours, stocked fridge in the office kitchen, etc. The best people will appreciate this and want to stay. So competition becomes irrelevant.
I think the conflict issue comes up when we treat our people as adversaries, so both the firm and the employees are looking out for #1.
But if we build a firm in which people and the firm look out for each other for mutual fulfilment and enrichment, then people will be happy to stay.
And this goes back to David’s (Maister) principles. And this is where we have to become 2R managers as Peter Friedes writes in his book. We have both to relate and request. With one hand we hold the fire under our people’s feet, and with the other we help them when they stumble and we do everything in our power to protect them from falling too hard.
Many firms expect their people to stand up for the firm but most firms don’t stand up for their people.
Non solicitation clauses remind me of non-competes. Non-competes, at least, are plain bad news from a policy and economic point of view. If someone can leave the company and make a better widget, or provide a better service, that’s all to the good. Silicon Valley, where folks often jump from company to company, including setting up their own companies in the same business, would have simply not happened if California didn’t make non competes illegal.
Charlie, about your concerns that the point of a non-solicitation clause conflicts directly with client service, I could not agree more.
Attorney Dan Hull (over at What About Clients) featured a great post called "Dude, if you can’t steal our clients, you’re fired" which I wrote about in my own post called "Client Portability and Trust." I think you’ll enjoy both posts.
Thanks for such a continually thought-provoking blog.
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There is a strong misconception about "owning" a customer, first of all, what does that mean? Did the customer sign themselves off as property of the company who provides the service or to the sales person or entity that "pitched" the deal? I think that before any one believes this notion can be enforced in a contract or even as a concept , simply ask the customer: Are you mine to own, and for what price did I buy you? I think the answers for either party will be true eye openers…Customers are earned, not owned, in fact we must earn them day in and day out!
We use non-solicitation agreements with our staff. We have invested a great deal of time and money in obtaining our clients and servicing their needs. We provide to certain sales people a vested economic interest in accounts produced by them. This, way, if they become disabled, die or retire and we retain the business, we pay those people or their estates a certain sum over a four-year period. If they voluntarily terminate or are fired and the client goes with them, then they pay us. For accoutns that are "house accounts," meaning no specific proudcer, no former employee may solicit their business for a period of one year after they leave our employ. We believe this is a fair way of protecting our investment.
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.)
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!
I apologize for the formatting. I don’t know what happened.