Commonly Used Language Made Non-Solicitation Restrictions Unenforceable

A Delaware court found restrictions reasonable but overbroad and unenforceable, highlighting the need for careful drafting of restrictive covenants for enforceability.

The court found that the restrictions on departing employees’ solicitation of customers were overbroad because they encompassed not only actual customers the employee had dealt with but also prospective customers whose identities the employee might not know, as well as customers about whom the employee had received any information. The court concluded that an employer has no protectible interest in prohibiting departing employees from contacting thousands of customers, most of whom the employee had never dealt with and had no confidential information about. 

The court found that the restrictions on departing employees’ solicitation of fellow employees were overbroad because they not only prohibited soliciting or recruiting employees but also prohibited encouraging or attempting to solicit or encourage employees to leave, not just to a competitor but to any other entity. The court concluded that the provision advanced no legitimate business interest, as it captured non-competitive conduct and restricted speech and conduct unrelated to unfair competition.

The court found that the non-solicitation provisions in the company’s Code of Conduct were not binding on employees, even though the employees had acknowledged the Code of Conduct as a condition of employment. 

The decision reconfirms that most employees do not have non-solicitation obligations based on fiduciary duties. Without contract language, non-solicitation obligations can arise from fiduciary duties, but generally only for directors, officers, and key management personnel. In this case, the court found that only one of the five defendants might be a key management person with fiduciary duties, as he was just one level removed from being a direct report to the company’s CEO. 

The decision emphasizes that overly broad restrictive covenants can leave a company completely unprotected. Typically, a company should draft restrictive covenants focusing on enforceability against employees rather than aiming for the broadest possible protections. The court reaffirmed that it will not modify excessively broad restrictive covenants to enforce them unless there is balanced bargaining power and an opportunity to negotiate, such as in the context of a sale business. 

A company should consider:

• Limiting a non-solicitation covenant to prohibit contacting any customer, including prospective customers and customers with whom the person has no confidential information or contact, and does not prohibit attempting to solicit customers.

  
  

• Limiting a non-solicitation of employees covenant so that it does not, without appropriate limitations, prohibit discussing with or encouraging an employee to leave their employment for employment with any other person or entity, or prohibit attempting to solicit employees or encouraging them to leave. 

• Given the trend toward greater judicial scrutiny of restrictive covenants and more decisions finding them overbroad, companies may want to review employees’ existing restrictive covenants to assess their enforceability and, if they are significant to the company, consider amending them to increase the likelihood of enforceability. 

• Companies should consider creating separate forms for different employee categories. While senior executives are often subject to specific, negotiated agreements, other employees are subject to the same broad-based company policies and form agreements. Consider whether a limited group of employees should be subject to arrangements tailored to their roles and relationships with customers and employees, to protect the company's interests.