What Parties Need to Know About Non-Competition, Non-Solicitation, and Non-Circumvention Provisions

Classical musicians often teach private students to supplement their income. When moving to a new geographic area, the quickest way to find new students can be to associate with a music school. The music school likely already has a reputation in the community and administrative infrastructure for student registration and payments.

The music school assigns students to teachers, who are contractors paid by the hour and need only show up to teach students. The music school usually provides a suitable teaching location and is responsible for collecting payment from the students, but the teacher gets paid even if the student doesn’t pay the music school.

In this scenario, the music school has significant overhead costs for the registration and payment infrastructure and staff, advertising, and rent or ownership of the lesson location. The music school also bears the risk of students not paying their lesson fees. Therefore, teachers' pay is often less than 50% of the amount the students pay for their lessons. For instance, the music school might collect $100 for a one-hour lesson but pay the teacher only $35.

Over time, many musicians become sought-after teachers and no longer need the music school to attract students. The teachers realize they can collect the $100 directly from their students, pay for registration and payment systems, and make double or more what they make from the music school.

So, the teachers cancel their contract with the music school and start their own studio. They soon learn that their agreement with the music school includes a combination of non-competition, non-solicitation, or non-circumvention language, which makes it more challenging for them to open their studio.

Non-competition, non-circumvention, and non-competition provisions don’t only appear in employment contracts; they also are common in contracts for the sale of a business or real estate. This article is part of a series on Contract Drafting Fundamentals and discusses these provisions and when they are appropriate and enforceable.

Non-Competition Provisions

Non-competition provisions prevent a party from having a business that competes with the other party. To be enforceable, non-competition provisions must have a duration or end date, and they usually will have a geographic boundary. A non-competition provision should be tailored to only protect a party’s business interests. Courts won’t enforce a non-competition provision that’s so strict that it prevents an individual from engaging in gainful employment in their profession.

For our music teacher, the music school’s contract might prohibit the teacher from teaching any music students at a studio within a 10-mile radius of the music school for one year after the teacher ends their relationship with the school. But, a court wouldn’t be likely to enforce a non-competition provision that prohibited the teacher from having music students at any location in the United States for five years. The latter provision would effectively prevent the teacher from working as a music teacher for five years.

Some states have laws limiting or prohibiting non-competition provisions. In addition to state-specific restrictions, when evaluating a non-competition provision, a court first will look at the “employer” party’s business interests. Generally, courts permit provisions only if they are closely tailored to meet the employer’s business interests and don’t prevent the employee from making a living in their chosen field.

Sometimes an employer will spend significant time and money training an employee in a specialized and limited industry. If so, the employer might have a business interest in the employee immediately using that training in a new job where they compete with the employer. In this situation, a non-compete of limited duration might be enforceable.

However, in our example, the music school didn't train the music teacher. Rather, the music teacher was hired because they already had the training to do the job. So, a non-competition provision isn’t necessary to protect the music school’s interests. What the music school is most concerned about is preventing the music teacher from starting their own studio with the music school’s students.

Non-Solicitation Provisions

A non-solicitation provision would address the music school’s concern by prohibiting the music teacher from teaching music school students outside of the music school. Other employers use non-solicitation provisions to prevent employees from encouraging other employees to leave their jobs or contracting with the employer’s customers.

A court won’t enforce a perpetual non-solicitation provision. As with non-competition provisions, the duration of a non-solicitation obligation should be only as long as necessary to protect the employer’s interests. Usually, one- or two-year provisions will be enforceable. Whether a longer non-solicitation period will be enforced depends on the circumstances.

Non-Circumvention Provisions

Non-circumvention provisions are common in joint venture agreements and other business relationships where two unrelated parties work together toward a common business opportunity. In those circumstances, non-circumvention provisions prevent either party from pursuing the opportunity independently and cutting the other party out of their profit from the joint venture.

Suppose the music school wanted to bid to provide music education to a local school district and the music school could not provide a service the school district required – perhaps Suzuki violin lessons. The music school might pair with a Suzuki violin teacher to jointly pitch services to the school district. A non-circumvention provision might prohibit either the music school or the Suzuki teacher from proceeding with the school district contract without the other.

Non-circumvention provisions are common in joint venture agreements. For example, suppose a private equity fund and real estate firm collectively bid to acquire an office building. They might have a non-circumvention provision that prohibits either party from purchasing the office building unless the other party is involved in the deal.

Non-circumvention provisions are less common than non-competition or non-solicitation provisions in the employment context. However, they sometimes are seen where an employee has marketable skills, as may be the case with a consulting firm.

For instance, suppose Company A bids on Contract X and includes an employee’s resume as a key employee who would work on the contract. Company B is also bidding on Contract X. If the employee were subject to a non-circumvention provision, they might not be able to work for Company B on Contract X. This non-circumvention provision would disincentive Company B from hiring Company A’s employees during the bidding process.

Tips for Preparing Contracts

When including a non-competition, non-solicitation, or non-circumvention provision (which I'll collectively call "Non-Competes"), a party should consider the following:

Don’t Forget Consideration

A fundamental rule in contract law is that there must be consideration for a contract to be enforceable. Non-Competes required at the beginning of a relationship usually have consideration, if only in the mutual agreements to work together.

Sometimes, employers ask employees to sign a Non-Compete during their employment as a condition of continued employment. However, some states do not recognize continued employment as consideration for Non-Competes. The best practice is to tie a Non-Compete to tangible consideration, such as a promotion, pay increase, or bonus.

Be Sure the Non-Compete Protects Legitimate Business Interests

Non-Competes should be no broader than is necessary to protect legitimate business interests. Before contracting, the party seeking the non-compete should evaluate whether they can demonstrate a legitimate business interest in the Non-Complete sought.

Authorize Equitable Relief

It's often difficult to quantify the damages caused by a breach of a Non-Compete. There's a general concept in the law that equitable relief, such as injunction, isn't available if there is an adequate remedy at law (i.e., money damages). Although a party can obtain equitable relief by demonstrating that monetary damages are inadequate, including a contract provision explicitly authorizing the non-breaching party to proceed directly to equitable relief is more efficient.

Consider Liquidated Damages or an Agreed Measure of Damages

Since monetary damages due to a breach of Non-Competes can be difficult to prove, parties might agree in advance on how damages from a breach will be calculated. For instance, damages could be disgorgement by the breaching party of all profits from the breach. Or, the parties could agree to a specific amount of liquidated damages.

Consider the Scope of Your Severability Provision

Contracting parties should include a severability provision that addresses what happens if a court declares the Non-Compete invalid. “Boilerplate” severability provisions may provide that the rest of the contract will be enforced even if the Non-Compete cannot.

But that doesn’t work for all contracts. For instance, where the Non-Compete is central to the contract, the parties might instead want an invalid Non-Compete to trigger contract termination. Or if the Non-Complete is invalid only due to its geographic scope, the parties instead might want to direct a court to reform the contract so it is enforceable.

© 2023 by Elizabeth A. Whitman

Any references to clients and their legal situations have been modified to protect client confidentiality

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