Author: VU Faculty
Every agency should have a contract with every producer. Every contract should include a clause that governs the solicitation of accounts if the producer leaves the agency. Unfortunately, too many agencies either don't have such contract provisions or the ones in place are legally unenforceable. In this article, we explain the difference between non-compete, non-piracy and non-solicitation agreements, including a sample contract that was upheld by a state supreme court.
"Can you please tell me the exact difference between a contract for "non-compete" and a contract for "non-solicit"?
Often, the terms "non-compete," "non-solicitation," and "non-piracy" are used interchangeably. In some ways, it's a matter of semantics, but as drafted, contracts can fall into one of these categories and courts have viewed their enforceability differently. Below are some comments from our faculty with regard to the specific question. Then we'll explore some related issues, offer a sample non-piracy agreement, and, via a separate article link, offer some solutions.
We use the terms Non-Compete and Non-Piracy, but I think they allude to the similar things. A Non-Compete clause protects the agency against the employee taking accounts that he/she produced while an employee. The Non-Piracy Clause protects the agency against the employee taking any other agency accounts.
The title is not important. What the contract actually stipulates is what is important.
A non-compete is just that. You cannot be in the same business in the territory designated by the agreement for the period of time stipulated. In other words, if you are selling insurance in Bowling Green and you have a non compete for three years following termination of employment, you cannot sell insurance in Bowling Green for 3 years. You are more or less relegated to finding another line of work.
A non-piracy agreement means that you agree not to "steal" accounts under any circumstances for a prescribed period of time. Using the same scenario, selling insurance in Bowling Green, termination of employment occurs, go to another agency, continue selling insurance...just not to clients, and sometimes prospects, of your former employer.
Rarely is a non-compete agreement enforceable these days. Check with similar cases in your state to see what precedence is being followed. Most states won't enforce a non-compete because it can deprive a person of their livelihood. A non-compete is usually enforceable, however, when it involves the sale of a business.
Some agencies may be aware that non-competes are unenforceable in some jurisdictions, but have their staff members sign them anyway. The Wall Street Journal reported on one such non-insurance case where an employee sued his former employer, alleging that he was fired because he refused to sign a non-compete agreement. The employer argued that it couldn't be held liable because, under the state "unfair business practices" law, the agreement would be unenforceable anyway. The state court of appeals didn't buy that argument.
According to The Industry Standard, courts are increasingly reluctant to enforce non-compete agreements, even where they are legal. Citing SmartAgreements.com, the article indicates that courts focus on three aspects of a non-compete agreement: (1) Does the employer have a legitimate need for the covenant, (2) Are any geographical restrictions realistic and reasonable, and (3) Is the duration reasonable. In addition, courts are more likely to find a non-compete agreement unenforceable if it is issued after a person's employment begins.
Below is a sample non-piracy agreement that was upheld by the Tennessee Supreme Court. (Caution: This is for illustrative purposes only...you should consult with a qualified employment practices attorney before developing any legal contracts of your own.)
Sample Non-Piracy Agreement
In addition, for information about a related decision by the Louisiana Supreme Court, click here.
For more information on this subject, check out these articles: