Thursday, February 25, 2016

Language matters when drafting restrictive covenants

Consider the following language in a non-solicitation agreement:
Neither PARTY will directly solicit for employment a current or former employee of the other PARTY who has performed any work in connection with this AGREEMENT. This provision will remain in effect during the term of the SERVICES and for one (1) year from the date of said former employee’s separation of employment from P&G or CONTRACTOR.… Further it is acknowledged that simply hiring an employee of the other PARTY is not a restricted activity in the absence of an improper solicitation as described above.
If a group of employees resigns and forms a new company, and their customer, with whom the group of employees did business for their old employer, directly engages the new company, has the customer violated the non-solicitation agreement?

In Definitive Solutions v. Sliper (2/17/16), an Ohio Appellate Court, focusing on the term “employment”, concluded that the agreement had not been breached:
To succeed in its argument, DSC has to show that “employment,” as the term is used in the agreement, has a broad meaning that includes contract work performed as an employee of another company. But where an individual works for a company that is hired by a third party to provide services, we don’t commonly think of the individual as in the employment of the third party. Suppose a homeowner has a clogged sink and calls Acme Plumbing for help. We all understand that the plumber who shows up to snake the drain is in the employment of Acme, not the homeowner. The same goes for the Employee Defendants in this case. This common understanding is demonstrated by the definition of an employee in the community created and edited “encyclopedia” Wikipedia, which provides that an employee is “a person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business.” (Emphasis added.) Wikipedia, Employee, (accessed February 1, 2016).
Reliance on Wikipedia aside, this case illustrates the importance of word choice in restrictive covenants. If DSC wanted to prevent its customer from using the services of an entity that employs its former employees, it should have said that. But it didn’t. Instead, it merely precluded the customer from “directly solict[ing] for employment”, which is very different than what the customer actually did.

Loophole? Yes. Lawyers reading a contract to determine its boundaries? Almost certainly. Dirty pool? Not at all. Words matter in contracts. When presenting a restrictive-covenant agreement to an employee, contractor, customer, or vendor, make sure you’ve thought through any possible manner of breach you want to prohibit, and triple check to make sure you language covers you.