In-House Legal Solutions NDA Guidance Note Series – Solicitation in a Non-Disclosure Agreement

Solicitation in a Non-Disclosure Agreement

We comment on solicitation causes in a non-disclosure agreement (“NDA”), in this Part 7 of the In-House Legal Solutions NDA Guidance Note Series.

The poaching of a counterparty’s employees isn’t a risk that automatically springs to mind when one thinks of negotiating an NDA, however this is something that is very often catered for by way of a non-solicitation clause.

In essence, it is a restrictive covenant which aims to prevent the receiving party of the confidential information from soliciting, encouraging or enticing away officers, directors and employees of the disclosing party’s company or a group company and/or using the discloser’s confidential information to divert business away from the disclosing party. Sometimes this clause can be mutual however more often than not it is unilateral and is usually drafted to prevent the recipient from gaining any sort of commercial advantage over the disclosing party.

However, it cannot be prevented altogether and nor should it. Ordinary business and commercial relations should still be able to go ahead but the key is to link such a clause to the confidential information that has been disclosed and received by the recipient. For example, a recipient may wish to narrow the scope of the restricted parties by attaching this restriction to ‘senior’ or ‘key’ employees only (sometimes with an awareness qualifier) and/or those persons who are referenced in the confidential information, or whom the recipient has dealings with, in respect of the transaction, which is the subject of the NDA, so as to not prevent the recipient from employing any persons from the company who are not involved in the transaction.

Representatives of the recipient may also be caught by this restriction so it is worth addressing the extent to which a representative should be required to comply with such a clause (whether to include affiliates and subsidiaries or just the contractual party), which can be extremely restrictive, especially if that recipient has not received any confidential information but just so happens to fall into the definition of “representative”. Careful consideration should be given to the extent to which professional advisors and lenders of finance are caught by a non-solicitation clause as they will often not agree to be bound by such restrictions.

A recipient may also wish to consider time limiting the restriction so that it has a maximum duration for example. Confidential information can be said to lose is confidential nature after a certain period of time and so if an NDA has a particularly lengthy duration, a shorter solicitation clause may be preferable and will help to support enforceability.

It will be important from a recipient’s point of view to include carve outs which permit recruitment in certain circumstances, such as a recruitment advert not targeted at the employee, an unsolicited approach made by the employee and solicitation where the employee has given or been given notice of termination of their employment. These carve outs are unlikely to be present in a first draft NDA but should be added by a recipient seeking to limit the restriction on them.

The disclosing party may also wish to consider whether a customer and supplier non-solicitation is necessary to protect its legitimate business interests. This will depend on factors such as the number of customers and suppliers in the industry and location to the parties and the likelihood that the confidential information may be used by the recipient to divert business away from the disclosing party.

As with most restrictive covenants, when drafting or negotiating an NDA thought should be given to whether the clause is appropriate and necessary to protect the parties’ legitimate business interests.

In-House Legal Solutions can help you to ensure that your business needs are adequately protected when negotiating NDAs. For more information or to discuss this further, please contact letstalk@inhouselegalsolutions.com.