While both non-compete and non-solicitation clauses are fixtures in the asset management industry, we’ve noticed some new trends regarding these contractual agreements. In general, it seems to be getting harder for firms to enforce them. It’s also interesting to note that many firms don’t take action to hold former staff to agreements regarding the solicitation of their current employees. (See this article that explores this topic.)
The application of non-compete (NC) clauses, also known as “non-competes” (NCs), varies widely across the industry although they’re more consistently found within the hedge fund community. NCs are not necessarily utilized more often at large versus small firms. We’ve seen small or boutique firms with onerous NCs and large firms with no NCs. In general, NCs that are less restrictive are more enforceable.
If a candidate is in possession of a trade secret or proprietary investment process then it’s more likely they’ll be asked to sign a NC. These agreements are typically more enforceable, as are NCs that more narrowly address key components of a candidate’s actual job description and function.
The state in which the candidate works is also a related factor in upholding NCs. For example, the state of California will not enforce them. Outside of California, when it comes to enforceability, what’s reasonable is subjective and there are many nuances that differ from state to state. Additionally, no post restrictions are allowed in California, outside of not sharing confidential information. This includes NCs as well as the non-solicitation of employees or clients.
Firms seem to take a commercial stance on whether to require NCs. Some firms believe that it’s not reasonable or feasible to attempt to keep someone from working legally, even in a competing role. Courts tend to favor employees in these disputes for the same reasons.
If a firm chooses to hold a former employee to a NC, then that individual is typically paid during the proscribed non-compete period. When a firm voluntarily pays a former employee, the enforceability of the non-compete agreement is increased. In New York, for example, it’s almost impossible to enforce a NC if the firm refuses to pay the employee, although non-paying firms may be able to attempt enforcement in theory.
Candidates with NCs who have been laid off tend to honor the agreement to protect their unvested equity unless a new employer is willing to buy it out.
Non-Solicitation (NS) of Employees
Agreements to prohibit the solicitation of current employees are more commonplace across the industry. The NS period is usually for a six to twelve-month term. Enforcement, however, is uneven. While engaging a search firm can help companies identify and recruit the best talent for critical positions, having that neutral intermediary can help employers minimize potential legal exposure relative to any binding NS agreements.
Non-Solicitation (NS) of Clients
Clauses that prohibit the solicitation of clients of the former employer are common for sales professionals and they take various forms. Some examples include: any clients of the firm; only clients the individual covered specifically; clients of the individual for the last twelve months only; or clients and prospects for the last twelve months only. Terms usually vary from three months to one year. In New York state, however, NS clauses are restricted in that they may be limited only to clients with whom the candidate had dealings.
For more information, please contact Melissa Norris at [email protected].