Is a Non-Recruitment Agreement a Non-Compete?

When you say “recruitment,” it brings up painful memories of law school. But hey, at least we had free pizza (sometimes).

Speaking of recruiting, the Wall Street journal recently reported that employee mobility is at a two-decade high. That means a lot of employees are quitting their jobs and going to work for competitors. Anecdotal evidence from my own law practice suggests the same. There are a lot of departing employee disputes and lawsuits in Texas right now, and I suspect the same is true in other states.

In many cases, when those employees leave their employers, they will have employment agreements that restrict them from soliciting the customers or employees of their former employer. People often want to know if that’s a non-compete.

The short answer is yes. Generally, a restriction on soliciting a former employer’s customers or clients is a form of non-compete. I covered this in my popular post Is a Non-Solicitation Agreement a Non-Compete? The answer matters because a non-compete has to be reasonable in scope. See Tex. Bus. & Com. Code § 15.50(a).

Restrictions on soliciting employees get relatively less attention. Lawyers and non-lawyers alike tend to assume such restrictions are enforceable.

In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the Texas Supreme Court said that restrictions on soliciting a former employer’s “customers and employees” are restraints of trade governed by the non-compete statute. But Marsh was not about solicitation of employees, so the part about soliciting employees could be viewed as dicta.

There is conflicting Texas case law on whether a restriction on soliciting a former employer’s employees is a non-compete subject to the requirements of the non-compete statute.

Some Texas courts have held that a restriction on employee non-solicitation is not a restriction on competition. See, e.g., Totino v. Alexander & Associates, Inc., No. 01-97-01204-CV, 1998 WL 552818, at *8-9 (Tex. App.—Houston [1st Dist.] Aug. 20, 1998) (not designated for publication); Nova Consulting Group, Inc. v. Eng’g Consulting Servs., Inc., No. Civ. SA-03-CA-305-FB, 2005 WL 2708811, at *18 (W.D. Tex. June 3, 2005) (citing Totino).

Other cases have held that a non-recruitment clause is a non-compete. See, e.g., Smith v. Nerium International, LLC, No. 05-18-00617-CV, 2019 WL 3543583, at *4 (Tex. App.—Dallas Aug. 5, 2019, no pet.) (mem. op.) (citing Marsh).

The better view is that a restriction on soliciting employees is a form of non-compete. (As always, this is just my opinion, not the opinion of my firm or clients.)

Think about it. Imagine that two competitors enter into an agreement not to solicit each other’s employees. Are you telling me such an agreement would not raise any antitrust concerns? No, of course it would.

Both the motive and effect of a restriction on soliciting employees are to prevent competitors from “poaching” employees. The company’s motive is to protect itself from competition. And the effect—if the restriction accomplishes its intended purpose—is to inhibit competition. So, a restriction on soliciting employees raises the same kind of anti-competitive concerns as a restriction on soliciting customers and should be treated as a non-compete.

Plus, If you say that a restriction on soliciting employees is not a non-compete, be careful what you wish for. Let’s assume for the sake of argument it’s not a “covenant not to compete.” In that case, it could still be a contract in restraint of trade or commerce, and that would make it illegal. See Tex. Bus. & Com. Code § 15.05. Or at the least, it would be subject to some reasonableness limitation.

I suppose you could argue that a restriction on soliciting employees is neither a restraint of trade and commerce nor a non-compete. But in that case, there would be no reasonableness limitation, and that seems like an untenable result. Are you saying that a restriction on soliciting employees could have a ten-year term, or no time limit at all? It makes more sense to treat a restriction on soliciting employees as a form of non-compete—as the Texas Supreme Court did in Marsh—which means it has a reasonableness limitation. 

But what about those Texas decisions that said a restriction on soliciting employees is not a restriction on competition?

Some of those cases were decided before Marsh. So you could argue they were implicitly overruled by the contrary statement in Marsh.

Even aside from that, I don’t find the reasoning of those cases persuasive.

In the Totino case, the court considered whether a non-recruitment covenant was a prohibited contract “in restraint of trade or commerce.” The court held it was not, reasoning that non-recruitment agreement is more like a nondisclosure covenant, which is not a non-compete. Totino, 1998 WL 552818, at *8-9.

Non-recruitment agreements, the court said, “do not necessarily restrict a former employee’s ability to compete with his or her former employer and, like nondisclosure covenants, should not significantly restrain trade.” The court added that an agreement not to solicit employees does not restrict those employees from leaving but only bars the former employee from soliciting them. Id. at *9.      

The reasoning is flawed. First, the premise that a nondisclosure agreement is not a restraint of trade or commerce is too broad. A confidentiality agreement can be so broad that it functions as a non-compete. See Thoroughbred Ventures, LLC v. Disman, No. 4:18-CV-00318, 2018 WL 3752852, at *4 (E.D. Tex. Aug. 8, 2018) (nondisclosure agreement that has the practical effect of preventing the former employee from using general knowledge, skill, and experience should be treated as a non-compete).

Second, even if we assume nondisclosure agreements are not non-competes, comparing a non-recruitment restriction to a nondisclosure clause is inapt. The primary purpose of a confidentiality agreement is to protect confidential information; the effect on competition is incidental. But as noted earlier, with an agreement not to solicit employees, the primary purpose is to protect the employer from competition.

That leads me to the third flaw in the Totino reasoning. The argument that the non-solicitation agreement is not an absolute bar to employees leaving goes to the reasonableness of the restriction, not whether it restrains competition. A contract term does not have to absolutely prohibit competition to implicate the reasonableness concerns of the non-compete statute. Restraining competition—to some degree—should be enough.

I’m not saying that a restriction on soliciting employees is prohibited. I’m just saying that it should be treated as a non-compete subject to the limitations of the non-compete statute, particularly the reasonableness requirement.

Ultimately, I think that was the real rationale of Totino—that the restriction was reasonable. It would have been better for the court to say, “yes, a restriction on soliciting employees is a restraint on competition, but we find this one to be reasonable.”

That was essentially what the judge did in Everett Financial, Inc. v. Primary Residential Mortgage, Inc., No. 3:14-CV-1028-D, 2016 WL 7378937 (N.D. Tex. Dec. 20, 2016). The reasonableness requirement of Section 15.50(a) applies to employee non-solicitation agreements, the court said, citing Marsh. Id. at *8. But the court held that the restriction on solicitation at issue was reasonable in scope, despite the lack of a geographic limitation, and did not have to be limited to soliciting employees with whom the former employee had “personal contact.” Id. at *8-9.

Bottom line: Totino does not provide a solid basis for holding that a restriction on soliciting employees is not a non-compete, especially in the face of the contrary statement in Marsh. The better view is that a restriction on soliciting employees is a form of non-compete, and therefore it must meet the reasonableness requirement of the Texas non-compete statute.

Totino does make a fine cheap frozen pizza though. Law school students take note.

(Thanks to Dallas lawyer Sean Lemoine for pointing out Totino and its progeny, even if he incorrectly thinks Totino was right, and to Houston lawyer Leigh Freeman for pointing out the Thoroughbred Ventures case.)

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

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