ASK AN EXPERT: PRODUCER ‘NON-COMPETE’ AGREEMENTS
by the IIABA Virtual University Faculty
The terms 'Non-Compete,' 'Non-Solicitation,' and 'Non-Piracy' are often used interchangeably, as a matter of semantics. However, contracts can fall into one of these categories — and courts have viewed the enforceability of each of them differently. This document explains the differences among such agreements, and includes a sample contract.
Every agency should have a contract with every producer. And every contract should govern 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. How should agency principals deal with these agreements?
Faculty Response No. 1
We use the terms Non-Compete and Non-Piracy, but I think they allude to similar things. A Non-Compete clause protects the agency against the employee taking accounts that they produced while an employee. The Non-Piracy Clause protects the agency against the employee taking any other agency accounts. The title isn’t important; what the contract actually stipulates is.
Faculty Response No. 2
A Non-Compete is just that. You can’t be in the same business in the territory designated by the agreement for the period of time stipulated. In other words, if you’re selling insurance in Bowling Green and you have a Non-Compete for three years following termination of employment, you can’t sell insurance in Bowling Green for three years. You’re 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, when you go to another agency, you can continue to sell insurance; just not to clients — and sometimes prospects — of your former employer.
Most states won’t enforce a Non-Compete because it can deprive a person of their livelihood. Check with similar cases in your state to see what precedent is being followed. A Non-Compete is usually enforceable, however, when it involves the sale of a business.
Some agencies might 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 in which 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’re 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’s issued after a person’s employment begins.
Reproduced, with permission, from the VuPoint Newsletter of the IIABA Virtual University. The members of the University Faculty offer expertise in every aspect of agency management and marketing. Many of these faculty members are available for in-house training or consulting.