0

My LLC is under a non-compete with a former client in one state that basically says not to provide any IT consulting or hosting that may be considered competition to what they do (lets call them "Acme Corp"). So if a potential client in that same state approaches me and I refer them in writing to my former client, Acme Corp, with whom my LLC has the non-compete, and my potential client responds in writing they dont want service from Acme Corp. Is it still competing at that point if I then take them on as a client?

Section:

During the term of this Agreement and for a
period expiring two (2) years after the termination of this Agreement for
any reason, Contractor covenants and agrees that Contractor will not:

a. Hire, offer to hire, entice away or in any other manner persuade or attempt to
persuade any officer, employee or agent of [Acme Corp] or any of its affiliates
to alter or discontinue a relationship with [Acme Corp] or to do any act that is
inconsistent with the interests of [Acme Corp] or its affiliates;

b. Directly or indirectly solicit, have contact for purposes of selling any
products and/or services to (except on behalf of [Acme Corp]), divert, or take
away any customers of [Acme Corp] or any of its affiliates; or

c. Directly or indirectly solicit, divert, or in any other manner persuade or
attempt to persuade any supplier of [Acme Corp] or any of its affiliates to alter
or discontinue its relationship with [Acme Corp] or any of its affiliates.

d. For the purposes of this Section 4, businesses that are deemed to
compete with [Acme Corp] include, without limitation, businesses engaged in IT
system sales, integration, consulting, application development,
maintenance and hosting. Competition also includes any additional goods
or services that [Acme Corp] provides its customer(s), including goods and
services that [Acme Corp] offers or prepares to offer in the future while
Contractor is employed with [Acme Corp]. Notwithstanding Contractor's
obligations under this Section 7, Contractor will be entitled to own, as a
passive investor, up to five percent (5%) of any publicly traded company
without violating this provision.

e. [Acme Corp] and Contractor agree that: this provision does not impose an undue
hardship on Contractor and is not injurious to the public; that this provision
is necessary to protect the business of [Acme Corp] and its affiliates, including
their trade secrets; the nature of Contractor's responsibilities with [Acme Corp]
under this Agreement require Contractor to have access to and develop
confidential information which is valuable and confidential to all of the
Business; the scope of this Section 7 is reasonable in terms of length of
time and geographic scope; and adequate consideration supports this
Section 7, including consideration herein.

.. where [Acme Corp] is a fictional entity


UPDATE: Based on interaction with Ross Ridge below, let me clarify:

1) my new client never intended to use Acme corp in the first place

2) therefore Acme Corp did not lose out on the possibility of servicing this client because this client wants nothing to do with Acme corp in the first place

3) I have obtained all this info in my agreement with the new client

  • You say the clause "basically says not to [...]". Could you provide the exact language of that clause? At first glance, you would still be competing. But the wording of that clause might make a difference. – Iñaki Viggers Jun 3 '20 at 7:18
  • @IñakiViggers, agreement section posted as requested. – StartupGuy Jun 3 '20 at 20:14
  • what states are involved? Some states allow non-competes only in limited circumstances. – George White Jun 3 '20 at 23:29
  • @GeorgeWhite, AZ – StartupGuy Jun 3 '20 at 23:30
2

The non-compete clause encompasses entities which have been customers (perhaps including prospective ones, although that is debatable) of Acme at any point during your relation with Acme. If the potential client (henceforth "PC") was not Acme's customer during your relation with Acme, then the clause does not apply because the company cannot reasonably argue that you took away its customer. It is unclear from your post whether PC has had a business relation with Acme at all.

If the clause is applicable, then your only option is that you or PC ask Acme to waive the clause as to PC. Since PC decidedly is discarding Acme this time, he seemingly has stronger leverage than you to persuade Acme on the waiver. After all, Acme's intransigence would only reinforce PC's refusal to assign to Acme any other business in the future.

Absent a prior relation between PC and Acme, your approach of first referring PC to Acme is needlessly risky and could backfire since the prospect of PC's business would be brought within scope of the clause. The scenario that you voluntarily make the referral --prior to servicing the PC-- still affords to Acme the plausible allegation that you prompted Acme to incur losses (in the form of resources Acme spent in trying to "close the sale" with PC) despite your knowledge beforehand that PC would retain you.

  • 1
    Marking as accepted answer because it makes the most sense and addresses different aspects in the most logical manner. Also, it considers what "competition" actually means in this context. – StartupGuy Jun 3 '20 at 23:29
2

Of course it is still competing.

The customers'preference is not relevant, as any customer that you service is prefering to deal with you rather than with your former employer. If they had prefered getting the service from your previous employer, they would have tried getting a contract with your previous employer.

The argument that "because the customer prefers me I am no longer bound by the non-compete" would make any non-compete clause pointless.

What is relevant is that you have the obligation (within the contents of the clause, and as long as it is legally enforceable) not to provide those services.

That obligation is from you to your former employer, a third party (the customer) generally cannot waive it, and neither can you "absolve yourself" (unless the contract allows for a way to do it), the same way that your customer cannot "absolve itself" from paying you the amount agreed in a contract unless there is some kind of stipulation allowing for it in the contract.

  • Its not that the customer prefers me, its that they refuse to use my former client (not actually an employer), but it sounds like that does not actually make any difference. – StartupGuy Jun 3 '20 at 19:52
  • @MikeM It would if you could prove that the new client wouldn't have used the services of your former client even if you had refused them. In that case, your former client wouldn't have suffered any damages because of your breach of contract and so wouldn't be able claim any damages because of it. – Ross Ridge Jun 3 '20 at 20:26
  • @RossRidge - Thanks! That is what I am trying to explain ... (1) that my new client never intended or will intent to use Acme corp in the first place. (2) Acme Corp did not lose out on the possibility of servicing this client because this client wants nothing to do with Acme corp. (3) I have obtained all this info in my agreement with the new client. – StartupGuy Jun 3 '20 at 20:31
  • @MikeM Just beware that it may not be as easy you think to prove that new client wouldn't have gone to "Acme Corp" if you hadn't breached the contract. Acme can point to the money you would earn from the new client as damages they suffered, you have to show that's money they couldn't never have earned. – Ross Ridge Jun 3 '20 at 20:54
  • @RossRidge it sounds like the new client needs to have some initial consultation with Acme Corp which they do not pursue for a stated reason, such as, Acme Corp does not offer the service they need or in their opinion cannot provide that service to their satisfaction or required level of competency. For example, if the new client's project requires a certain certification but Acme Corp does not have it and my firm does, then in my mind its not even competition because Acme Corp cannot meet the requirement and therefore cannot "compete" at the level required by the client. – StartupGuy Jun 3 '20 at 21:08

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.