Negotiating Covenants Not to Solicit & Not to Disclose

In my previous blog entry, I discussed the key areas of a covenant not to compete that need to be negotiated, and how to negotiate them. Today, I will discuss the key areas of negotiation in covenants not to solicit and covenants not to disclose; if you are unfamiliar with these two covenants, I recommend following the links to read my past posts on the subjects.

Negotiating a Covenant Not to Solicit

With respect to a covenant not to solicit, often there will be little to no effort by the seller of the business to contest the buyer’s wording of this covenant. The general thought is “I am retiring”; this thought is prevalent even among persons who can work for another 20 years (such as the 50 year old). However, only so much golf can be played. Going back into business likely means going back into a business that is just different enough from the business sold as to avoid a violation of a covenant not to compete. Doing something you know, but slightly different. Many of your old employees have skills that can be valuable in your new endeavor.

The key factor to negotiate in a covenant not to solicit is the length of time within which one cannot solicit. This usually falls within one to three years. Much more than that, and you will run into the Texas common law on restricting an employee’s right to work. Another feature to negotiate is the situation in which an employee comes to you for a job, even though you did not attempt to recruit him or her. If this clause is in the buyer’s draft of the covenant, I recommend arguing for a term that is shorter than the one for solicitation. And you know what argument I will use: chilling an employee’s right to work. You should also attempt to negotiate the definition of solicitation.

Negotiating a Covenant Not to Disclose

In the past, I often did not find covenants not to disclose in the deals I helped to draft or negotiate. However, this circumstance is becoming less and less frequent.

With respect to a covenants not to disclose, it is important to negotiate the definition of the term “confidential information”. If you are a seller, this term should be limited in scope. The definition of “disclose” also has to be negotiated; there should be exceptions for certain circumstances of disclosure (i.e. the information having been previously disclosed by the buyer). For the seller leaving retirement, it is almost impossible to do so without using confidential information in building his or her new business. After all, the seller generated the knowledge in the first place, and you cannot tell someone not to use the general knowledge he developed in his prior business experience. But, this is precisely what a broad definition of “confidential information” means. I do the best I can to limit the scope of this definition. Ultimately, my client will use some of the information that is still protected anyway. Then I rely on the fact that proving the use of the information, and the value of the information, is difficult.