Avoiding Pitfalls: Common Problems with Non-Compete and Non-Solicit Clauses in Insurance

Non-compete and non-solicit agreements are essential for protecting an agency's interests, but disputes often arise regarding their enforceability and interpretation. Here are five common issues that frequently come up in these disputes:

1. What Does the Agreement Say?

The first step in resolving any dispute over non-compete or non-solicit agreements is to examine the exact wording of the document. The language used is crucial and primary evidence in determining the outcome. Understanding what the agreement explicitly states is essential to evaluate its enforceability and scope.

2. Does the Agreement Lack Consideration?

For non-compete and non-solicit agreements to be enforceable, they must be part of a mutual bargain between the parties involved. Typically, the agreement must be signed at the beginning of the arrangement. If the agreement is introduced later, it might be unenforceable unless the individual receives additional benefits as part of the new agreement.

3. Did You Solicit?

Non-solicit agreements allow employees or independent contractors to work for competitors but restrict them from soliciting their former agency's clients. Disputes often revolve around what constitutes solicitation. Generally, if a client initiates contact, it may not be considered solicitation. However, explicitly asking for business from former clients likely violates the agreement.

4. Are the Restrictions Too Broad in Terms of Geography?

Non-compete agreements are designed to prevent unfair competition. The geographic scope is a critical factor in their enforceability. Restrictions that cover regions where the employee or independent contractor did not operate are often deemed too broad. For example, a non-compete preventing work in a state where the employee never conducted business is likely unenforceable.

5. Are the Restrictions Too Broad in Terms of Time?

Courts typically favor agreements that allow individuals to work and earn a livelihood. Non-compete agreements lasting more than two years are often considered unreasonable, especially if the employee or independent contractor's tenure is shorter.

Understanding these common issues can help agency owners and employees or independent contractors navigate the complexities of non-compete and non-solicit agreements, ensuring they are used fairly and effectively to protect legitimate business interests.

Status on the FTC ban on Non-Competes:

On July 3, 2024, U.S. District Judge Ada Brown?issued an Opinion and Order granting a stay and a preliminary injunction of the non-compete rule with respect to the plaintiffs in Ryan LLC v. FTC. It is not a nationwide stay or preliminary injunction, so the non-compete rule is still technically set to go into effect on September 4, 2024 absent a permanent injunction. The Opinion and Order noted that the court expected to issue a final decision on or before August 30, and also concluded that “Plaintiffs are likely to succeed on the merits that the U.S. Federal Trade Commission (FTC)?lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” (The US FTC Voted to Ban Noncompetes What Happens Now?, 2024).

The US FTC Voted to Ban Noncompetes What Happens Now? (2024, April 24). SIDLEY AUSTIN LLP. https://www.sidley.com/en/insights/newsupdates/2024/04/the-us-ftc-voted-to-ban-noncompetes

Bill Gordon is Vice President of Sales for Southwest Insurance Agents Alliance (a member of SIAA). With more than 35 years in the local insurance industry, Bill uses his expertise as a former captive agent and former owner of an independent insurance agency to assist others in the industry looking to build or expand their agency. Working with SIAA, he can provide comprehensive tools, access to carriers and markets, and coaching to help owners navigate the different stages of growth and emotions that can often supersede the changes that will fuel real actionable revenue growth you can take to the bank.