Non-Solicitation Clauses in broker carrier agreements – void in California or not?

by gspencermynko

Non-Solicitation Clauses in broker carrier agreements – void in California or not?

 

A common clause in your typical broker-carrier agreement restricts a carrier from dealing directly with the shipper/customer. These contracts will have a clause which typically says something like this: “carrier shall refrain from directly soliciting freight business during the term of this agreement, or for 12 months thereafter, from any entity which: 1) was not solicited by carrier prior to the effective date of the contract and, 2) actually tenders at least ______shipments to carrier during the term of this agreement.” The question I want to address is whether these clauses are enforceable.  Based on my informal observations, I believe most Brokers think they can contractually prevent back solicitation. And most Carriers and Owner-Operators probably think they are legally required to abide by an agreement not to back solicit the Broker’s customers.

Back solicitation is understood to mean a practice where a delivering Carrier obtains freight business from a broker and then uses the information obtained from the broker to determine who the customer is and then solicits the business of the customer directly. The question I have is whether Non-solicitation clauses designed to prohibit such behavior are valid and enforceable, or void and unenforceable.  In other words, if you are a Carrier or Owner-Operator, could a Broker successfully enforce the non-solicit provision? If a Carrier or Owner-Operator started doing business directly with a Shipper who was introduced to the Carrier or Owner-Operator by the Broker, could the Broker go to court and 1) stop the back-solicitation, and 2) sue the Carrier or Owner-Operator for damages?

California is one of very few states in which Non-compete agreements are void as against public policy. Business and Professions Code section 16600 provides that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The exceptions to this rule are very limited, and they deal mainly with the sale of a business or dissolution of a partnership, or protection of “trade secrets”. The California Supreme Court has made clear that even narrow restraints on competition are invalid under section 16600.  Hence, even “non-solicitation” clauses have been deemed invalid by the California Supreme Court as an illegal restraint on trade.

The California Supreme Court in Edwards v. Arthur Andersen L.L.P., 44 Cal. 4th 937 (2008) ruled that all restrictive covenants, except those covered by express statutory exceptions, are invalid and void as against public policy. (holding that noncompetition agreements are invalid unless expressly permitted by statute). The Edwards court said Business & Professions Code § 16600 “protects ‘the important legal right of persons to engage in businesses and occupations of their choosing'” (Edwards (2008), 44 Cal.4th at p. 946 quoting Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520). The Court went on to state: “Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16602, or 16602.5. Every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  Another court observed that “any attempt to restrict competition by the former employee by contract appears likely to be doomed under section 16600”

The California Supreme Court decision in Edwards was expected. Many appellate court cases had declared “non-competes” void, and, in the years prior to Edwards, several decisions found that non-solicitation of customer clauses were also void and unenforceable under section 16600.10.  What was notable about the decision in Edwards was the absolute invalidation of Non-solicitation agreements. Section 16600 states that any restraint is void and that section “represents a strong public policy of the state which should not be diluted by judicial fiat.”

Unfortunately, for those of us involved in trucking, I was not able to find a case directly on point where the validity of a Non-solicitation clause in a Broker-Carrier agreement was addressed by either the California Court of Appeals or the California Supreme Court. However, the case law that is out there covers a wide variety of professions and businesses, and the issues and arguments in those cases are relevant and applicable to trucking.

So, back to our question: Are Non-solicitation clauses in Broker-Carrier agreements void and unenforceable? Well – I say maybe, because until you actually put a legal question to the test, you can’t be sure. That said, It’s my opinion that the stronger argument is that non-solicitation clauses are void and unenforceable, and I have not found any authority that states otherwise. So should Carriers simply back-solicit Broker’s customers to their heart’s desire? Should Broker’s give up on preventing carrier’s from directly dealing with their customers? I won’t say that, but I will say this: stay tuned because Transportation Attorneys is currently litigating a case regarding the enforceability of non-solicitation agreements in Broker-Carrier agreements.

I will give a warning to any company that puts a Non-solicit clause in their contracts: Be careful! If your non-solicit agreement is determined to be void and unenforceable, it could also be illegal under California Business & Professions Code section 17200 and thereby expose your company to further negative consequences.

If you have any questions about Non-solicitation agreements in particular or contracts in general, call Transportation Attorneys today and set up a consultation.