From time to time I see services agreements with exclusivity (aka noncompete) provisions. This post breaks down these types of provisions and how you can respond to them.
Let’s first make sure we are talking about the same thing when we refer to an exclusivity provision. A typical exclusivity provision might provide something like the following:
At all times while providing services under this agreement and for a period of 12 months thereafter, Agency shall not perform services for businesses that compete with Client.
While this seems straightforward and maybe even reasonable, there are a number of things an Agency should keep an eye out for:
- A good first response to a clause like this would be to delete it. For the reasons discussed below, it is a big ask so don’t assume you have to agreement. Make sure it isn’t just dusty boilerplate that the Client doesn’t really care about (many do not).
- If striking the clause doesn’t work, ask the Client to identify the specific business concerns as applied to your relationship. That will help you identify the real issue and come up with an appropriately drafted restriction. Is the concern confidential information? Or just that they are worried that the design you do for them will show up on a competitor’s website. These are different concerns and there may be ways other than exclusivity to address them.
- Exclusivity isn’t free. A client asking you to restrict your potential field of clients is basically asking you to take yourself out of certain aspects of the market. This is a big ask! If you consider agreeing to a provision like this, make sure you are getting paid for it.
- If your Agency has a narrow industry focus (e.g., only do websites for breweries or only do websites for craft breweries in the Pacific Northwest), exclusivity provisions can be very restricting on your ability to take other work and should have a higher price. If you are a general service Agency without industry specialization, you won’t be able to command as high a price for exclusivity (and it is probably less of a concern).
- If you have a narrow industry focus and you are being hired by a client within that industry, you can remind the Client that they are hiring you expressly because of that focus. Having that focus and working with companies in that industry is what makes you the right agency for the job.
- It is far more reasonable to ask for exclusivity during the term of the agreement. Exclusivity beyond the term of the engagement (12 months in the above example) should come with a very high price to Agency.
- If you are negotiating a provision like this, keep an eye out for broad provisions like “businesses that compete with Client.” Judged in hindsight, this can be viewed very broadly and is subject to interpretation. Better approach is to specifically list the companies, or even the business units within companies, that are considered competitive.
- If you are a large agency, one response is to include language requiring that if you service a competitor, that you must do so with a separate client team and no information access. This has logistical and technical challenges and is understandably difficult for smaller agencies.
- If you are forced to agree to an exclusivity clause, its fair to ask for a provision prohibiting the Client from hiring your employees and contractors away from you. While not a direct tit-for-tat, it does give address some of the risk created by an exclusive relationship where your client team works so closely with the Client.
Keep these tips in mind the next time you face an exclusivity provision in a services agreement. Tackling other problems in your services agreement? Find most posts like this in our ongoing series Anatomy of a Services Agreement.