I know how you feel. You’ve been reading a long Service Agreement and you are exhausted. And bored. Your brain is fried and you’ve had it up to here with legalese. You’ve hit the boilerplate section, often a series of sections under the heading Miscellaneous, and you start to skim…quickly. “Can’t be anything bad in here, can there…”
Well just slow down a minute. While most of the heavy lifting is done, there are a few traps lurking. Not every contract will have every one of these clauses and that is OK. But keep these sections in mind as you finish your review.
From time to time you’ll see a Service Agreement with an exclusivity provision. Some people call these non-compete provisions. A simple form of 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 several things an Agency should keep an eye out for.
- Just Delete It. If proposed by a Client, a good first response to a clause like this is to delete it. For the reasons discussed below, it is a big ask so don’t assume you must accept it. It may be dusty boilerplate that the Client doesn’t really care about for your project.
- Understand the Business Case. If striking the clause doesn’t work, ask the Client to identify the specific business concerns as applied to your relationship and work. That will help identify the real issue and come up with an appropriately drafted restriction. Is the concern sharing of information (more a confidentiality issue)? Or is the Client worried that the design your Agency develops will show up on a competitor’s website (more of a copyright than exclusivity provision). These are different concerns and there may be ways other than exclusivity to address them.
- One at a Time. The typical concern is that Client doesn’t want you working for a competitor at the same time you are working for Client. That is a much different (and more easily solved) problem than what is presented in the sample clause above. So, when looking for ways to tailor a clause like this, a first step is to have it apply only while Agency is providing services to Client. In other words, after your engagement is complete, you are free to work for anyone.
- Exclusivity Isn’t Free. If your Agency is forced to accept an exclusivity clause remember that exclusivity isn’t free. A clause like this essentially takes an Agency out of certain aspects of the market. This is a big ask! For an Agency to consider agreeing to a provision like this, make sure the Agency prices itself accordingly. If your Agency has a narrow industry focus an exclusivity provision could be devastating and should only come at a high 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).
- Be Specific. Keep an eye out for broad and vague provisions like “businesses that compete with Client.” This language can be read very broadly. Better approach is to specifically list the companies, or even the business units within companies, that are considered competitive and off-limits.
- Use a Separate Team. Large agencies can often respond to a clause like this by with a carve out that allows work for a competitor with a separate client team. This addresses a client concern about sharing of Client information and creative ideas with competitors. This has logistical and technical challenges and is understandably difficult for smaller agencies.
Most Service Agreements contain a clause describing the independent contractor nature of the relationship between Client and Agency. A typical clause might read like this:
📑 Independent Contractors. Agency is an independent contractor, and not an employee, partner, agent or joint venturer with Client. Agency will be solely responsible for all acts, obligations, and payments due with respect to Agency. Agency, and not Client, is responsible for the hiring, supervision, discipline, and control of Client and its personnel. Neither party will have the power to bind the other or incur obligations on the other party’s behalf without the other party’s prior written consent
While there isn’t a lot to negotiate in a short clause like this, there are a couple things to keep an eye out for:
- Beware Indemnity. Sometimes buried in these clauses is an indemnity from the Agency in favor of the Client for any extra costs that Client may suffer if Agency is reclassified by the state as an employee instead of a contractor (e.g., unemployment withholdings, workers’ compensation, etc.). This isn’t much of a risk for an Agency of any size, but it can be a risk for a freelancer (even one with an LLC). An indemnity is inappropriate because the reasons a freelancer might be reclassified as an employee are generally under the Client’s control, not the Agency’s. An Agency shouldn’t have to indemnify for risks outside of its control.
- Contract May Not Control Contractor Status. Again, an issue for freelancers: in some states, the wording of the contract is not the final determinant in whether a person is classified as a contractor (vs. an employee). Rather, the determination in those states is based on the nature of the actual relationship between the parties.
- Long Form Clauses. Sometimes an independent contractor clause is a lengthy repetition of all the tests under state and federal law as to what creates contractor status (vs. employee). As applied to the freelance Agency, some of these statements may not be true. Your focus in this case should be simply to avoid the indemnity clause discussed above. Otherwise, your negotiating energy is better spent elsewhere.