What is a Non-Competition Agreement?
A Non-Competition Agreement is a restrictive covenant that places a restriction on individuals and organizations from providing services or engaging in businesses in certain markets and geographies for a period of time. The clause protects businesses from the potential that knowledge gained by an employee or business partner will be used in the future to compete against the business. Essentially, it is a clause in an employment contract that sets out the rights and obligations of an employee after his/her departure. The purpose of this clause is to attempt to prevent an employee from competing with an employer after he/she leaves the place of employment. It does not matter what the circumstances of the departure are
It is very important that the Non-Competition Agreement be very carefully drafted, as generally, these agreements can be very punitive in nature, as they often limit an employee’s ability to earn a living following his/her departure. To ensure these agreements are fair, courts have set out certain characteristics a Non-Competition Clause must have in order to be enforceable. For example, courts have held that the clause must be necessary to protect a legitimate proprietary interest for the employer and it must be drafted in such a way that it is not viewed as being too broad, convoluted or vague. Moreover, courts have held the clause to be invalid in situations where another clause, such as a ‘non-solicitation’ agreement would have been sufficient to protect the company’s interests.
Are Non-Competition Agreements Enforceable?
What happens when you have signed a non-competition agreement and want to move on to ‘greener pastures’ whether in the form of other employment or starting your own business?
Generally, if a non-competition clause unnecessarily restricts an employee’s freedom to earn a livelihood after their departure from their job, Canadian courts will not enforce such a clause. In order to enforce the non-competition clause, the former employer must convince the court that the Non-Competition clause’s scope is “reasonable” and “necessary” for the protection of the business. What is considered “Reasonable” and “Necessary” will depend on the nature of the business, the surrounding circumstances, and the duration of time stipulated, the geographical reach, and the activities that are being limited. In Quebec, the civil code provides that the non-competition clause is not enforceable if the employer terminates an employee’s employment without cause.
In Ontario there are generally, three different reasons why a Non-Competition Clause may be held to be invalid and therefore Unenforceable:
- The restrictive covenant was provided to the employee after he/she has begun working.
- The restrictive covenant was signed by the employee when he/she was under duress
- The restrictive covenant goes beyond limiting an employee’s post-employment activities to the extent that it is absolutely necessary.
The Restrictive Covenant was provided to the Employee after He/ She has Begun Work:
If the restrictive covenant is provided to the employee after he/she begins working, even if on the first day, it will likely be held invalid. This restrictive covenant must be agreed to by the employee before he/she accepts employment. If an employee is required to sign the agreement after employment, in order to be valid, it must be accompanied by something of value in exchange for signing it (consideration), such as a bonus, raise or promotion.
The Restrictive Covenant was Signed by the Employee When He/ She was under Duress:
If an employee was forced to sign the clause or otherwise threatened with losing his/her job (duress), an argument may be made that it is invalid. A contract must be entered into freely and voluntarily.
Reasonableness of the Restrictive Covenant:
Courts are generally reluctant to enforce non-competition agreements that are unreasonable or otherwise not carefully drafted. Generally, non-competition agreements or covenants are enforceable depending on whether the restriction is reasonable between the parties, and in the public interest.
What constitutes a “Reasonable” Clause?
It is difficult to define ‘reasonable’ in the context of a non-competition agreement, as what constitutes “reasonableness” depends on the circumstances of each case. Generally, the courts determine this by examining the non-competition clause, the entirety of the agreement within which the clause is found, and the facts of the case and surrounding circumstances
Balancing of competing Interests:
When determining whether to enforce these agreements, the court balances two competing interests. On the one hand, there is the public interest in discouraging unreasonable restraint on trade, and maintaining free and open competition which benefits both society and the affected employees. And on the other hand, there is the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power. In order to balance out these interests, the court determines whether there exists a propriety interest in need of protection, and if so, whether the non-competition clause goes beyond what is reasonably necessary to protect that interest.
Limiting post-employment activities only to the extent that it is absolutely necessary:
In order to be ‘reasonable’ the clause must only limit an individual's post-employment activities to the extent that is absolutely necessary. This is often assessed by considering the length of time the restriction applies, the geographic scope of the restriction and whether it is even necessary. The agreement must be limited in time frame, business scope, and geographic scope to what is reasonably required to protect the company's proprietary rights, such as confidential marketing information or client relations and the scope of the agreement must be unambiguously defined. Where the clause has stipulated a lengthy period of time and/or a very wide range of activities and/or a large or vaguely defined geographical location, it may be held to be invalid.
What Is a Non-Solicitation Agreement
When coupled with a well-drafted confidentially agreement or provision, non-solicitation agreements can often effectively achieve the same results as a non-competition agreement. Non-solicitation agreements restrict a former employee from soliciting employees or customers of the company
Thus, while a non-competition covenant prohibits a former employee from becoming engaged in a business that competes with the business of his or her former employer, a non-solicitation covenant prohibits a former employee from soliciting the customers or employees of his or her former employer. However, sometimes the line between the two types of covenants is blurred by “no-deal” provisions, which restrict employees from having dealings with customers even absent solicitation.
The importance of non-solicitation agreements cannot be emphasized enough -- in fact, some courts will not even enforce a non-competition agreement or clause if a non-solicitation clause would adequately protect the employer's interests. The Ontario Court of Appeal has made it clear that Non-Solicitation Agreements will nearly always be preferable to Non-Competition Agreements when it comes to protecting former employees
The Supreme Court of Canada has made confirmed a well-established principle that non-competition clauses should only be enforced in exceptional circumstances; and that the non-solicitation clause, which appropriately stipulates time and territory terms more appropriately, balances the competing interests than non-competition clauses. An appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person's ability to work in his or her chosen field.
HOW WE CAN HELP
When determining whether to and how to fight a restrictive covenant, you must carefully assess the language used to determine what form of the restrictive covenant it actually is, and whether it has any chance of being enforced. The law around this area, although it may be easy to state, it is often very complex and difficult to apply. It is highly advisable to become well-informed and get some good legal advice
If you are an employee who is facing a non-competition clause/ restrictive covenant that your employer wants you to agree to, or if you are a former employee who is now being threatened by your former employer because you have taken up a similar job and are alleged to be in breach of the non-competition clause, Murray Ralston can help.
Murray Ralston will review your case with you and determine if the clause is likely to be upheld or not so that you are able to make an informed decision about what steps to take.
In addition, Murray Ralston can assist you with your contract issues through mediation, negotiation, and/or litigation. What route is best for you will depend on the circumstances of your case. At Murray Ralston, we appreciate that each and every case is unique, and will use our expertise to ensure your legal rights are protected by ensuring you are well-informed about the law and your legal options, and by assisting you in determining which option is best for you.
Still have Questions?
If you have any questions regarding non-competition agreements, would like help creating a non-compete agreement, or need to get out of a non-competition agreement, simply click the button to the right to talk to one of our experienced lawyers.