January 9, 2012 By: David A. Stout
Print

Many businesses have invested significant time and resources in developing unique products, services, know-how or business relations which give them a competitive advantage in the marketplace. This distinctive information can be a business' most valuable asset. It is therefore essential that businesses take proper steps to protect this information and prevent it from being disclosed to and used by a competitor. One way to do this is through the inclusion of restrictive covenants in agreements with employees, contractors, and business partners. Carefully drafted agreements containing these provisions will help in preventing former employees and other individuals who have intimate knowledge of the business from joining with a competitor or establishing his or her own competing business for some period of time within a particular geographic location. Properly drafted restrictive covenants also generally prohibit employees or other individuals from soliciting the business’ clientele and employees both during and after the term of the employment or other arrangement. Restrictive covenants may be enforced by getting a court injunction to prevent the offending party from carrying on a certain activity in a restricted area for the restricted time. The restrictive covenants may also be enforced through the award of monetary damages.

Non-Competition Clauses

A non-competition clause typically prohibits an individual from directly or indirectly carrying on a certain activity in a specified geographical area for a certain period of time after the termination of his or her engagement with a business. Care should be taken when drafting non-competition clauses because courts will not enforce provisions that are unreasonable. Whether a non-competition clause is unreasonable depends on the unique circumstances of the situation. In assessing whether the restraint on competition is reasonable, the business must have a legitimate interest deserving of protection, the restraint must go no further than protecting the business' legitimate interest and it must be in the public interest to permit this form of protection. A balance must be struck between enforcing contractual obligations and discouraging unreasonable restraints on free and open competition. Generally, non-competition provisions will not be enforceable if they are unreasonably long in duration, inclusive of too broad a range of activities, or if they cover an unreasonably large territory.

Non-Solicitation Clauses

Non-solicitation provisions restrict a former employee, contractor or other individual from soliciting employees, clientele, or specific suppliers of the business. When coupled with a well drafted confidential provision, non-solicitation clauses can sometimes effectively achieve the same results as non-competition clauses.

Although courts have a tendency to be very cautious regarding the enforcement of non-competition provisions, they have taken a different approach regarding non-solicitation provisions and tend to interpret these less strictly than non-competition provisions. This is not to say that the courts do not carefully scrutinize non-solicitation clauses. Courts do examine these provisions carefully and will not uphold them if they are not reasonable. Typically, courts will examine the nature of the departing person’s functions with the business or its clients in order to assess the reasonableness of the limits being sought by the non-solicitation clause. Courts will look at the facts of the situation and will consider whether the contacts made by the departing person with clientele and suppliers are such that the departing party could influence these clients, suppliers and employees to switch loyalties. Businesses should seek to protect themselves by including this type of clause in their agreements wherever reasonably possible.

Conclusion

Restrictive covenants can and should be a critical part of your business’ major agreements, including employment, contractor, partnership and shareholder agreements. However, in order to be enforceable, they must be reasonable. Fairness and balance are the keys to determining whether such provisions are reasonable. Businesses are encouraged to obtain legal advice early to assist in determining if, when, and how to use these types of provisions. This can save unnecessary grief and cost if things do go wrong at the end of the employment or business relationship.

For more information, please feel free to contact David Stout, david.stout@nelligan.ca.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Business Law