Non-Competition and Non-Solicitation Clauses

Non-Competition and Non-Solicitation Clauses

Derek Sinko

Restrictive covenants are terms that may appear in employment contracts and typically appear in the form of non-competition and/or non-solicitation clauses. Employers may attempt to use restrictive covenants to protect the business’s interests from departing employees who have gained knowledge of valuable information such as trade secrets or who have developed close relationships and influence over customers. A non-competition clause attempts to prohibit a departing employee from working for a competitor in the same industry or from opening a competing business in the same industry. A non-solicitation clause attempts to prohibit a departing employee from soliciting the former employer’s customers and employees.

Non-competition clauses are generally thought to be “in restraint of trade” by Canadian courts and therefore at first impression they are unenforceable. The inequality in bargaining power between employers and employees, the public policy rationale of not restricting an individual’s ability to earn a living, and the promotion of free competition in the market place are all oft-cited reasons by the courts when considering the enforceability of a non-competition clause. However, the law does recognize that in certain contexts an employer’s ownership and business interests may also need protection. The court will view a non-competition clause as reasonable and enforceable if the employer can demonstrate that:

1. the employer has a legitimate “proprietary interest” entitled to protection;
2. the time period and geographic scope of the clause is reasonable and not overbroad; and
3. the clause goes no further than is necessary to protect the employer’s legitimate business interest and is not contrary to the public interest.

The enforceability of a non-competition clause is highly contextual and depends on the facts. If a clause is found to be too broad in the geographic scope which it covers, or if it is found to operate for an amount of time that is longer than necessary, then the court will find the clause unenforceable. It is difficult to draft a clause that is reasonable in the court’s view but still serves as adequate protection for the employer’s business.

Non-solicitation clauses, on the other hand, are more likely to be upheld. An employer will still need to demonstrate that the clause is reasonable given the nature of the industry and the type of work that was carried out by the employee. Geographic limitations are usually not a concern but the time period that an employee will be prohibited from soliciting customers or employees is still an important consideration.

Employers and employees may find themselves asking what kind of conduct may amount to a solicitation. Advertising of a general nature or notifying customers of new contact information has generally not been found to be soliciting. There must be something in the act of the employee that goes beyond merely providing information and instead implies a request or invitation for the customer or employee to follow the departed employee. It can be difficult to determine where the line is drawn.

Non-competition clauses and non-solicitation clauses require careful, context specific preparation and analysis. If you are an employer or employee and you have questions about restrictive covenants, contact a lawyer at Waterous Holden Amey Hitchon.

Communications on this website are intended for information purposes only and do not constitute legal advice or an opinion on any issue. Readers are cautioned against making any decisions based on this material alone. The lawyers of Waterous Holden Amey Hitchon LLP would be pleased to provide additional details or advice about specific situations.