Written by: Krystle Ng-A-Mann
Restrictive covenants (more commonly, “non-competition agreements”, “non-solicitation agreements” or simply, “non-competes”) can be vital instruments used by an employer or business owner to protect confidential information, such as trade secrets, know-how, or other proprietary information of a business. However, in using these types of agreements and clauses to safeguard sensitive information, care must be taken not to go overboard, since Canadian courts are quite happy to strike such agreements down in their entirety on the basis that they are too broad.
How do they (or don’t they) work?
Restrictive covenants are usually directed at two evils: competition and solicitation. When found in stand-alone agreements, combined in one agreement, or incorporated into the terms of an employment contract, non-competition and non-solicitation clauses place a negative obligation on an individual formerly associated with a business (whether as employee, director, officer or shareholder) to refrain from engaging in competitive behaviour and from enticing existing or future customers away from the business. At the root of these evils is the concern that the individual will use the proprietary information acquired in the course of his or her association with the business to cause irreparable harm when the business relationship is terminated.
Instead of asking how restrictive covenants work, perhaps the better question to ask is: “How don’t they work?” They certainly don’t work if all-encompassing. So, while you may want to see language that will restrict competition, “both direct and indirect, in any capacity whatsoever, whether by way of being employed by, being an independent contractor of, managing, operating, controlling or having an ownership interest in, being a partner, or by and through any joint venture, partnership with a similar or substantially similar business… for a period of 5 years worldwide”, because you think you will be covering all your bases, what you will actually be doing is decreasing the likelihood that any such agreement will be enforceable.
Avoid Boilerplate!
Unfortunately, one size does not fit all when it comes to commercial agreements, generally, and restrictive covenants, especially. Restrictive covenants are actually prima facie unenforceable (which essential just means that, on their face, they are void) because they are contrary to public policy for restraining trade. Thus, you will want to ensure that a well-tailored agreement is prepared, which if ever tested, will be upheld in a court of law, and you cannot rely on boilerplate language in putting together the key terms of a non-competition or non-solicitation agreement.
Here are some “don’ts” and one simple “do” for you to keep in mind about non-competition and non-solicitation agreements. DON’T surf the internet for ‘standard form’ clauses to cut and paste into an agreement you’ve drafted yourself. DON’T try to get more mileage out of an agreement that may have been used for someone or something else. DON’T be over-inclusive; less is actually more in this case. DO seek the help of a professional with the appropriate expertise, such as a corporate/commercial lawyer.
In protecting your interests and proprietary information, you and your legal counsel should: be specific in describing your business, services, products and customers in the agreement; be purposeful by aiming to restrict competition and solicitation, without going so far so as to prevent the former employee, director, officer or shareholder from gaining a livelihood; and finally, be reasonable, which is the key to drafting an effective and enforceable restrictive covenant.
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