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Courts limit impact of non-compete clauses

Posted by on May 24, 2011 in Compensation, Moneyville | 0 comments

By Sheryl Smolkin

Read this article and comments at Moneyville.ca

At some point in your career you may be asked to sign a non-compete clause that will kick in if you ever leave the company. You may wonder if it’s legally enforceable.

Courts do not like restrictive covenants designed to restrain employees from working after they leave another job says Koskie Minsky partner Arleen Huggins. She says the extent to which a judge will intervene, depends on the precise nature of the clause the employer is trying to impose.

Here are three examples and how they generally have been viewed by the courts.

Confidentiality clauses:

Confidentiality clauses may be created by contract or arise as a result of common law. So even if you didn’t sign anything, when you leave a company, you cannot use their confidential information such as customer lists or trade secrets.

A major exception is if you have to testify in a court case. Furthermore, if the information has already been disclosed to the public (i.e. someone else posts it on Facebook), it is no longer off limits.

There is also a difference between confidential information and what my husband calls the “frontal lobotomy” clause. For example, if you are a computer engineer who brought knowledge of various software tools to your job, you cannot be limited from applying those techniques in a new setting.

Non-solicitation clauses:

If an employer shows there is a reasonable business interest to protect, the courts will generally uphold non-solicitation clauses. This means you cannot take former client contact information with you or directly approach former customers to move their business to your new company.

However, you can send out a general flyer announcing your new business or run an ad in the newspaper. Then if a former client calls you, you are generally free to provide services.

But before you go ahead, Huggins says it is very important to carefully review the precise wording of any non-solicitation clause. That’s because in some cases the clause you agreed to may restrict you from both “soliciting and accepting” work from your former employer’s customers.

Courts also tend to look at professionals like lawyers, doctors and dentists differently. Because the relationships are so personal, there have been rulings that it was unreasonable to prevent these people from taking their clients with them.

Non-compete clauses:

A clause that prevents you from working “anywhere in North America” is a true non-compete clause that appears to go beyond what is necessary to protect the company’s interest. In fact, a non-solicitation clause requiring that you stay away from their customers would typically be sufficient.

Even if the company can show something beyond a non-solicitation clause is required, a court will look at the non-compete clause very carefully to ensure the restricted activities, the geographic limitations and the time period of the prohibition are reasonable.

It is unlikely that a judge will ever enforce a clause limiting you from consulting anywhere in the country. Even a clause preventing you from working in the GTA might be considered too broad. Furthermore, if your employer gave you six months of termination pay, the company cannot prohibit you from conducting business for a more extended period such as a year or longer.

The main issue beyond reasonableness a court will consider is ambiguity. In one case a former employee was limited from working in “Metropolitan Vancouver.” This is not a legal definition and the court was not prepared to interpret it or “read in” meaning. Therefore the clause was ruled unenforceable.

But in the case of very senior executives with a fiduciary responsibility to the company, the courts are less reluctant to enforce non-compete clauses. And Huggins says if the reason you left because you sold the business, the courts will be prepared to uphold even a restrictive non-compete clause.

“The reason is that the seller has received consideration for a business sale which includes good will. If the seller then goes out and competes with the new owner, the good will he paid for is out the window.”

 

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