Non compete non solicitation

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  • 1. Prepared By: Page 1 of 24 Michael Carabash Non-Compete | Non-Solicitation Agreements in Ontario DISCLAIMER: Please note that the information provided in this DL Guide is NOT legal advice and is provided for educational purposes only. Laws are subject to change and without notice. This DL Guide may be outdated. If you need legal advice with respect to drafting, revising, negotiating or resolving a dispute concerning an non-compete or non-solicitation Agreement, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. You can contact Michael Carabash directly at michael@carabashlaw.com. Last Updated: June 2010 © 2008-2010, Dynamic Lawyers Ltd. All Rights Reserved. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 2. Non-Compete | Non-Solicitation Agreements in Ontario Page 2 of 24 Table of Contents What are Restrictive Covenants? .................................................................................................................... 3 What are Non-Compete and Non-Solicitation Clauses? ................................................................................ 3 Are they valid and enforceable? ..................................................................................................................... 3 Reasonableness: Duration, Geographic Scope, Activities, and Public Interest .............................................. 6 Too Vague / Uncertain to be Enforceable .................................................................................................... 10 Exceptional Circumstances........................................................................................................................... 14 Should I require both? .................................................................................................................................. 15 When should Employees agree to Restrictive Covenants? .......................................................................... 15 What if an Employee never signed an Agreement with Restrictive Covenants? ......................................... 17 Restrictive Covenant Tips ............................................................................................................................ 19 Basic Structure of the Non-Compete | Non Solicitation Agreement ............................................................ 21 About Us ....................................................................................................................................................... 24 Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 3. Non-Compete | Non-Solicitation Agreements in Ontario Page 3 of 24 What are Restrictive Covenants? ―Restrictive Covenants‖ are terms and conditions in an Agreement (such as an Employment, Independent Contractor, Shareholder, or Partnership Agreement) that limit one party’s ability to do certain things. Typical examples include restrictions on the use and disclosure of confidential information as well as non-compete and non-solicitation clauses. The idea behind restrictive covenants is that a party which is privy to another party’s sensitive information or clients should be prevented from simply leaving the relationship and competing with the other party with all those benefits. What are Non-Compete and Non-Solicitation Clauses? A ―Non-Compete‖ clause in an agreement puts limits on one party’s ability to compete in the same business as the other party. In other words, during the term of the agreement and for a period of time thereafter and within a set geographic area, one party cannot establish their own business or work for others such that they sell the same products or services as did their current or former client, employer, partner, etc. A ―Non- Solicitation‖ clause in an agreement means that one party will not solicit (attempt or actually sell) customers or employees of the current or previous employer, client, or partner. This is a less drastic restrictive covenant than a Non-Compete clause. While this DL Guide focuses on Non-Compete and Non-Solicitation clauses in the employment context, they can also be found in business agreements (e.g. partnership agreement, shareholder agreement, independent contractor agreement, share or asset purchase agreement, etc.). Are they valid and enforceable? Since restrictive covenants are contractual, the principles of contract law apply to their validity, interpretation, and enforceability. In Ontario, this means that the provision in an Agreement must be clear and certain enough (i.e. not too vague or missing information) to be enforceable. There’s an age-old rule of interpretation called contra-proferentum which states that, in the case of an ambiguity, the provision should be interpreted against the party who wrote it. Ouch! Don’t use wishy-washy language, such as ―may‖; use definitive language such as ―must‖ or ―shall‖. Finally, don’t provide alternatives in the restrictive clause itself – for example ―the non compete clause may last 1, 2, or 3 years‖; this will make it unenforceable for vagueness. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 4. The full DL Guide is available for FREE with the purchase of a Legal Form. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 5. Non-Compete | Non-Solicitation Agreements in Ontario Page 14 of 24 Exceptional Circumstances So what constitutes an exceptional case for a non-compete clause to be upheld by a court, you ask? Well, although the Ontario courts haven’t said much about it, there was a case in Manitoba which did try to answer that question. In Winnipeg Livestock Sales Ltd. v. Plewman, [2001] 1 W.W.R. 153, the Manitoba Court of Appeal reviewed the various Canadian authorities on the issue of ―exceptional cases‖ and held that the following factors were relevant: In summary, the authorities reveal that the following circumstances will generally be relevant in determining whether a case is an ―exceptional‖ one so that a general non-competition clause will be found to be reasonable: 1. The length of service with the employer. 2. The amount of personal service to clients. 3. Whether the employee dealt with clients exclusively, or on a sustained or recurring basis. 4. Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies. 5. Whether the nature of the employee’s work meant that the employee had influence over clients in the sense that the clients relied upon the employee’s advice, or trusted the employee. 6. If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation. 7. The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required. 8. The nature of the business with respect to the strength of customer loyalty, how clients are ―won‖ and kept, and whether the clientele is a recurring one. 9. The community involved and whether there were clientele yet to be exploited by anyone. So if you’re thinking about having another party sign an agreement with a non-compete clause, you should think long and hard about these factors to help mitigate against future challenges to the enforceability of such a clause. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 6. Non-Compete | Non-Solicitation Agreements in Ontario Page 15 of 24 Should I require both? While you can always demand that an employee, independent contractor, shareholder, partner, etc. sign an agreement containing both Non-Compete and Non-Solicitation clauses, there are a few reasons why you may decide against doing so. First, having both may dissuade a prospective employee or independent contractor from signing on from the get go. They may feel that, if anything goes wrong and they leave, they will be unemployable. Related to this is the morale factor: a new employee or independent contractor may feel bad because, right away, they’re threatened with sanctions if things don’t work out and they try to do something akin to what they’ll be doing for the employer. Ouch! Finally, having non-compete and non-solicit clauses may actually INCREASE the amount of notice (or payment in lieu thereof) an employee is entitled to at common law if the matter gets litigated: courts may increase the normal amount of notice or payment in lieu thereof because it would take the employee longer to find suitable work with the existence of non-competes and non-solicit clauses. When should Employees agree to Restrictive Covenants? Well, there are basically three options here: (1) right at the beginning, (2) during the course of employment or (3) right at the end. I’ll discuss the pros and cons of each in turn. Prior to Employment This is generally a good time to have an employee sign a non-compete / non-solicitation agreement. The Consideration (i.e. pay, benefits, etc.) which the employer provides in exchange for the employee to agree to these clauses will be reflected in the written agreement. It’s not a good idea is for the Employer to have an oral agreement or offer of employment and then have the employee start working on that basis. When the employer later tries to introduce a written employment agreement with non-compete and non-solicitation clauses without offering any new ―Consideration‖, the employee may claim damages based on constructive dismissal. So make sure that the employee doesn’t start working until a written agreement has been signed. One problem with entering into these agreements at the beginning of the relationship is that may become unreasonable with the passage of time. Whether a restrictive covenant is valid and enforceable will depend, in part, on whether it was reasonable at the time it was entered into (not at the time it was broken). So if an employee agrees to a restrictive covenant 50 years ago, the courts may look at this negatively. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 7. Non-Compete | Non-Solicitation Agreements in Ontario Page 16 of 24 During the Course of Employment As discussed above, if the employer tries to unilaterally change fundamental aspects of the employment relationship without giving the employee additional consideration (e.g. pay, benefits, etc.), then the employee can argue that they were constructively dismissed and seek damages for reasonable notice (at common law) and under minimum standards legislation (e.g. Ontario Employment Standards Act, 2000). So how can an employer avoid this from happening? Well, it all comes down to asking the employee to agree to the restrictive covenants in return for X (i.e. something of value). This could be a pay increase, one-time payment, etc. The employee is being asked to give something up – namely, their right to compete. So the employer must give something in exchange. After termination of the Employee So when the employee is terminated or resigns, it’s a good idea to: (1) get an employment settlement and release agreement (so that the employee does not go after the employee for something to do with the employment or termination thereof) and (2) get the employee to agree to a non-compete or non-solicitation clause, if it can be done. These are two key things an employer will want; to get them, the employer will need to provide – you guessed it – ―consideration‖ (i.e. something of value to the employee in exchange for giving up its rights). Now, the good news is that, if an employer can get these documents signed and delivered, then it will look good on the employer if the matter is ever contested in court. Why? Because it was agreed to by two parties who were leaving each other. Unlike a restrictive covenant which is agreed to at the beginning of the relationship (which may have been long time ago), signing at the end of the relationship will mean it’s more recent to when the alleged breach of contract would occur. The payment may be part of an overall termination / severance package. It’s just a good practice to have these things entered into at the end to put some clarity on the issue so you’re not leaving it up to courts to decide whether they should be enforceable. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 8. The full DL Guide is available for FREE with the purchase of a Legal Form. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 9. Non-Compete | Non-Solicitation Agreements in Ontario Page 17 of 24 What if an Employee never signed an Agreement with Restrictive Covenants? So the situation is as follows: as an employer or human resources person, you’ve gone ahead and hired someone. Now, for whatever reason, you didn’t use an Employment Agreement which contains restrictive covenants, such as non-compete and non-solicitation clauses. But you didn’t think about it. Now the employee has left and is basically competing with you in the same business and soliciting your clients and employees to join them. Nothing was ever written or signed to the effect that they couldn’t do so. So where does that leave you? It’s a very complex area of law, but there was an important case that talked about this very situation – albeit in a very unique circumstances. In Gertz v. Meda Ltd. (2002), 16 C.C.E.L. (3d) 79, the Ontario Superior Court of Justice was faced with the following situation. An employee engineer worked for a placement agency for 8 years. The employee was dismissed and then went to work briefly for another placement agency to help put together a proposal he had previously given to the original placement agency. This is where things got contentious: the original placement agency sued for damages resulting from breach of fiduciary duty and confidentiality. So the issues before the Court were twofold: (1) was the employee a fiduciary of the employer which required him NOT to compete against the employer and (2) did the employee breach confidentiality provisions. Keep in mind that there was no written agreement dealing with these matters, so the Court would have to rely on common law (i.e. judge-made law). With respect to whether the employee breached his fiduciary duty to the employer by leaving and then immediately competing, the Court concluded that this particular employee owed NO SUCH DUTY. Therefore, the employee was free to do so. The Court reasoned that, while certain employees (such as top management, directors, officers, etc.) may have a fiduciary duty not to do so (in accordance with their duty of loyalty, good faith, and avoiding conflicts of interest, etc.), this particular employee was simply a glorified salesman: Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 10. Non-Compete | Non-Solicitation Agreements in Ontario Page 18 of 24 38 I conclude on the evidence that Mr. Gertz was, essentially, a salesman who managed the Chrysler account and others, with a view to selling labour at a markup. He had little or no authority to make decisions that affected the company. He had no power to direct and guide the affairs of the company. As issues arose that required the exercise of authority, his function was to make recommendations only, while the power to make decisions remained with Mel Lawn and, to a lesser extent, Mr. Rosenthal. To use the label that emerges from the caselaw, I find that Mr. Gertz was a ―mere employee‖, to whom a fiduciary duty does not attach. OK, so the court found that MERE employees are entitled to get up and compete with their previous employer. Those in top management, however, may not be so lucky – even if no contract is signed. Their duties of good faith, loyalty, and avoiding conflicts of interest may restrict their ability to compete. So that takes care of the first issue. But what about using confidential information? When the employee left, he didn’t take anything with him other than his accumulated knowledge retained in his mind. The Court found that there was no breach of confidence. So how did it get there? Well, first the Court said that a breach of confidence requires 3 elements: 1. Confidential information 2. Which was communicated in confidence and 3. Which was misused by the party who received it. Among other things, the Court found that the information was not confidential (it was shared, common to the industry) and it was not unfair for the employee to use that information anyways since he had been wrongfully terminated. So what’s the moral of the story? Well, just because employees haven’t signed restrictive convenant agreements (e.g. non compete, confidentiality, non-solicit) doesn’t mean that they can be PREVENTED from competing or soliciting. At common law, they CAN be PREVENTED from doing so if they owed a fiduciary duty or a duty of confidence to the employer. There are common law tests that need to be met before a judge will conclude that the employee did anything wrong. So why wait until a judge rules on an unclear matter when you can just have a contractual obligation entered into at the beginning of the relationship and perhaps at the end? If they are clear, reasonable, and fair and entered into properly, then you (as an employer) stand a much better chance of enforcing them if you need to. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com
  • 11. The full DL Guide is available for FREE with the purchase of a Legal Form. Michael Carabash, B.A., LL.B., J.D., M.B.A. michael@carabashlaw.com Need an Ontario Lawyer? Make a Post. Get FREE Quotes! www.DynamicLawyers.com