One hour interactive lecture to Osgoode Hall legal drafting class.

1. Anatomy of a Restrictive Covenant
Dan Michaluk
February 24, 2009

2. Anatomy of a Restrictive Covenant
Outline
• Interpretive context
• Client objectives
• Enforceability opinions
• Enforceability
• The components
• Scope and ambiguity
and relationship
protection
• Scope and ambiguity
and information
protection
• Severance

3. Anatomy of a Restrictive Covenant
Interpretive context
• This is an employment contract
• employer drafts – contra proferentum
• unequal bargaining power
• So…
• …use different language than you would in a
commercial contract

4. Anatomy of a Restrictive Covenant
What’s the client’s objective
• Create a means of control over departing
employee risks
• Misuse of confidential information
• Theft of trade secrets
• Capitalizing on trade relationships
• Capitalizing on personal relationships with other
employees

5. Anatomy of a Restrictive Covenant
Warning about enforceability opinions
• Departing employee litigation is driven by colour
• The party who looks the cleanest often wins
• The enforceability test is very contextual
• So…
• template contracts are a bad idea
• don’t guarantee enforceability… ever

6. Anatomy of a Restrictive Covenant
Test for enforceability
• From Elsley (SCC, 1978)
• Reasonable between the parties
• Reasonable in the public interest

7. Anatomy of a Restrictive Covenant
Test for enforceability
• “Private reasonableness”
• Is judged in the full context, including how the
parties executed the contract
• Is associated with proportionality
• Did the employer go only so far as necessary to
protect a legitimate interest?
• Lyons v. Multari (Ont. C.A., 2000) – If a non-
solicitation clause will do, it must do.

8. Anatomy of a Restrictive Covenant
Types of covenants
• Non-competition – I will not work for a company
that competes with you
• Non-solicitation – I may work for a company that
competes, but I won’t solicit your customers,
suppliers or employees

9. Anatomy of a Restrictive Covenant
Types of covenants
• Hybrid – I may work for a competitor, but I will not
accept business from any of the customers I
worked with while in your employ
• The Ontario Court of Appeal has recently said
these are really non-competition clauses and
should be treated as such (Staebler, June 2008)

10. Anatomy of a Restrictive Covenant
The components
• Covenant
• Ancillary language
• Acknowledgement
• Relief language
• Severability language
• Survives termination language

11. Anatomy of a Restrictive Covenant
Scope and trade relationship protection
1. I will not work for a company that sells widgets
to businesses in North America.
2. I will not solicit the company’s clients for 3 years
from the day my employment is terminated.
3. I will not solicit my former clients for 1 year…
4. I will not solicit my active clients for 1 year…

12. Anatomy of a Restrictive Covenant
Ambiguity and trade relationship protection
• What does “solicit” mean?
• What does “my active clients” mean?
• What does “termination” mean?

13. Anatomy of a Restrictive Covenant
Scope and information protection
1. I will not work for a company that competes with
you for 3 years from the day my employment is
terminated.
2. I will not work for a company that competes with
you in Canada for 1 year from the day my
employment is terminated.

14. Anatomy of a Restrictive Covenant
Ambiguity and information protection
1. What does work for mean?
2. What does “competes with you” mean?

15. Anatomy of a Restrictive Covenant
Severance
• A court will not make the bargain for the parties
• So you can say, “I’ll take restriction A, and if I
can’t get that please give me B.
• KRG v. Shaffron (SCC, January 2009) weighs
strongly against severing restraints on trade

16. Anatomy of a Restrictive Covenant
Where to learn more
• Check out our podcast at
• www.hicksmorley.com
• Visit All About Information at
• http://danmichaluk.wordpress.com

17. Anatomy of a Restrictive Covenant
Dan Michaluk
February 24, 2009