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Competition and Restrictive Covenants: Beware Boilerplate (Non-)Solutions

By Graeme McFarlane

Your organization has developed its special expertise and is well positioned in the marketplace. However, much of that expertise resides in the individual skill sets of your operational employees. Recently, one of your competitors was decimated when some of its employees left to set up their own shop. You are charged with designing a regime to protect the company from that type of situation.

In common law there are few protections available to the company. Most employees are free to quit their jobs and then directly compete with their former employer. Any such former employee is only restrained by the notion that he or she must not compete unfairly. Generally, this means that a departing employee cannot take away confidential information and then use it to secure an advantage in the marketplace.

The basic common law protections can be enhanced by way of an employment contract. In such a document, the parties can include restrictions on competition, solicitation and use of information. These types of clauses are called restrictive covenants and are designed to limit what a departing employee can do for a set period of time after they leave.

In Canada, it is illegal to restrain trade. That principle extends to individual contracts of employment. Courts generally do not like to prevent people from earning a living in the field where they have gained their experience. As a result, the law has developed so as to rule all restrictive covenants void at first instance. In order to rely on such a clause, the employer will have to convince a judge that the restrictive covenant in question serves only to protect a legitimate business interest in the most efficient way possible.

If an employee leaves and the employer believes that the employee is in breach of a restrictive covenant, it must take action to enforce the contract. The first step usually consists of writing to the employee and his/her new employer reminding him/her of the restrictions and warning them that legal action may result if the offending conduct continues. Surprisingly, this simple step often produces the desired result. Success probably results from the fact that the new employer was not aware of the restrictive clauses and directs the employee to cease any restricted activities.

Unfortunately, there are instances where the employee and the new employer act in concert so as to try and obtain the benefit of the employee’s past employment. Depending on the employee, this can have a large impact. In this circumstance, a warning letter will have little effect. To enforce the restrictive covenant, the previous employer will need to start a civil action. In conjunction with the lawsuit, the employer will also apply for an interim injunction pending the trial. The injunction would take the form of a court order requiring the employee and perhaps the new employer from continuing any breach of the restrictive covenants.

Interim injunctions are difficult to obtain. The legal test in British Columbia is twofold. First, the previous employer will have to show that there is a fair question to be tried. Second, the court will have to be convinced that the balance of convenience lies in favour of granting the injunction. What does this legal mumbo jumbo mean?

When addressing the first part of the test, the importance of the drafting of the restrictive covenant becomes apparent. The court will only enforce a restriction that protects a legitimate business interest to the minimum extent necessary to do so. A clause that is too vague, is for too broad an area, contains elements that were not part of the employee’s regular duties, or is for too long a duration will not be enforced. Therefore, if the clause is improper, the court will conclude that there is no fair question to be tried. Many courts have commented that confidentiality and non-solicitation clauses are probably enough to protect an employer’s interests. This suggests perhaps an even higher standard now for the enforcement of non-competition provisions.

When addressing the second part of the test, the court will look at the effect on the previous employer. If the employer can be compensated by an award of money, an injunction will not be issued. The employer will have to show that the breach of the restrictive covenant will harm a more intangible part of its business. Loss of goodwill and effect on client relationships are two examples of damage that a court has held to be sufficient to grant an injunction.

You can protect your human expertise. However, the protection must be carefully implemented. The use of boilerplate language for restrictive covenants should be avoided. Each clause should be tailor-made for each situation. While this may sound like unnecessary up front work, avoiding unenforceable language in an employment contract seems worth it. Do you?

Graeme McFarlane is a partner at Roper Greyell LLP which is a firm focused on partnering with companies to find solutions to workplace legal issues.

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Category: PeopleTalk, Raising the Bar

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