For many businesses, non-competition agreements can be very alluring. As all employment relationships eventually come to an end, surely it’s in a company’s best interest to have a contract with staff stating that competition with the employer is prohibited at the end of the employment relationship.
A great idea, maybe, but are these agreements enforceable? In other words, are non-competition agreements a bullet-proof vest, providing protection against real threats, or a security blanket, providing an easily penetrated false sense of security?
Like so many things in law, it depends. Non-competition agreements generally pit two important competing interests against each other. On the one hand, there is a strong public interest argument. Canada is a democratic market economy, where people are encouraged to pursue the profession of their choice with the employer of their choice. Further, restraints on trade and competition are decidedly not in the public interest, as competitive trade drives down prices, promotes better services and allows opportunities for the victor to prosper.
On the other hand, our courts are understandably hesitant to restrict the right of two knowledgeable, consenting parties from entering into a valid contract. Contracts are in many way the backbone of a consumer based economy, where we assume that people are rational and act in their best interests. Contracts are only voided with great caution.
In balancing these two competing interests, our courts apply the “reasonableness” standard. This broad analysis of the non-competition agreement tries to consider all surrounding circumstances of the employment relationship. This standard is generally considered to have three primary factors:
1. Does the employer have a “proprietary interest” entitled to protection?
Companies can have a proprietary interest in their book of business, their goodwill with customers, as well as trade-secrets such as research, marketing and pricing strategies. As such, we must first consider whether there is an interest worthy of protection. A business with little or no goodwill, trade secrets or other proprietary interests deserving of protection is unlikely to succeed in enforcing a non-competition clause, and courts will not enforce contracts that are simply looking to stamp out competition.
2. Are the temporal or spatial features of the clause too broad?
“Temporal and spatial” literally mean the duration and geography of a non-competition agreement. Companies are encouraged to carefully consider what interests they are protecting and what are the minimum geographical and time requirements to secure that interest. For example, the owner of a Kelowna flower shop may want her manager to have a non-competition agreement, recognizing that there exists valuable goodwill and client relationships that are vulnerable if the manager ever left and engaged in direct competition. While a non-competition agreement may be warranted, it would be unreasonable to restrict the manager from competing across the country or the province as a whole. A better exercise would be to examine the location of primary customers warranting protection, and restricting competition only to those areas.
Similarly, an overly broad time restriction on competition – such as for “10 years” or “for life” – would also likely be considered against public interest. A court will more likely assess whether the time restriction is reasonably required to protect the employer’s interests, without unnecessarily depriving the employee of the liberty of pursuing the profession of his or her choice for an unreasonable time.
3. Is the agreement against competition generally, and simply limited to soliciting clients of the former employer?
This third criteria will assess whether a non-competition agreement is required to protect the employer’s customer base, or whether it is simply trying to keep competition out. Generally speaking, the courts will not enforce a non-competition agreement where a non-solicitation agreement would adequately protect the employer’s interests. A non-solicitation agreement is far less encompassing than a non-competition agreement, as it simply requires that former employees refrain from actively engaging the company’s existing customers. As one court put it : “A non-solicitation clause is sufficient in conventional employer/employee situations”.
I would suggest that a further consideration in whether a non-competition agreement is enforceable is the degree of imbalance in bargaining power. For instance, a non-compete agreement against a low-level employee would likely be inappropriate, as it would be unlikely that the company would be vulnerable to unfair competition if the employee ever left and worked for a competitor. Circumstances may be different, however, where the employee is a senior manager in a position of trust, or where someone is purchasing a business and is concerned that the seller will walk across the street and engage in direct competition.
When dealing with employees, it is encouraged that employers consider all options before insisting on a non-competition agreement. If a confidentiality and non-solicitation agreement will adequately protect business interests, these will likely be more appropriate avenues to explore. However, if the company is inherently vulnerable to unfair competition, a carefully contemplated non-competition agreement should be considered. This agreement should be limited in scope to only what is reasonably necessary to protect the company’s business interests.
David M. Brown, Doak Shirreff LLP dbrown@doakshirreff.com
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