Business Venture Blog
This is where we post about business, ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Prospectus Exemptions in Securities Law
One of the most significant barriers to growing a business corporation is financing. Among other methods, start-up founders may choose whether to secure a line of credit, acquire government subsidies or trade their cash for shares in a corporation. However, these options are restricted to the founders’ capacities of obtaining capital. In order to expand the pool of funds without violating the complex legal rules of expensive prospectus requirements, small business owners may consider offering shares to an exceptional group of friends, family or associates as detailed in the Canadian securities National Instrument 45-106.
Under Canadian securities law, a corporation must file a prospectus, which is a comprehensive legal document that discloses the material facts of an investment offering, prior to distributing its securities to the public. The public requires a prospectus in order to make an informed decision about purchasing respective shares. Such a requirement can be an expensive task, involving many professionals including investment bank underwriters, accountants, financial advisors and legal teams, which creates prohibitive obstacles for budding firms. Recognizing this limitation and driven to encourage small firm growth, the government passed the National Instrument 45-106.
The National Instrument 45-106 is a set of rules that governs all securities’ jurisdictions in Canada — except for Ontario, which permits exemptions under its own legislation not discussed here. Using the exemptions detailed in the instrument, a small firm may seek capital through distributing shares, without filing a prospectus, in certain transactions or to a limited group of investors. These investors include close family members, close business associates, or accredited investors, rich and sophisticated individuals for whom a significant amount of protections provided through securities legislation would be unnecessary. Below are a few examples of the exemptions available using this instrument.
According to section 2.3 of the National Instrument, the prospectus requirement does not apply if an issuer distributes securities to an accredited investor. An accredited investor includes financial institutions, banks, advisors, dealers, trusts, government organizations, or individuals who, alone or with their spouses, own assets exceeding $1,000,000 or $5,000,000 (the latter do not have to sign risk acknowledgement forms), or have net incomes of at least $200,000 in the past two years (or $300,000 with a spouse). A corporation may also fit into this category provided the fulfillment of certain conditions, such as having net assets of at least $5,000,000; however, the exemption does not apply if a corporation was created solely to hold securities as an “accredited investor”.
Family, Friends and Business Associates
Under section 2.5, a corporation may distribute securities to founders, employees, directors, officers, control persons or affiliates, their close family members, their close personal friends or business associates, or respective trusts or estates. The court has determined “close” by asking whether it would be acceptable to use a friend’s, family member’s, or business associate’s bathroom without asking.
The issuer may choose to distribute offering memorandums through the required form of section 2.9 in lieu of a full prospectus. A corporation may issue shares to certain qualifying investors in Alberta without a prospectus, provided that:
While using an Offering Memorandum may widen the group of potential investors, this exemption carries the same level of disclosure and liability as issuing through a prospectus.
The private issuer exemption applies to companies that have restrictions from trading securities in the open market without the director’s approval, that don’t have more than 50 shareholders, and that don’t report to any Securities Commission. Under these circumstances, a company may distribute securities to those connected to the firm, such as directors, officers, employees or control persons, their close family members, their close friends or business associates, or accredited investors. Furthermore, unlike the exemptions above, private issuers are not required to publicly report each distribution.
In conclusion, the National Instrument 45-106 provides opportunities for small companies to raise funds through share distribution under certain circumstances without the expensive prospectus requirement. If your organization is looking to make use of the opportunity or has questions regarding details of securities law, please do not hesitate to contact a caseworker at the BLG Business Venture Clinic.
Nick Konstantinov is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
Business and Product Liability
Many businesses operate by producing and selling various products. However, as the manufacturer of a product a business may open itself up to certain legal claims if a customer is injured by their product. What follows are some considerations for product manufacturers regarding product liability.
What is your Liability for Injuries Resulting from a Product?
Start-ups may encounter claims from customers who were injured by faulty or defective products. The burden lies with the customer to prove that but for the product being faulty or defective in some way, they would not have been injured. If this is successfully established by the customer the manufacturer of the product will be held liable for the injury of the customer. While this situation may be avoided through heightened quality control measures and adequate product testing, there are circumstances when an injured customer may bring forward a claim even if the product was functioning properly.
Duty to Warn
The manufacturer of a product must provide sufficient warnings regarding the risks of using their products. If there were not sufficient warnings provided, a customer may still sue a manufacturer even if the product was functioning properly and the injury resulted from the normal use of the product. The extent of the warning required hinges on two factors:
How Can a Manufacturer Defend Themselves from an Injury Claim?
The Injury was not a Result of the Product
In the event that a customer has chosen to bring a claim due to being injured by a manufacturers’ product, there are certain defenses available to the manufacturer. For one, the manufacturer may contend that a separate and distinct event was the cause of the injury. For example, if an individual is injured in a car accident because their breaks failed, this would indicate that the manufacturer may be liable for the injury. However, if it is determined that the breaks failed because of an error made by the customer’s mechanic then this may absolve the car manufacturer of liability. This is because the injury was a result of the negligent mechanic, and not any fault on the part of the manufacturer in manufacturing the vehicle.
The Customer Assumed the Risk of Injury
A manufacturer may also defend themselves by suggesting that the injured customer was aware of issues with the product. This is because the customer was aware that the product was altered or defective in some way, and still chose to operate it despite the heightened risk of injury. An example of this would be a customer choosing to use a knife even after knowing that the blade was faulty. If the blade were to snap and injure the customer the manufacturer may raise the defense that the customer assumed the risk when they chose to use the faulty or defective product.
The Customer Used the Product Negligently
Another possible defense that a manufacturer may raise is that the customer was injured because they used the product negligently in a manner that it was not meant to be used. For example, if an individual chooses to stand on a laundry hamper in order to change a light bulb and is injured because the hamper topples over, the manufacturer may argue that the injury was a result of the customers’ negligence. This is based on the customer using the hamper in a manner that that it was not meant to be used, and the argument that but for the misuse, the customer would not have been injured.
The bringing forward of a claim by an injured customer is subject to a statutory limit. This means that a claim by an injured customer can only be brought forward within a specific period of time once the injury has occurred. This period varies from province to province, but in Alberta it is generally within 2 years of the time the injury occurred. Additional information regarding limitation periods can be found in the Alberta Limitations Act.
Richie Aujla is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary
Carrying on a Business in Other Provinces and Territories
Ever wonder how to expand your business beyond its provincial borders? New entrepreneurs may be surprised to learn that they will not generally be able to carry on business in another province without first clearing some basic bureaucratic hurdles. Though the specifics will depend on several factors, including where a business was incorporated, where it will operate, and what kinds of business activities it will be carrying on, a province will most often require that a business register in that province in order to carry on business there.
The specific registration requirements and the definition of “carrying on business” will vary from province to province (the same is true of the territories) and may be affected by trade agreements such as the New West Partnership Trade Agreement between British Columbia, Alberta, Saskatchewan, and Manitoba. In Alberta, for example, an extra-provincial corporation (a corporation incorporated outside of Alberta) is carrying on business and must, therefore, register if any of the following conditions apply:
One of the potential advantages of the extra-provincial registration process, especially for start-ups and new entrepreneurs, is that it allows a single business entity to operate across several provinces, rather than requiring the incorporation of a new business in each province. Incorporating in each province would mean managing several businesses and their filing requirements across multiple jurisdictions, whereas extra-provincial registration allows for the management of a single business entity in its home province with the only filing obligations in other provinces being the less onerous registration requirements, as specified by that province.
An additional consideration for entrepreneurs looking beyond their provincial boundaries is the use of their business’ name; a business incorporated in Alberta, even if properly registered as an extra-provincial corporation in another province, may not be able to operate under its name if there is already a business operating in that province with the same name or a similar name. If it is important that a business operate country-wide under the same name, federal incorporation may be a good option; though federal incorporation will generally involve more paperwork every year than provincial incorporation, it allows a company to conduct business under the same name across Canada, even if there is already a company operating in a province with that same name.
For more information about federal incorporation, provincial incorporation, and extra-provincial registration requirements across the provinces and territories, visit the Government of Canada’s Business and Industry “Registering your business” page:
Aleksandar Kukolj is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary
Copyright is the sole right to produce or reproduce; publish or perform original literary; dramatic, musical or artistic works. Essentially, it is the right to copy. Copyright applies to all original content, provided the conditions of the Copyright Act are satisfied, regardless of whether the original owner has registered their copyright. Therefore, copyright rights exist the second an author concludes their book, a software engineer finishes a block of code, or a choreographer completes their routine. Certificates of registration of copyright only act as evidence that copyright exists and that the person registered is the owner of the copyright. This can be particularly helpful as an owner may transfer ownership or license their work out to other individuals. One thing to note is that the Canadian Copyright office does not perform “gatekeeping” functions. What this means is that anyone can claim to be the owner of a piece of work. In Andrews v McHale and 1625531 Alberta Ltd. et al, 2016 FC 624, an ex-employee was able to register copyright ownership of some of his ex-employers’ software, turned around and sued the company for copyright infringement. Additionally, the Copyright office does not “police” and therefore, the onus is on the owner of the copyright to ensure that no one is infringing on their right to reproduce.
A challenge for many growth companies with regards to copyright is who owns of the software when the author is an employee. As established above, the general rule is that the author is the owner. However, an exception can be found in section 13(3) of the Copyright Act. It states:
“Where the author of a work was in the employment of some other person under a contract of service or apprenticeship and the work was made in the course of his employment by that person, the person by whom the author was employed shall, in the absence of any agreement to the contrary, be the first owner of the copyright”
What this establishes is that if you own a company and hire a software engineer to write code, the code they wrote in the course of their employment would belong to your company, unless there was an “agreement to the contrary”. It is important to remember that this agreement does not have to be in writing, and in certain circumstances, like in an academic context – where professors are generally owners of their work regardless of their employment, creators ownership can be presumed. Another interesting concern relating to copyright is an author’s moral rights. Moral rights are an author’s right to maintain the integrity of the work and the right to be cited as its author. Even if the work is created under employment or their rights to ownership were waived through contract, their moral rights in their work cannot be assigned and are not automatically waived.
In conclusion, this post is to give you a little taste of how copyright works in Canada and how it can apply to growth companies.
Tyler Anthony is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary.
 Canadian Intellectual Property Office, A guide to copyright(Ottawa: Canadian Intellectual Property Office, 2018) <ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03719.html?Open&wt_src=cipo-cpyrght-main/> accessed October 28, 2018
 Copyright Act,RSC 1985, C-42 [Copyright].
 Christopher Heer and Daryna Kutsyna, “Copyright FAQ” (13 August 2018), Heer Law (blog), online < https://www.heerlaw.com/copyright-faq/>.
 Richard Stobbe, “Ownership of Copyright in Software”, (21 September 2016), The Medium (blog), online < https://www.fieldlaw.com/portalresource/lookup/wosid/cp-base-4-7474/overrideFile.name=/Ownership_of_Copyright_in_Software.pdf/>. [Richard].
 Andrews v McHale and 1625531 Alberta Ltd, 2016 FC 624.
 Richard supra note 4.
 Copyright supra note 2 s.13(3)
 Jean-Sebastien Dupont and Guillaume Lavoie Ste-Marie, “Do you actually own the IP generated by your Canadian employees” (16 June 2016), Smart & Biggar Fetherstonhaugh (blog), online: <http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=866/>.
An Intro to Cooperatives
When you’re thinking about starting a business, one of the first legal decisions you have to make is what structure to use. Limited corporation, partnership, limited partnership, and sole proprietorship are the models traditionally considered. This post is about another option that makes sense in some circumstances, the cooperative corporation, or coop. Coops are a business structure option often discounted, and they don’t make sense in every situation. Where you have a group of people facing a common problem though, and your value proposition is deeply based on solving that problem and building the loyalty and participation of that group, a cooperative might be a good fit. Coops are especially good at meeting needs “that neither the market nor the public sector fulfill.” Mountain Equipment Coop, for instance, was built as a consumer cooperative because it was designed to meet a niche retail need, and to serve those consumers. Similarly, the Coop grocery store was built as a response to a lack of good grocery and gas options, and so it made sense to build it as a cooperative to serve member needs. Stocksy United is a platform coop that provides stock photos and whose members are the photographers who take those photos. Those photographers being members rather than employees or contractors gives them an extra incentive to have the overall platform succeed. Coops also have a built in set of principles that they have to operate under as mandated by the legislation that help them fulfill this vision of people coming together to solve a problem or meet their or their community’s needs:
So, what exactly is a coop? At its base, it is a corporation that has members instead of shareholders, and that is democratically controlled by those members. Profits are generally shared amongst the members, often based on use of the coop’s services, rather than strictly by number of shares. However, this is alterable by share structure choices. The basic idea is that members own and control the business. So, who are members? There are four basic options:
Once you’ve decided what kind of coop you are going to make, you should make sure that you are thinking about the cooperative in a way that makes it successful. Coops can be really powerful vehicles to meet the needs of people and communities, and do so in a way that puts those needs, not profits, first. But in order to do that, coops have to have a viable business case - they must be financially feasible. A feasibility study or a business plan aren’t necessary to creating a coop, but thinking about those kinds of things is important before you create a coop.
The basic legal steps to create a coop are pretty similar to creating a corporation. You must file an articles of incorporation, a summary of those articles and statutory declaration, a notice of address form, a notice of directors, and an incorporation fee of $100. These documents have to specify what kind of cooperative you are creating. You also have to complete a NUANS search to make search that your name isn’t being used by somebody else already. Full details on this process in Alberta can be found here: https://www.servicealberta.ca/1041.cfm.
Once the articles are filed and the coop is incorporated, you must create bylaws for the cooperative. Bylaws for cooperatives are a little bit different from, and a little more complicated than, a set of bylaws for a shareholder corporation. The Albertan government has created a list of Cooperative Act sections that have to be complied with for every section of the bylaws, and that can be found here: https://www.servicealberta.ca/pdf/coop/Bylaw_Requirements.pdf.
For more help creating a coop, you can find a list of coop developers and professional service providers for coops here: http://www.coopzone.coop/developers/members/region/Alberta/.
Matt Hammer is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
What is an Escrow Agreement?
Often, the founders of a start-up will be issued stock at the same time notwithstanding one of the founder’s main contribution occurring in the future. However, if the founder has already received the shares, he or she might not be incentivized to satisfy his or her obligations. This blog will describe how an escrow agreement may ameliorate some of the problems resulting from these arrangements.
(2) What is an Escrow Agreement
An escrow agreement is a legal document defining the arrangement by which one party deposits shares with a third-party, an escrow agent. The Escrow Agent will release the shares to the beneficiary upon the beneficiary satisfying specific terms and conditions outlined in the escrow agreement.1
By depositing the shares with an escrow agent, all the founders can rest assured the beneficiary will not receive the shares unless he or she has satisfied the obligations under the escrow agreement.
A founder receiving shares without having contributed to the business raises several issues. Firstly, it may cause resentment amongst the founders. This resentment might impede founder productivity or result in the founders sabotaging the business. Secondly, outside investors are often hesitant to invest in businesses if they perceive a shareholder is not contributing to the company. In this regard, it is important to distinguish growth companies from publicly traded companies which have many inactive shareholders. Thirdly, this may result in a hold-out risk. If the founder possesses enough shares, he or she may impede the other founders from making important decisions on how to grow the company.
Examples of Situations Where an Escrow Agreement Would Have Been Useful
The following are some examples of where an escrow agreement could be useful.
Firstly, changes in business plans may render the founder’s contributions superfluous.2 The risk of a business having to change its business model should not be underestimated. For example, Blockbuster started out with a compelling business model. Its value proposition was clear – enabling consumers to watch hit movies in the comfort of their homes.3 However, ultimately Blockbuster failed because they failed to adequately adopt their business model to compete with Netflix.4
Secondly, the founder may quit the company, or choose to dedicate his or her time to other ventures, upon receiving shares within the growth company. This is not unheard of. For example, Facebook founder Eduardo Saverin opted to commit his time to develop Joboozle rather than Facebook.5 In turn, Mark Zuckerberg chose to dilute his shares, and costly litigation ensued.6
Thirdly, the founder may be ineffective. Although the founder may look impressive on paper, his or her skills may be ineffective in that industry. For example, Apple chose John Sculley to replace Steve Jobs as the CEO of their company. Mr. Sculley had developed an impressive marketing resume during his time with Pepsi Co. However, Mr. Sculley knew little about marketing computers.7 When Steve Jobs returned to Apple, the company was on the brink of failure.8
In conclusion, an escrow agreement can be a useful legal tool for those wishing to start a growth company. It is particularly useful if one of the founder’s main contribution to the growth company does not come till after the business is formed.
Sunny Uppal is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
2 Bryce C Tingle, Start-Up and Growth Companies in Canada, LexisNexis Canada Inc. 2018 at p 110.
3 Saul Kaplan, Business Model Innovation: How to Stay Relevant When the World is Changing (John Wiley & Sons, 2012) at p 5.
4 Ibid at p 9.
Registering Your .ca Domain Name
Millions of people, organizations, and businesses trust the .ca domain name to brand themselves as Canadian online. The .ca domain represents an important tool for companies operating in the Canadian marketplace, and therefore it is advisable to proactively secure brands as .ca domain names at the earliest opportunity.
Benefits of a .ca domain name
The .ca domain name is ideal for Canadian websites for many reasons, including:
There is a Canadian presence requirement (CPR) for individuals, organizations and businesses to register a .ca domain. This requirement is meant to reserve .ca domain names for Canadians. All .ca domain name registrants must meet at least one of the 18 CPRs, i.e., the individual, organization or business must be, for example, a Canadian citizen, permanent resident, corporation, trademark registered in Canada, partnership, etc.
Register your .ca
2. Choosing a Registrar
While CIRA manages the .ca domain name registry, the domain names are actually registered through online retailers called Registrars. Registrars are evaluated and certified by CIRA every year and there are over 150 of them. When you search for a .ca domain name on CIRA’s website their certified Registrars are displayed. The Registrar you choose is important as they will be the main point of contact for the registration and management of your .ca domain name.
3. Registering a domain name
Once you’ve chosen a Registrar, a fee of $9.50 per year is payable by the Registrar on the approval of an application by CIRA. Tips for registering and protecting your domain include: to always register the domain name yourself so that you will always have access to the account; choose a strong password; provide the Registrant with the correct administrative contact information for renewal purposes; choose a registration term length that works for you (auto-renewal can be set up).
Protecting/Recovering domain names registered in bad faith
The .ca domain name operates on a first-come first-served basis. However, if there was a delay in registering a .ca domain name, there is the potential that cybersquatters (a bad faith Registrant) would have had the opportunity to register the domain name corresponding to brands that have recently entered in the Canadian market and, for non-Canadian companies, brands that are expected to enter Canada. If you suspect that there was a bad faith registration, there is a specific .ca domain name dispute resolution process called the CIRA Domain Name Dispute Resolution Policy (the “Policy”). Before a complaint can be made, the Complainant under the Policy must meet the CPR for registering a .ca domain before it can initiate a dispute. In order to succeed in a dispute, a Complainant must prove that:
Amber Blair is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary.
 https://cira.ca/cira-domain-name-dispute-resolution-policy; http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=166.
 https://cira.ca/cira-domain-name-dispute-resolution-policy; http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=166.
The Emergence of Women Entrepreneurship in Canada
Historically, women faced greater barriers than men in entrepreneurship. To name three:
1. Access to education – generally, entrepreneurs require knowledge or understanding of the field they attempt to innovate within, and much of this knowledge is usually obtained through education – due to gender-based barriers, many women lacked this needed foundation to start their own businesses,
2. Social stigma – For much of history, women were expected to be caretakers and homemakers, not income earners, and
3. Greater difficulty raising capital – due to the gender pay gap, women historically earned less than men. It logically follows that if women earn less income, there would be fewer women with sufficient capital to start new ventures.
The first 2 barriers have been equalized or are slowly equalizing. Women are surpassing men in higher education and notions of “gender appropriate” careers is but a relic in the Western world.
The declining effect of the education and stigma barriers have contributed to a recent surge of women entrepreneurs, especially in Canada.
However, a major concern remains that Canadian women appear to be trailing far behind men in financing new ventures. The reason for this might stem from the gender pay gap which still remains an unsolved issue (although it is improving). Regardless of the reason, it’s important to realize that improved education for women and changing social norms won’t help women entrepreneurs be successful if they still lack capital to finance their ventures – a key component in building any business.
The Alberta Women Entrepreneurs – an organization that specializes in assisting women entrepreneurs find financing -- seems to be helping to improve the financing gap for women. Organizations like these may prove central to the future growth of the Canadian economy, especially if women are to take a more central part in that growth. (links below)
David Kim is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary.
A Guide to SR&ED
SR&ED (pronounced “shred”) stands for Scientific Research and Experimental Development. It is a federal tax incentive program used to encourage businesses to conduct research and development in Canada. The program is administered by the Canadian Revenue Agency (the “CRA”). Research by the Canadian Advanced Technology Alliance shows that the CRA provides around $3 billion in tax credits every year.
What are the tax benefits?
There are two main tax benefits of the SR&ED tax program.
Businesses, individuals, partnerships, and trusts operating in Canada can all gain tax benefits through the program. However Canadian-controlled private corporations (“CCPC’s”) get enhanced benefits through the program. Click HERE to see the requirements for what qualifies as a CCPC.
What kinds of research is covered
The Income Tax Act defines SR&ED in subsection 248(1). Broadly speaking, SR&ED means “systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis”. This covers: basic research (scientific work without a specific practical application in view); applied research (scientific work with a specific practical application in view); and, experimental development (work aimed at achieving technological advancement for the purpose of creating improving or creating new products, devices, materials, etc.).
The definition also coves work done by, or on behalf of the tax payer, with respect to “engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research” where the work is commensurate with the needs and directly supports the above three (basic research, applied research, or experimental development).
What kinds of research is not covered
The government has made it clear what kinds of things they do not want to be covered with this tax incentive program. The following are not covered by the program:
To make a claim under the program, you have to file Form T661 along with your income tax return. Additionally, you must file either Form T2SCH31 if you are applying for a corporation, or form T2038(IND) if you are filing as an individual.
Along with the forms, you must provide additional documents to support your SR&ED claim. Depending on what you were researching/developing, this can include things like experimentation plans, data records, prototypes, projecting planning documents, records of trial runs.
The ability to apply for SR&ED will not last forever. Corporations have 18 months after the tax year for which the expenditures were incurred. Individuals have 17.5 months from this date.
What is on the horizon for SR&ED?
The SR&ED has seen its fair share of criticism. Some have said that program disproportionately helps big corporations and foreign subsidiaries. Media reports of SR&ED abuse in 2012 spurred the government at the time to provide the CRA with more resources to curb this abuse. In 2017, the Federal Budget stated SR&ED would be reviewed. As of today, we have not heard from the government if this review has occurred.
Rick Josan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary
 Supra, note 1.
 Income Tax Act, section 248(1).
 Supra Note 1.
So you are an entrepreneur with a great business idea and you want to share it with potential partners/employees or contractors to scale your business. But you also don’t want those potential partners to steal your ideas, or those trade secrets that allow your company to work in a unique way. You need an NDA: Non-Disclosure Agreement.
WHAT IS AN NDA?
A Non-Disclosure Agreement is generally given to an employee or other person working with the company to protect the company’s intellectual property – particularly trade secrets. Trade secrets include information surrounding a corporation’s finances, profit margins, customer lists, technology know-how, current and future strategy, and R&D initiatives.
An NDA can:
The enforceability of an NDA is unpredictable and relies heavily on the judge that looks at it. Despite the uncertainty of enforceability, there are measures you can take to improve the chances of an NDA being successfully enforced.
1. Make sure you have Consideration
The difference between an NDA included with an employment agreement and a stand-alone NDA is “consideration”. Consideration is anything of value. In order for a promise to be enforceable, it must be made in return for something of value.
If an NDA is included in the employment/contractor agreement, the required consideration is the promise of a job. However, if an NDA is executed at a different time than the employment agreement, the employee/contractor must be given something else of value in exchange for their promise not to disclose information.
2. Be Specific
An NDA may be found unenforceable if it acts as an overly broad restraint on trade. The courts go to great lengths to ensure that employees are protected, thus the more limited the NDA is in scope, time, and geography the more likely they will be held up by a judge or a court.
3. Contractual Counterparties or Independent Contractors
A court will consider an employee or dependent contractor as dependent on the company. If the contractor however is a true independent contractor, it means that they operate like a business. They declare profits and losses, use their own tools and control their own schedule. Most importantly, they are free to subcontract work to other parties and are not financially dependent on a single employer. In these circumstances, the courts are more likely to uphold an NDA.
Overall, these agreements do not guarantee the protection of information that is deemed to be within the general skills and knowledge of that employee/contractor. The level of protection they provide largely depend on the nature of the company’s information, the scope of the position, and how the NDA is drafted to address these specifics.
Christina Hassan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.