IP Issues regarding Software Codes that Canadian Start-ups and Growth Companies Should Know

Written by Thao Nguyen
JD Candidate 2026

Intellectual property (IP) is important to a business, especially start-ups and growth companies, as IP could influence the profit a business can obtain in selling its products, services, and processes. Therefore, a business employs many safeguards to ensure its IP rights over any work that the business’s employees produce or work on.
 
More specifically for software, a business usually uses technical and legal safeguards to protect its IP rights over software code written by its employees.[1] As the current Canadian patent laws do not allow patents for abstract ideas, obtaining patent protection for software-related inventions can be difficult.[2] Therefore, this blog will focus on how a business can protect its software codes using copyright and trade secrets.
 
In Canada, copyright is governed by the Canadian Copyright Act (the Act)[3]. Under the Act, software codes developed during the course of an employee’s employment belong to the employer if there is no agreement that says otherwise.[4] An employee, as the author of the software, may assign their rights and grant a licence to the employer. The assignment and grant must be in writing and signed by the employee.[5]
 
Issues arise when an employee claims that they work on the software outside of the course of their employment. For example, in Knowmadics v Cinnamon (Knowmadics),[6] the employer plaintiff applied for an interlocutory injunction order prohibiting the use and sale of a piece of software sold by a former employee and her new business. The court found that the employee’s new software was similar to the software created by the employee during the course of the plaintiff employer’s employment and that the sale of this new software depleted the plaintiff’s customer base by undercutting prices, leading to irreversible loss of goodwill and market share.[7] The court granted an interim, interlocutory injunction allowing the defendants to service only their existing Canadian clients.[8]
 
It is, however, not guaranteed that a court would find in favour of the employer in cases of software copyright dispute with former employees. In the recent decision Nexus v Krougly,[9] with similar facts to Knowmadics, the court found for the employee defendants who started a new company upon departing from the plaintiff’s company. The court commented that despite the actions of the defendants in selling software he created during the course of employment with the plaintiff employer, there was no copyright infringement in this case as the purpose of copyright law was not to punish bad actors.[10]
 
Copyright issues also arise from the statutory requirement of having the assignment in writing and signed by the author of the software. Most notably, in Tremblay v. Orio Canada Inc.[11], the Federal Court found the employee did not sign the assignment of the copyright as required by s 13(4) of the Act.[12] Therefore, the employee did not assign the copyright over to the employer; however, the court also found that the employee gave an implied licence for the employer to use the copyrighted software, so there was no copyright infringement.
 
Besides copyright, an employer can protect its copyright over its software codes by keeping them as trade secrets. It is common to find restrictive covenants on employment agreements requiring employees not to disclose information they learn from the course of their employment to others, or that they cannot compete with the former employer within a specified period and/or in specific geographical areas.
 
These employment restrictive covenants, however, are prima facie unenforceable as they restrict open trade and employment opportunities for an employee. The presumption is rebuttable in very few cases where the court finds that these restrictive covenants are enforceable. The onus is on the employer to prove that these restrictive covenants are enforceable: 1) Whether the employer had a proprietary interest entitled to protection; 2) Whether the temporal or spatial limits are too broad; and 3) Whether the covenant is overly broad.[13]
 
Overall, it is common to find that generic restrictive covenant provisions found in boilerplate employment agreements are usually found unenforceable. For example, in Ceridian Dayforce Corporation v. Daniel Wright[14], the employer in the industry of providing human resources management software to businesses sought to enforce a non-compete clause barring a former software developer employee from providing or engaging in any business competitive with the employer within North America for 12 months. From the evidence, the court found that the scope of the term “Competitive Business” and the proprietary interest the employer claimed were overbroad and ambiguous, effectively barring the employee from working in any capacity in a competitive business.[15] Additionally, the court determined that the 12-month period was not reasonable and arbitrary and that the geographical scope was also overbroad.[16] The court declined to conclude that the non-compete clause was enforceable due to the non-compete salary payments that the employee received, and affirmed that the non-compete clause was unenforceable and void ab initio.[17]
 
Furthermore, other contexts regarding an employee’s departure from a business might impact the enforceability of restrictive covenants. For example, the courts have demonstrated different treatments toward restrictive covenant provisions in an employment contract versus a resale contract.
 
In GDL Solutions Inc. v. Walker et al., [18] Mr. Walker sold his information technology business to GDL and became the general manager of GDL. Mr. Walker and GDL formed a non-compete agreement which mandated that Mr. Walker could not engage with any business that was the same or similar to GDL’s business in the geographical area of Ontario and a surrounding 10-km ring[19] for 3 years.[20] Mr. Walker later left GDL and joined a new IT business based in Toronto before the 3-year period ended.  In affirming the enforceability of the non-compete agreement, the court substantiated that Mr. Walker had sufficient understanding of what business was similar to GDL’s business, the geographical and temporal restrictions were reasonable, and both parties had extensively negotiated over the asset sale with comprehensive legal consultation.[21]
 
To conclude, start-ups and growth companies must be attentive to protect their IP rights over software codes by properly executing IP rights assignment and designing its restrictive covenant clauses in employment and resale contracts. These considerations often involve an extensive review of the nature of the business, the specific IT areas it operates in, and the roles the employees play in the software development process. A well-drafted agreement will likely prevent many future disputes or litigations regarding who owns the IP and what trade secrets can be protected and for how long after the employees’ departure from the business.
 
The above information does not constitute legal advice. No guarantees are made regarding accuracy, completeness, or its applicability to individual situations or needs.

[1] Martin Kratz, The Creator and the Benefits of Creation: Protection of Software in the Information Revolution, 1985 9-3 Dalhousie Law Journal 555, 1985 CanLIIDocs 463, <https://canlii.ca/t/7nfjg>, retrieved on 2025-11-09

[2] Ibid, p 578.

[3] RSC 1985, c C-42 (the Act).

[4] Copyright Act, s 13(3).

[5] Copyright Act, s 13(4).

[6] 2019 ONSC 6549.

[7] Ibid, para 25.

[8] Ibid, para 28.

[9] 2024 ONSC 1346.

[10] Ibid, para 370.

[11]  2013 FC 109 (CanLII), [2014] 3 FCR 404.

[12] Tremblay, paras 41, 48

[13] Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 at paras. 15-17; Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 at para. 16.

[14] 2017 ONSC 6763 (CanLII).

[15] Ibid, paras 45-46.

[16] Ibid, paras 48-49.

[17] Ibid, paras 54-55.

[18] 2012 ONSC 4378 (CanLII).

[19] Ibid, para 55.

[20] Ibid, para 63.

[21] Ibid, paras 49-68.