Non-Compete Clauses

NON-COMPETE CLAUSES
What are they?
A non-compete clause is a provision designed to limit a former employee’s ability to work for a competitor or open a competing business. Non-compete provisions are sometimes included in employment contracts, but they can also form a standalone agreement.
Non-compete clauses are very common, especially among start-up companies. After all, the last thing a company wants when an employee resigns or is terminated is for that employee to launch a competing business or head straight to the nearest competitor. Employees may have intimate knowledge of their former employer’s trade secrets, operations and business plans, and may have gained access over the course of their employment to valuable information relating to customers, clients, new products and marketing strategies.
Are they enforceable?
Despite their popularity, non-compete clauses can be difficult to enforce. From a public policy perspective, the courts want to ensure that individuals are not unfairly prevented from earning a living.  This has resulted in courts frequently striking down non-compete provisions that are deemed to be “an unreasonable restraint on trade”.[1]
However, there are a number of surrounding factors that courts consider in assessing the reasonableness and validity of a non-compete clause. Understanding these considerations can help employers craft effective non-compete provisions that are as minimally restrictive as possible. To design a non-compete that will protect the company and withstand a legal challenge, consider the recommendations below.
              Limit the scope
The more limited a non-compete is with respect to duration and geographic scope, the more likely courts are to enforce it. In Kohler Canada v Porter, the provision in question restricted a manager from competing anywhere in North America for one year after termination of employment “in a line of business…in which the employee worked”. The court struck down the provision for being too broad.[2]
Moreover, the geographic scope should be clearly and unambiguously defined. In Shafron v KRG Insurance Brokers (Western) Inc., the court refused to uphold a non-compete clause they deemed unenforceable due to ambiguity.[3] The contract in question sought to prevent a former employee from working anywhere in “the Metropolitan City of Vancouver”, which is not a legally recognized geographic area. As a consequence, the court held that the entire agreement was invalid.
Employers should also embed in the agreement itself the rationale for the geographic and temporal scope.[4] Courts may consider such factors as the duration of the employee’s tenure, the size of the market in a geographic region, and the nature of the information to which the employee had access or how closely they worked with clients.[5] Being transparent about the factors that inform the scope of the non-compete can help a court assess whether or not it is reasonable.
Further, a company may choose to tailor a non-compete clause in terms of the specific jobs its employee will be prevented from taking, or the competitors they will be prevented from joining for a period following the termination of their employment.[6] This way, the company can protect itself in the areas in which it is most vulnerable, without unduly hampering the employee’s ability to find subsequent employment. This means that non-compete clauses must be specific to the employee, having regard for the roles and competitors where that employee most poses a risk to the company.
              Don’t impose non-compete agreements on everyone
While it may be tempting to bind every employee to a non-compete agreement, such indiscriminate application can actually weaken the protection afforded by such provisions. If every employee is required to sign a non-compete agreement regardless of how tangential their role is to the company’s main business, the courts may view this as demonstrating a company’s unreasonableness.[7] In assessing whether a non-compete clause is necessary or reasonable, courts will consider whether a departing employee had influence over clients or customers and how much damage the employee could do in the same market as the company.[8] A receptionist leaving the company likely doesn’t pose the same risk that a software engineer or salesperson does. A company’s use of non-compete agreements should reflect that.
              Consider a non-solicitation agreement instead
A non-solicitation agreement can be used to prevent a departing employee from poaching the company’s clients, investors, suppliers and other employees. While non-solicitation agreements can also be struck down if they are too broad, they are more likely to be enforceable than are non-compete agreements. Non-solicitation agreements may be as (or more) effective as non-compete agreements at protecting a company. A salesperson leaving to join a competitor’s team can do far less damage if they are not allowed to take clients with them. Although non-solicitation clauses should be customized just as non-competes are too avoid being struck down for over breadth, there are a few good rules of thumb. First, limit them to one year or less. Second, the clause should be drafted to prevent an employee from soliciting only those individuals with whom they developed a relationship over the course of their employment. Attempting to prevent the employee from contacting anyone the company does business with has greater potential to be viewed as unreasonable, particularly in smaller markets.
 
Melanie Bowman is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary.

References:
[1] Bryce C. Tingle, Start-up and Growth Companies in Canada 3rd ed (LexisNexis Canada Inc., 2018), at 131.
[2] Kohler Canada Co. v Porter [2002] OJ No.2418, 26 BLR (3d) 24 (Ont SCJ).
[3] Shafron v KRG Insurance Brokers (Western) Inc.,2009 SCC 6, [2009] 1 SCR 157.
[4] Supra, note 1 at 132.
[5] Lisa Stam, “Is My Employee’s Non-Compete Agreement Enforceable?” (21 February 2018), online (blog): Employment and Human Rights Law in Canada < https://www.canadaemploymenthumanrightslaw.com/2018/02/employees-non-compete-agreement-enforceable/>
[6] Supra, note 1, at 132.
[7] Ibid.
[8] Supra, note 5.