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Non-Compete and Non-Solicitation Agreements (Part 1)â¦
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to Non-Compete or Non-Solicitation clauses, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. If you’re looking for Non-Compete and Non-Solicitation clauses within an employment or independent contractor agreement, then check out our legal forms + video guides.
So this if the first of many blog posts about non-compete and non-solicitation clauses. Yes, I’ve previously blogged about this topic (e.g. here, here, and here). So here, I’ll be talking about these clauses from the perspective of an employer or human resources manager. If you’re either one of these, you absolutely need to check out our employment agreements or independent contractor agreements.
First thing’s first: do I actually need one?
Whether you need to restrict or limit an employee’s ability to do something (e.g. compete with the business, solicit clients from the business, solicit employees from the business) really depends on whether you have something worth protecting. Do you have a legitimate interest in protecting a business idea? If you have provided confidential information to an employee, clearly you want them signing a confidentiality agreement as part of their employment (if they are an employee) or engagement (if they are an independent contractor). If an employee or independent contractor had access to client lists, trade secrets, pricing policies, formula, or technology that is proprietary, the last thing you want is for them to set up shop across the street or share it with anyone else. So there has to be some type of harm or damage which could result from this employee or independent contractor doing something to you. If there is a reasonable prospect of such harm occurring, then having a non-compete or non-solicitation agreement or clause within an agreement makes sense.
Difference between Non-Compete and Non-Solicitation Agreement
OK, so assuming you need a non-compete or non-solicit, the next question to ask is: what’s the difference? And will one of them suffice? A non-compete clause in an employment agreement or an independent contractor agreement puts limits on the person’s ability to establish their own business or work for others so as to compete with their previous employer or client. This is a much more drastic step than a non-solicit clause. The latter, when included in an employment agreement or an independent contractor agreement, means that the person will not solicit customers or employees of the previous employer or client. Now, why not have both, you ask? Well, there are a few reasons…
First, having both may dissuade a prospective employee or independent contractor from signing on from the get go. They may feel that, if anything goes wrong and they leave, they will be unemployable. Related to this is the morale factor: a new employee or independent contractor may feel bad because, right away, they’re threatened with sanctions if things don’t work out and they try to do something akin to what they’ll be doing for the employer. Ouch! Finally, having non-compete and non-solicit clauses may actually INCREASE the amount of notice (or payment in lieu thereof) an employee is entitled to at common law if the matter gets litigated: courts may increase the normal amount of notice or payment in lieu thereof because it would take the employee longer to find suitable work with the existence of non-competes and non-solicit clauses.
So, assuming you as an employer still want to have a non-compete and/or non-solicitation clause just for the sake of having them, the next question becomes: do you need both or will one suffice?
Non-Compete vs. Non-Solicit in Employment Context
Interestingly, the case of Lyons v. Multari (2000) 3 C.C.E.L. (3d) 34 becomes relevant here. This is a leading case by the Ontario Court of Appeal concerning an employee dentist who was sued for allegedly breaching a non-competeclause in an employment contract. The issue before the court was whether that restrictive covenant was enforceable. The facts of that case are straightforward. One dentist was a principal of the business (i.e. the employer). Another dentist was an associate (i.e. employee). The two dentists signed a short-hand note that limited the associate’s ability to practice dentistry if he chose to leave. The entire non-compete clause said: “Protective Covenant. 3 yrs. – 5 mi.” After 17 months of working, the associate dentist left and opened up his practice – which competed with his employer’s business and was 3.7 miles away. The employer sued for breach of contract. The Ontario Court of Appeal disagreed, holding that the non-compete clause was unenforceable.
So how did the Court of Appeal end up there? Well, it started off by saying that all restrictive covenants go against public policy (free trade, etc.) and are therefore VOID. The only exception to this general rule is if the restraint is reasonable in the interests of the parties and also reasonable in the public interest.So there are a few factors which a court should consider to answer these questions: (1) whether the employer has a proprietary interest entitled to protection, (2) whether the temporal or spatial features of the clause are too broad, and (3) whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee.
So with this test and factors in hand, the Ontario Court of Appeal held the following:
- The employer had NO proprietary interest in other dentists who referred clients (so those referring dentists were up for grabs);
- The employer benefited from the relationship with the employee;
- The role played by the employee was not special; and
- A non-solicitation clause would have sufficed (a non-compete clause was too drastic).
So based on all of these things, the Court of Appeal concluded:
48 For all of these reasons, I conclude that Dr. Lyons’ non-competition clause is unenforceable. His legitimate interest in protecting his own referring dentists and patients could have been protected by a non-solicitation clause. An established professional person or firm — be it in the field of dentistry, medicine, engineering, architecture, law or other professions — will constantly seek to recruit entry level associates to the practice. Such recruitment is good for the established person or firm and for the young associate.
So what does that tell prospective employers and employees? Well, basically, you can put whatever you want in an employment agreement (for show), but at the end of the day it may not be enforceable. Asking too much and not being reasonable may defeat your restrictive covenant. In the case above, the Court of Appeal held that a non-solicitation clause would have sufficed because a non-compete was too harsh. Only in exceptional cases will non-compete clauses be upheld; that case was not an exceptional one.
Exceptional cases for non-competes?
So what constitutes an exceptional case for a non-compete clause, you ask? Well, although the court in the above case didn’t get into it, there was a case in Manitoba which did try to answer that question. In Winnipeg Livestock Sales Ltd. v. Plewman [2001] 1 W.W.R. 153, the Manitoba Court of Appeal reviewed the various Canadian authorities on the issue of “exceptional cases” and held that the following factors were relevant:
In summary, the authorities reveal that the following circumstances will generally be relevant in determining whether a case is an “exceptional” one so that a general non-competition clause will be found to be reasonable:
- The length of service with the employer.
- The amount of personal service to clients.
- Whether the employee dealt with clients exclusively, or on a sustained or recurring basis.
- Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies.
- Whether the nature of the employee’s work meant that the employee had influence over clients in the sense that the clients relied upon the employee’s advice, or trusted the employee.
- If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation.
- The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required.
- The nature of the business with respect to the strength of customer loyalty, how clients are “won” and kept, and whether the clientele is a recurring one.
- The community involved and whether there were clientele yet to be exploited by anyone.
So any employer or HR manager should think long and hard about these factors if they’re concerned about the validity and enforceability of a general non-compete clause…
Now onto the next article about non-competes and non-solicitation clauses and agreements…