By Graeme McFarlane

When corporations are faced with challenges, most often they look to their executive team for leadership. These individuals are often highly remunerated and ultimately responsible for the successes or failures of their respective businesses. These people are intimately involved with the organization both in terms of how it developed and where it is going.

Information is crucial for leadership. Without it, poor decisions can result. Executive teams usually have access to virtually all information residing in a business’s facilities. They use this information to develop the strategic plans necessary for the business to succeed and prosper.
Because of their role and access to information, an executive can cause extensive damage to the business if they leave and use their information while working for a competitor. This risk has prompted businesses to try and protect themselves from unfair competition from departing executives. The most common form of protection is the use of restrictive covenants.

Restrictive covenants are contractual terms that limit a departing employee’s ability to engage in certain conduct in the future. The most common forms of restrictive covenants are confidentiality, non-competition and non-solicitation agreements. Confidentiality agreements prevent the disclosure of proprietary information owned by the former employer. Non-competition agreements completely bar the employee from engaging in business activity that is competitive with the activity of his/her former employer. A non-solicitation agreement allows competition, but bars the employee from engaging with the former employer’s customers and hiring away other employees.
Canadian Business magazine reports that existing CEOs believe strongly in securing this type of protection for their businesses. Seventy percent of surveyed CEOs use non-competition agreements for some of their employees. Ninety-three percent said that non-competition agreements should be in place for employees who have direct access to trade or technical secrets.

Notwithstanding this strong corporate view regarding restricting competitive activities of departing employees, Canadian Courts do not agree. Judges do not like enforcing agreements that essentially bar people from working in a position that is commensurate with their education, experience and training. Under Canadian common law, restrictive covenants are considered illegal as restraints against trade unless the party seeking to enforce the agreement can show that the particular language of the restriction is a reasonable limitation that will protect a legitimate business interest of the former employer. This test, especially in terms of a non-competition agreement, is very difficult to meet.

When seeking to enforce a restrictive covenant, the party seeking protection must convince a court that the provision is reasonable in all of the circumstances. There are a few elements to this analysis.

First, the duration of the restrictive covenant must not be too long. The duration of the agreement should not be longer than the period during which the departing employee could cause real damage. A great deal of corporate information becomes stale very quickly. So too do business contacts, especially if the former employer takes immediate steps to build relationships with important stakeholders. Courts will rarely enforce restrictive covenants that last longer than one year.

Second, the scope of the restrictive covenant cannot be too broad. The restriction should only cover activities in which the business operates. Care must be taken to draft language that properly describes the employer’s business activities. Imprecise or vague language will likely cause the provision to be struck down.

Third, the geographic area of the restriction must be appropriate given the business activities of the company and the area(s) in which the former employee was engaged. A court will not enforce a worldwide restriction for a company that only performs regional business. Likewise, an employee whose business contacts are limited to a specific area should not be restricted from moving and performing work in an area where his prior work will not cause unfair competition.

Ultimately, a court will only enforce the least restrictive form of covenant that will properly protect a legitimate business interest. Courts prefer non-solicitation agreements over non-competition provisions, and will not enforce a restriction on competition if it finds that the protection could be provided with a lesser form of clause. A company seeking protection that will withstand judicial scrutiny must carefully draft these clauses or else they face the risk of having little or no protection at all.

Graeme McFarlane is a partner at Roper Greyell LLP, a firm focused on partnering with companies to find solutions to workplace legal issues.

(PeopleTalk: Winter 2010)