Non Solicitation and Non Competition Clauses
Are you thinking of leaving your employer and hope to take your clients with you? Sometimes such behaviour can result in a legal action. Nothing infuriates a company more than a former employee taking away its most important asset.
In some proposed employment contracts and in many termination proposals, there is a clause prohibiting an employee from working for certain alternate Companies in the industry for a certain period of time in a certain geographical location. These are called non-competition clauses.
Many lawyers and some judges for the Courts look at these kinds of covenants as generally void, except in exceptional circumstances. Many lawyers will counsel an employee to sign such a clause at the time of employment or termination stating that “they’re not worth the paper they’re written on”.
While Courts were predisposed to throw out many of these cases stating it was unfair to preclude an employee from making a living and citing public policy against such a restraint of trade, it may be that the tide is turning on whether or not a Court will enforce these clauses. This is particularly so when the employee has sophisticated business acumen and has negotiated the contract prior to his employment or in the context of the termination.
Therefore when such a contract is presented at the termination of an employment relationship and has not previously been part of the employment contract, I would strongly counsel the employee to seriously consider the ramifications of signing such a clause and its impact on future job prospects.
A recent Nova Scotia Court of Appeal case found a 12 month restrictive covenant not to compete with the company or solicit their customers in mainland Nova Scotia, to be unenforceable for being a restraint of trade. While the Court found the geographical and temporal restrictions of the covenant to be reasonable, it struck down the clause because the facts did not justify “the most drastic weapon of a non-competition clause reasonably necessary to protect the interests” of the company in its trade connections.
In a more recently released Ontario case involving two insurance brokers working for an insurance company, the Court upheld the non-competition clause the employees had signed when starting with the Company that provided that for a period of two years following their termination, they wouldn’t conduct business with any clients of the agency they had serviced. Upon a change of management, the brokers became unhappy and resigned, moving to a new agency. Many of the insured clients transferred their business to this new agency. Their former employer was successful in its action to prevent them from approaching any customer and was also successful in an action against the new Company for inducing the breach of contract. The Court found that the restrictive covenants were reasonable in the circumstances and that because of the nature of the relationship between an insured client and his insurance agent, a simple non-solicitation clause would not have been sufficient to protect the company because the clients would be likely to follow their insurance agent without any solicitation. The Court further found that the restrictive clause was not contrary to public interest as it did not prevent them from earning a living in their chosen field and that the two year duration of the clause was reasonable.
ADVICE FOR EMPLOYERS
An employer, who has been damaged by an employee who has thwarted such an agreement, should consider taking action to prevent any further loss of business and to obtain damages for the loss as a result of the employee’s breach of contract.
An Employer should also seriously consider the ramifications of offering employment to a competitor’s former employee who is under a non compete agreement. It may be wise and save you legal costs in the future to ask applicants about the existence of any such agreement at the first interview and document the answers accordingly.
ADVICE FOR EMPLOYEES
Therefore, an employee should give serious consideration to the implications of signing an agreement that limits the options for re-employment following termination.
It is crucial to analyze any employment contract that you signed during the course of your employment or to consider the particulars of your position and situation to determine your rights. It is common to find any combination of non-solicitation, non-competition and confidentiality clauses restricting your ability to work for the competition or to solicit your previous clients in your new position.
Some of the considerations we’ll explore in an analysis of any restrictions which may govern when you leave employment include:
an analysis of any employment contract (written or implied) that governs your employment
whether any employment contract restrictions were drafted unreasonably or imposed on you improperly according to the law
Even if there is no formal contract in place, an employee may be prevented from soliciting prior clients to his new place of business. All employees have an unwritten duty of good faith and fidelity. This duty prohibits taking confidential information to use in competition against an employer and could continue to exist as long as that information remains confidential. Employees who have considerable control and responsibility in the Company and were likely in a management position may be viewed as fiduciaries. Such fiduciaries are under a very strict obligation to act only in the best interests of the company and not to compete unfairly after leaving.