Non-Competition and Non-Solicitation Agreements

One of the ways that employers try to protect their business is to require employees to sign non-competition or non-solicitation agreements.  Both types of agreement are usually signed either at the beginning of or during the term of employment but come into effect once the employee has left their employer.  A non-competition agreement provides that the employee will not be engaged in a business, either on his or her own or as part of another firm, that competes with their former employer.  A non-solicitation agreement provides that the employee will not try to attract (or "solicit") other employees or customers of their former employer to their new business or employer.

While non-competition and non-solicitation agreements can be useful in certain situations, there are some pitfalls to note.  The main difficulty is that there is a presumption in Canadian law that restrictive covenants of this type are unenforceable as being restraints on trade.  In order to be enforceable, the employer must prove that the restrictions are economically reasonable.  A court called upon to enforce a restriction against competition or against soliciting former co-workers or customers will have to be persuaded that it is not an unreasonable restriction on competition generally or on the former employee's ability to pursue his or her occupation of choice.

A restrictive covenant of either type must be carefully drafted and must address a legitimate business interest.  It cannot be used simply as a means to keep employees in line.  In particular, the courts have identified a three-part test that must be met before the restrictive covenant will be enforced:

• the employer must be able to identify the specific threat that the restrictive covenant addresses, such as the potential for misuse of proprietary and confidential information or the close relationship between the former employee and the employer's customers
• the restrictive covenant must be limited to the extent necessary to address the specific concerns of the employer, usually in terms of the duration of the covenant, the geographical area covered and the activities that are sought to be prohibited
• the restrictive covenant must not limit competition generally, rather it should be limited to protecting the specific and legitimate business interests of the employer that could be adversely affected in the absence of the restrictive covenant

A well drafted non-competition or non-solicitation agreement will not prevent a person from practicing their trade but can provide some protection to his or her former employer that the goodwill, specific knowledge gained from employment or close relationships formed during the period of employment will not be used by the former employee to the detriment of the employer.

The comments in this article are intended as general information only and are not to be relied on as legal advice or an opinion applicable to your particular situation.   For further information, please contact Bruce Farrend at Farrend Law.