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Non-compete agreements often can’t compete

Employers’ right to protect sensitive information versus employees’ right to earn a living

By Jeffrey R. Smith

When employees are in position to be exposed to sensitive information about an employer, its business or its customers, it makes sense the employer would want to protect itself from employees using that information against it if they leave.

Hence the attempt by many employers to place limits on what the employee can do after leaving. Non-compete, non-solicitation and confidentiality agreements are often put into employment contracts to provide this protection.

However, these kind of restrictive covenants are not always enforceable. An employer can’t arbitrarily decide what kind of limits it can place on a departing employee — those limits must be seen as reasonable by objective standards. A lot can depend on the employee’s position, the employer’s business and the wording of the restrictive covenant.

Chem-Trend, a manufacturer based in Howell, Mich., had a restrictive covenant with a North American salesperson that stipulated he would not offer competing products or services to, or solicit business with, any customers Chem-Trend had during his employment for a period of one year after his employment ended. This was because the salesperson had inside knowledge of Chem-Trend’s sales targets, market opportunities and business development plans, not just for North America but for its global business.

But last month the Ontario Court of Appeal ruled these restrictions were not enforceable. The salesperson worked 17 years for Chem-Trend, so excluding any customer that did business with the company over that time was too broad, particularly since it was likely he would find similar work in the industry.

Since Chem-Trend operated globally, it was also unfair to prevent him from doing business over such a wide area, said the court. The court also noted there was another clause preventing him from using the company’s confidential information, so that was already protected from the salesperson’s subsequent business dealings.

So how far can a restrictive covenant go to protect an employer from a former employee using knowledge gained within its fold?

As far as competing directly with it, probably not very far — as long as the employee doesn’t directly steal customers with that knowledge. In a 2009 decision, the Supreme Court of Canada determined that since a restrictive covenant is a restraint on trade, it generally goes against public policy, so an enforceable one must be clear and reasonable.  In the Supreme Court of Canada ruling the Vancouver-based employer’s restrictive covenant was found to be unreasonable because it prevented the former employee from doing business in “the Greater Vancouver Area” for a year. This was deemed unfair because there is no official entity under that name and therefore the geographic restriction was ambiguous.

It’s within employers’ rights to protect confidential information, but once an employee gains skills, she is essentially free to leave for another employer and use those skills. But if an employee holds a key position with an employer, knows a lot of inside information and develops good relations with customers before leaving, is it reasonable for there to be limits on who she can do business with and where for a period of time? Is it likely the employee will be able to avoid using any and all of the sensitive information she has, whether intentionally or not?

Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective. For more information, visit www.employmentlawtoday.com. He can be reached at jeffrey.r.smith@thomsonreuters.com.

Jeffrey R. Smith

Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective.
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