Protecting customers from competition in wired world
Non-solicitation clauses may no longer need to define geographical areas but what about non-competition clauses?
Oct 21, 2013
By Jeffrey R. Smith
When an employee with valuable knowledge and skills leaves a company, there can be more to worry about than just losing what that employee brings to the table. It can also mean another company in the same industry — possibly a direct competitor — will then hire that employee and gain her knowledge and skills.
When that’s a possibility, employers try to include restrictive covenants in the employment contracts. These often involve provisions that stipulate if employment is terminated by either the employer or the employee, the employee can’t directly compete or solicit the employer’s clients for a certain period of time after the termination and in a specific area.
However, the bar is pretty high for restrictive covenants to be enforceable. Courts will declare them invalid if the terms are too vague or unreasonable. In the past, where an employee was prevented from doing similar business or contacting old clients in a geographical area and the area was too large or not well-defined, the clause could be invalidated by a court.
However, we may be reaching an era were geographical limits don’t matter when it comes to soliciting customers. Nowadays, everything is so connected, distances have little meaning when it comes to business and communication. When a business or a person is one click away, geographical areas may not be so important.
The Supreme Court of Canada recently ruled that a non-solicitation clause in a sales agreement did not require geographical parameters, since customers were not limited geographically in today’s economy and technological environment. Canada’s top court went so far as to label geographical limits in non-solicitation clauses as “obsolete” (Guay inc. c. Payette, 2013 CarswellQue 8646 (S.C.C.)).
However, the court maintained geographical limits for non-competition clause remained necessary, as it would be unfair to prevent a departing employee from trying to find work anywhere. Companies can only restrict departing employees from competing directly with them in specific and defined areas that are reasonable for protecting their business interests.
So does it make sense for employers to be able to prohibit departing employees from soliciting their customers anywhere, while only being able to prevent those employees from directly competing with them in a clearly defined area? These type of clauses can be important to companies that deal with technology and online business, so is there a difference in where they set up shop to compete?
Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective.