Drafting restrictive covenants and making them stick

It can be an uphill battle for employers trying to protect their business interests when employees leave, but enforceable restrictive covenants are doable

When an employee leaves employment, there can be concern over whether the employee will keep the employer’s information confidential or use skills learned with the employer against it. Restrictive covenants can help protect employers in such circumstances, but they are difficult to legally enforce. Read on below for key points in drafting enforceable restrictive covenants.

Restrictive covenants have long been a key tool used to protect employers against unfair post-employment competition from their employees; a sort of legal safety net in case a departing employee attempts to poach clients, misuse confidential information or establish a competing business.

Restrictive covenants usually come in three forms: non-competition, non-solicitation and confidentiality clauses. These clauses protect organizations’ proprietary information or trade secrets, defend against the solicitation of their clients or employees, or prevent a departing employee from working with a competitor or starting a competing business. In the age of social media where many employees have LinkedIn, Twitter and Facebook accounts, employers are increasingly faced with challenges as to how to protect their business interests as communication on these platforms is public, but — to an extent — could be targeted to clients. While social media is a unique mode of communication, courts have thus far indicated they will likely continue to approach the enforceability of restrictive covenants as they have in the past.

It is a widely established principle of Canadian law governing the enforceability of restrictive covenants that they must be reasonable in the prohibitions on post-employment activity. Employers must be able to show legitimate business interests to be protected and the restrictive covenants should contain reasonable limitations in terms of geography, duration and scope of restricted activities. That assessment is factually driven by the circumstances, but is typically based on the following: the nature of employment, the geographic scope of the employee’s activities, the employee’s access to confidential information and extent of his relationship with clients, as well as the employee’s duties and responsibilities. Courts will be reluctant to enforce restrictive covenants that provide for restraints broader than what is necessary under the circumstances. Further, restrictive covenants that are ambiguous are considered unreasonable.

High bar for validity

To add to the enforcement challenges, there is a presumption by courts that restrictive covenants are contrary to public policy as they can restrain a departing employee from working. It is not surprising that non-competition clauses are subject to close scrutiny compared to non-solicitation clauses, which only prevent the solicitation of clients and perhaps employees. Courts will typically only uphold non-competition clauses in exceptional cases. In 2000, an Ontario Court of Appeal decision affirmed that, as a general rule, non-solicitation clauses are to be preferred over non-competition clauses. As such, even if a non-competition clause is reasonably drafted, should an employer be unable to show exceptional circumstances, the non-competition clause can still be struck down by a court if a non-solicitation clause would provide adequate protection of an employer’s business interests. Non-competition clauses are considered to be a drastic measure that should only be used in limited situations, as they have the effect of limiting an employee’s re-employment opportunities. As a final principle, the restrictive covenant has to strike a balance between competition and an employer’s right to protect its business.

While non-solicitation clauses are preferred by courts, these clauses also need to be reasonably drafted and provide reasonable prohibitions that are necessary to protect an organization’s client base. Take the 2013 case of Planit Search Inc. v. Mann, where the restrictive covenants prohibited the former employee of a placement agency organization from contacting any candidates or clients of the organization for one year. Planit alleged that a former employee contacted the company’s clients, whose names were in the internal database of 12,000 clients and 80,000 candidates and, as such, the client information used was confidential. Planit took this argument a step further by asserting that the entirety of the database was confidential requiring protection. However, some of the names on this database were available on websites and social media — including LinkedIn — which undermined the confidential nature of this information and the assertion that such information required protection. The restrictive covenant was considered unenforceable by the court for several reasons, including the overly broad scope of prohibited clients. The restrictions placed a solicitation ban on all names in the database, including those of whom the employee was unaware, and was not limited to the contacts that the employee had dealt with. Further, the clause was ambiguous as it did not clearly identify the clients who were prohibited and were among the thousands of clients and candidates of the organization, some of whom were mere prospects.

Social media can undermine an employer’s claim to proprietary interest in confidential information — a requirement in enforcing restrictive covenants — particularly when the information is available in the public domain. In the 2013 case of Eagle Professional Resources Inc. v. MacMullin, the Ontario Court of Appeal affirmed the decision by a motions judge that information available on websites will not be considered “confidential information” and former employees are entitled to use this information after the end of employment. Three former employees went to work for a competing company after resigning from employment. In attempting to enforce the employees’ non-solicitation obligations, Eagle alleged the employees breached their non-solicitation obligations by misusing confidential information — the customer list — in order to solicit clients. However, this confidential customer list was also available through the followers’ list in social networking websites, which was where the former employees argued they had obtained the information. Eagle was unable to prove it had a legitimate business interest to protect because the client list was public information available on social media websites and the non-solicitation clause was held unenforceable as a result.

Eagle is also a cautionary tale for employers to be careful about only prohibiting mere solicitation. The court warned that non-solicitation clauses that restrict “dealing” or “accepting” engagements with clients will be treated as non-competition clauses and subject to greater scrutiny — only upheld where there are exceptional circumstances. While some employers may wish to use restrictive covenants to prohibit a former employee from accepting requests to connect with clients via LinkedIn or having any contact with clients via social media, employers will need to ensure the restrictions are only as intrusive as is necessary. By prohibiting any contact with former clients including for purposes unrelated to the organization’s business or social purposes, this is likely to be considered overreaching.

When adapting restrictive covenants to address the risks posed by social media, employers should be aware that employees are entitled to make a general announcement about their departure. Accordingly, it is not considered solicitation by a former employee to post to followers that he is leaving an organization, or set a notification of a change in employment status on a personal social media account. However, an employer could restrict social media postings by a former employee where the content of the posting uses confidential information or targets a specific group of company clients for the purposes of engaging in specific activities in which the employer has a legitimate interest.

It’s important to remember that, as with any employment law tool, restrictive covenants need to be customized to suit the organization, as well as the specific position,and the responsibilities of the employee, and these requirements are no different in the context of social media. With that in mind, here are some key points to remember when drafting enforceable restrictive covenants:

Evaluate the organization’s legitimate business interests. In most circumstances, employers should be reluctant to ask lower-level employees to sign employment contracts containing non-competition clauses. Instead, the use of non-competition provisions should generally be limited to senior executives or employees with access to confidential files, key client contacts, or who could realistically pose a competitive threat upon leaving the organization. The nature of the employment is important as there could be more justification to impose a non-competition clause on a president than the receptionist. Further, consider whether or not these business interests can be adequately protected by a non-solicitation or confidentiality clause rather than by a non-competition clause.

Limit restrictions contained in the clause. The scope of prohibited activity needs to be clearly defined and should be restricted to the duties and responsibilities which the employee had recently performed prior to the end of employment. A blanket prohibition on engaging in any activity with a competitor, including holding shares, will likely not be upheld by a court. Also, the geographic scope of the non-competition clause must be limited to the location in which the employee had most recently worked during his employment or the clients with whom the employee worked. The duration of the restrictions should be guided by the length of time it will take to reduce the risk of a former employee attempting to solicit the organization’s clients, the employer’s business cycle and the length of time to protect legitimate business interests. Generally, a period longer than 24 months is not likely to be enforceable unless there is a legitimate business justification.

With non-solicitation clauses, the covenants should not overreach by preventing the solicitation of prospective clients of whom an employee may have no awareness, or even past clients who have no connection with the departing employee. Rather, prohibition on solicitation of clients should be limited to clients with whom the employee was in direct contact prior to departing the employment relationship.

Understand the distinction between non-solicitation and non-competition clauses. Non-competition clauses restrain activity that is not mere solicitation. If consideration is being given to restricting more than non-solicitation of clients — for example, “dealing” or “engaging” with clients — then these will be considered non-competition obligations and scrutinized accordingly.

Review covenants regularly. Most employees change positions, or see their duties change, every few years. As such, the restrictive covenants in the employment agreement may no longer provide the adequate level of protection given the new responsibilities. Employment agreements should be reviewed and amended as the nature of the employment relationship evolves, particularly in the event of an employee’s promotion or drastic change in duties and responsibilities. Also, the covenants should be regularly reviewed to ensure they are still in keeping with any developments in the law.

For more information see:

• Planit Search Inc. v. Mann, 2013 CarswellOnt 15233 (Ont. S.C.J.).
• Eagle Professional Resources Inc. v. MacMullin, 2013 CarswellOnt 7745 (Ont. S.C.J.).

Pamela Chan is a lawyer with Williams HR Law, a human resources law firm in Markham, Ont., serving employers exclusively. She can be reached at (905) 205-0496 ext 228 or pchan@williamshrlaw.com.

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