Are non-compete clauses really effective?

The Ontario Superior Court recently reminded employers that non-compete clauses in employment contracts are usually worth less than the paper that they are written on. In Ceridian Dayforce Corporation Justice Kristjanson refused to enforce a non-compete that a software company had included in its employment agreement with a software engineer involved in program development. This case is a good reminder for employers that careful consideration is required when drafting restrictive covenants in employment contracts. It is important that employers only include restrictive covenants that will be enforceable.

In Ceridian the Employer wanted to enforce its non-compete clause against a software developer who resigned. The Employer was concerned that the former employee held trade secrets on the software development and processes that could impact its business if disclosed or used by a competitor. The non-compete was included in the employment contract that was signed at the time of hire and it stated:

1. The non-competition period, defined as the “Restricted Period” means the period up to 12 months from the date the employee ceases to be employed by the Company as determined by the Company in its sole unfettered discretion, provided that the Company informs the Employee of the length of the period within 5 business days of the Employee ceasing to be employed by the Company.
2. The Employee shall not, “directly or indirectly provide services, in any capacity, whether as an employee, consultant, independent contractor, owner, or otherwise, to any person or entity that provides products or services or is otherwise engaged in any business competitive with the business carried on by the Company or any of its subsidiaries or affiliates at the time of his termination (a “Competitive Business”) within North America”.
3. The Employee shall not “be concerned with or interested in or lend money to, guarantee the debts or obligations of or permit his name to be used by any person or persons, firm, association, syndicate, company or corporation engaged in or concerned with or interested in any Competitive Business within North America”.
4. Nothing restricts the Employee from holding less than 1% of the issued and outstanding shares of any publicly traded corporation.
5. During the Restricted Period, the Company is to pay the Employee his or her base salary, less applicable deductions.

In deciding not to enforce the non-compete clause, the Court reiterated that any restraint on trade, such as a non-compete, is unenforceable as a general rule. There are only limited circumstances where a non-compete will be enforced. Any employer wanting to rely on a non-compete must prove that it has a proprietary interest that is entitled to protection and that the clause used to protect that interest is reasonable and clear. It must also be in the public interest to enforce a restrictive covenant. As a result, it is very difficult to enforce a non-compete.

Generally, courts discourage non-competes and consider whether a non-disclosure or non-solicit clause would have been sufficient to protect the company’s interest. Employers should carefully consider the minimum protection that is necessary to protect their interest. For example, is it necessary that the employee not work for a competitor or is it sufficient that the employee not contact any of the clients they previously worked with once beginning employment with a competitor. It is only the minimum protection that is necessary that will be enforced by a court.

Employers should also keep in mind that courts will not read down or fix an unenforceable non-compete. As a result when drafting, it is often better to have more limited but reliable and enforceable language than a broad but unenforceable clause. In Ceridian the Court refused to enforce the non-compete for the following reasons:

1. The limit on providing services in any capacity to a competitor was overly broad. The Court found that protecting the software interest did not require a restriction on the former employee’s ability to work for a competitor in any capacity. For example, the decision found that the non-compete as written would prevent the former employee from working for a competitor as a janitor.
2. The term competitive business was overly broad. The Court determined that there was no evidence on how working for a competing business in an area outside of software development would impact the proprietary interest that the Employer was seeking to protect. For example, the decision noted that the clause would prevent the former employee from working with gift cards at a competitor’s business.
3. The term competitive business was ambiguous. The Court stated that at the time of hire that the employee could not know whether a business was a competitive business. In order to be enforceable the restrictive language must be clear.
4. The geographic scope was unreasonable. The Court determined that the restriction on all of North America, which included Mexico and the Caribbean, was too broad and unnecessary to protect the Company’s interest.
5. The time limit was unreasonable. The Court found that 12 months was unreasonable as there was no evidence to link the time limit to the proprietary interest that required protection.

This case is a good reminder for employers that when using restrictive covenants – less is often more. Employers should carefully assess the type of restrictive covenant that is needed to protect their proprietary interest. Generally the most limited restrictive covenant that effectively protects the company’s interest should be used. Click here for a list of team members who can assist you in assessing what type of restrictive covenant is appropriate and in drafting enforceable language.

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