Restrictive Covenants on Employees Must Be Used With Caution
January 8, 2018
By Noel Courage
Restrictive covenants are a tool sometimes used by innovative companies that want to protect their intellectual property (IP) from leaving with employees. They are also often used between sophisticated companies that are business or R&D partners, but this article will focus on the employment context. Although two parties are typically free to enter a contract on whatever terms they wish, there is a public interest in discouraging restrictions on trade. Courts have become understandably leery of employment restrictive covenants as a result of reviewing many overly broad restrictive covenants with wide geographic scope and long durations. Many restrictive covenants have been found unenforceable as a restraint on competition.
The Ontario Court of Appeal, has pronounced restrictive covenants as enforceable only in “exceptional” circumstances. A restrictive covenant will not be enforced where a non-solicit clause will be sufficient to protect a company’s interest. These decisions, like many other restrictive covenants cases, were made in the context of sales and/or business, not in the context of the IP of a technology company. In the case of Mason v. Chem-Trend Limited Partnership (2011), 2011 ONCA 344, the Court invalidated a clause that was a complete prohibition on competing with the employer for a year. The employee was in a large sales force, not the president or chief financial officer, where there might be more justification for a broader prohibition on competition. The employee was prohibited not just from soliciting former customers, but from dealing with them in any way in competition with the company. The former employee was in a difficult spot because he would not even have access to a list of all of the company’s present and past customers for the past 17 years of his employment, so he would not have a way to know if he was complying with the clause.
Despite the risk of invalidity, confidentiality clauses can still be used where possible. Non-solicit clauses should be used where the company has customers vulnerable to solicitation by a departed employee. Confidentiality clauses are also useful to protect IP and business information. In the Mason v. Chem-Trend case mentioned above, the Court did recognize that the employer would have some protection through a clause that protected trade secrets and confidential information. Assignment of IP clauses should be used to ensure that the employee does not own any IP they generate while working for the company.
It is imperative that all restraints should be reasonable and drafted to fit the specific circumstances. Drafting should take into account that severability clauses need to be able to clearly sever any unenforceable obligations can be readily severed. In Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72, the non-complete and non-solicit clauses could not be severed, so they went down together. These clauses had no fixed, outside limit on their term. These provisions are unreasonable and therefore unenforceable. The courts will not rewrite the contract for the parties. However, again, in that case, the confidentiality provision of the Agreements was considered reasonable and therefore enforceable on its own (ie. the whole agreement was not lost).
Employers should consider which types of restrictions are appropriate for each employee. Different types of restrictions can be combined. However, all restrictions must be reasonable. The goal must be fair protection of the employer’s IP and business, not punishment of departed employees or restricting competition. Agreements should also be drafted in a way that clauses at higher risk of invalidity can be severed, so that the rest of the agreement can continue in force.
 H.L. Staebler Company Limited v. Allan, 2008 ONCA 576, involving commercial insurance. See also Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 involving a chemical company sales representative. Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72 in the context of an employee and minority shareholder signing restrictive covenants in conjunction with a sale of a business.
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