Thursday, January 04, 2007

Non-Compete Clauses: Canada vs the US

Dan McKeown and I worked together at Nortel, where he was master of the kinds of employment issues that come with a workforce of 65,000. Here's a terrific piece Dan put together that explains the subtle differences in approach to non-competes with American and Canadian hires:

Employment Non-Competes in Canada and the US

As many organizations that employ in both Canada and the United States can attest, there are significant differences in how Canadian and American courts interpret and apply post-employment restrictions on departing employees.

Known colloquially as non-competes, post-employment restrictions purport to prohibit or place parameters on a departing employee’s post-employment remunerative activities. Non-competes appear in various guises, including an obligation to protect a former employer’s business interests by maintaining the confidentiality of trade secrets and other confidential information obtained during employment, a prohibition on employment with a competitor (referred to as a non-competition covenant), and a prohibition on soliciting a former employer’s customers and employees (referred to as a non-solicitation covenant).

In the U.S., a non-compete arises almost exclusively from a written agreement between an employer and an employee. However, in Canada, a post-employment restriction may also be implied by the common law. In other words, in Canada, a court may enforce a restriction against a departing employee even in the absence of a written, non-compete agreement.

Regarding implied restrictions, an important legal distinction that operates north of the border is whether the employee in question is, or is not a fiduciary. If the departing employee is a fiduciary, it is more likely that a court will imply a restriction.

Fiduciaries tend to occupy top management roles and are characterized by an ability to exercise discretion and power unilaterally in affecting the employer’s legal and practical interests. If a departing employee is a fiduciary, the common law imposes a duty of utmost good faith. A fiduciary cannot usurp, or divert to others, a maturing business opportunity, or solicit his former employer’s customers/employees for a reasonable interval post-departure.

Employees in Canada who are not fiduciaries nevertheless owe their former employer a common law duty not to divulge or otherwise use trade secrets and other confidential information acquired during employment.

American courts are also willing to apply a doctrine known as inevitable disclosure. The doctrine is sometimes used as a ground to request an injunction against a former employee, prohibiting the employee from employment with a competitor on the basis that the employee will inevitably reveal to the new employer trade secrets and other confidential information of the former employer. To date, Canadian courts have been reluctant to recognize and apply this doctrine.

Written, non-competition covenants are also treated differently in the two countries. In the U.S., a written, non-competition covenant is generally enforceable (i.e., provided that the agreement satisfies the legal requirements of contract law, and enforcement of the covenant is necessary to protect the former employer’s legitimate business interest). However, in Canada, courts are not inclined to enforce non-competition covenants because they constitute a restraint of trade and ,therefore, are considered not in the public interest. Instead, Canadian courts are more likely to accept a tightly drafted, otherwise reasonable, non-solicitation clause.

The notion of “consideration” is also treated differently by Canadian and American courts. In the context of a non-compete, consideration is some form of “payment” by an employer in return for an employee’s agreement to be bound by a restrictive covenant. Consideration is usually a payment of money (e.g. a pay raise), but a promotion, or being made eligible for an incentive award may suffice.

In the U.S, an employer’s agreement to continue an employee’s employment (or, stated conversely, to forbear from terminating the employee’s employment if the employee should not agree to become bound to the non-compete) is, generally speaking, enforceable. However, this is not always the case. Where the employment is at-will, an employer is free to terminate or demote an employee at any time, with or without just cause or notice of termination. Accordingly, some U.S. courts have held that an at-will employee who has received a promise of continued employment, in return for a non-compete, has received nothing.

In Canada, courts have very rarely found an employer’s forbearance from termination to constitute adequate consideration for a non-compete. Consideration in the form of a promise of employment is more likely to be successful in a new hire situation (i.e. prior to commencement of employment).

Finally, it is significant that U.S. courts have demonstrated a willingness to modify a restriction imposed on an individual in a non-compete agreement to the extent necessary to render the restriction reasonable (sometimes referred to as blue penciling). This might include reducing the geographic or temporal ambit of a restriction.

Canadian courts, on the other hand, are more inclined to strike out covenants they find unenforceable, rather than amend or modify them.

In summary, it should come as no surprise that the courts in two sovereign nations - - Canada and the United States - - often take different approaches to employment non-competes. It is also clear that, given the continuing evolution of the information age and growth of the service economy, protecting confidential information and preserving customer relationships will remain high on the corporate agenda. Prudent employers that are serious about protecting these interests will, therefore, want to bear these considerations in mind when designing and recording employment relationships.

If you want to chat with Dan about a specific issu, let me know and I"ll introduce you.

The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Reading this article does not create a lawyer-client relationship.

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