Two Non-Competition Cases Are Big News

A non-competition covenant is the harshest of the usual restrictive covenants.  The weakest is the confidentiality covenant (an obligation to keep confidential trade secrets and other sensitive private information), followed by the non-solicitation covenant (an obligation not to solicit the customers), followed by the non-dealing clause (an obligation not to accept business from the party’s customers, regardless of who initiated the contact) and finally, the non-competition covenant, which prevents the party from being in the same business.

Historically, commercial and employment agreements routinely contained onerous non-competition clauses.  The courts intervened, for good reason.  A party has a right to protect its goodwill, but not to stifle fair competition.  The courts declared that, to be upheld, a restrictive covenant must not be overly broad in scope (the activity that is restricted), geography (where is the activity restricted), time (how long is the covenant) and not against public policy.

In Ontario, the Court of Appeal said in 2000 that where a non-solicitation clause will suffice, a non-competition clause will not be enforced.  Lawyers got into the habit of advising clients that “less is more”:  i.e., the less restrictive the covenant, the more likely it will be upheld by a court.

Courts have also repeatedly said that they will not rewrite an unreasonable covenant to make it unreasonable.  That makes sense, because otherwise, parties would write very harsh covenants with the knowledge that a court would then determine and enforce what it thought was reasonable.  This would lead to great uncertainty for contracting parties and too much litigation.

Two recent cases have made it a lot more difficult to give good advice in this area.  In a case last month, the Ontario Court of Appeal upheld a non-competition covenant that lasts for five years and restricts competition globally, even though the party seeking protection only conducted business in North America.  I note that it was not a unanimous decision (maybe an appeal to the Supreme Court of Canada is coming?)

In another decision, the Ontario Superior Court tossed a non-solicitation covenant because it protected customers with whom the former employee had never had contact.  (The clause covered all of North America and the employee only dealt with Canadian customers.)  That part was predictable.  However, the court went on to find that the employee was a fiduciary (loosely defined as a person in a position of trust, such that the company is vulnerable) and therefore prevented him from dealing with the Canadian customers for a year. 

This case also causes uncertainty.  While the court did not technically rewrite the clause, it effectively did so.  The fiduciary argument is not logical either.  Anytime someone has the ability to successfully solicit customers, the company is vulnerable.  Does that make anyone who has knowledge of customer lists a fiduciary?  I don’t think so.

Until the law reacts to these cases, the lawyers’ reaction will likely be a clause in contracts where the party agrees that he is a fiduciary, so that the company can try to rely on that if their restrictive covenants are not upheld.