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Restrictive Covenants Subject to Limits


Restrictive Covenants Subject to LimitsRestrictive covenants are often utilized by employers to govern the post-employment activities of key employees. The employer seeks to protect itself from damage imposed by former employees engaging in competitive business activities. There is a range of restrictive covenants commonly in use for this purpose.

Non-competition covenants are generally used to limit the former employee’s ability to compete in the same industry. Non-solicitation covenants are intended to prevent the former employee from approaching the employer’s customers. Another form of non-solicitation covenant prevents the former employee from poaching the employer’s other employees.

It is a matter of public policy that individuals should have the ability to carry on their chosen trade. As a result, all manner of restrictive covenants are, in the employment context, contrary to public policy. Judges are highly reluctant to uphold these limitations on the activities of a former employee.

That is not to say that an employer can never impose restrictive covenants on its employees. Within certain narrow boundaries, restrictive covenants can be successfully used to protect a business from the competitive threat posed by former employees.

An employment contract purporting to limit the post-employment activities of the employee will be enforceable if the former employer can show the restriction is justifiable and reasonable in scope. But, contractual limitations amounting to a complete restraint of trade or which do not protect a legitimate proprietary interest of the employer will not be upheld.

This is another way of saying that the employee’s general skills, training, and knowledge of an industry are beyond the reach of the employer. Many employers, unaware of this limitation, end up imposing limitations which are too extensive. A recent Ontario court decision provides a good example.

The case involved an Ontario employer engaged in producing products for accenting automobile interiors (so-called dash kits). The employer claimed to have developed unique proprietary and confidential manufacturing processes and techniques relating to its products which were critical to its growth and survival.

The employer had imposed restrictive covenants upon certain employees, prohibiting them from working for a competitor for two years after the end of their employment. The covenants were very broad in scope, preventing virtually all forms of involvement with the employer’s competitors. Notwithstanding the presence of the restrictive covenants, several of the employees left their employment to work for a competitor.

The employer sued, seeking to enforce the restrictive covenants. The Court determined that, although the employer had a proprietary interest (the confidential information and trade secrets) worthy of protection, it had a weak case on the reasonableness of the restrictive covenant.

Because of the breadth of the restrictive covenant, the employees were essentially disqualified from using their skills and knowledge. The covenant would have entirely prevented the employees from utilizing their acquired information and training in that industry. Such information and training was determined to be beyond the reach of a restrictive covenant.

That is the key element of this Ontario decision. The Court recognized employers have legitimate proprietary interests to protect. But it emphasized that absolutely foreclosing employment for any competitor precludes the employee from using his acquired skills and knowledge without encroaching on those proprietary interests.

The case stands as yet another example in which the employer has violated the “less is more” rule in drafting its restrictive covenants. Simply put, the lesser the restriction on the employee’s activities, the more likely it is to be upheld. Perhaps, however, the rule is more effectively stated in reverse – “more is less” – the more expansive the restriction, the less likely it is that a court will enforce it.

Most importantly, this decision of the Ontario Superior Court of Justice emphasizes one of the key rules relating to the imposition of restrictive covenants. The employer is not entitled, in designing a post-employment restriction, to unduly intrude upon the employee’s use of her accumulated knowledge and expertise in the industry. Those things are the employee’s to exploit as she likes and, assuming she is not doing so unfairly, no manner of creative drafting can undermine that right.

These items are intended for general informational purposes only and should not be construed or relied upon as legal advice. The legal issues addressed in these items are subject to changes in the applicable law. You should always seek competent legal advice concerning any specific issues affecting you or your business.

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