When Less is Truly More: A Realistic Approach for Companies Wanting to Protect Trade Secrets and Confidential Information through Non-Competition/Non-Solicitation Covenants
For many companies, the most valuable asset they possess are their employees. Employment with a company can provide employees with the skills and experience necessary to make them competitive in the market. And while this is valuable to employees in terms of employability, it can be costly to companies in terms of recruiting, training and familiarizing employees with a company’s systems, clients, and technology. Therefore, it is often cost effective for a company to simply poach an employee from its competitor, instead of hiring and training employees from outside its industry.
With the prospect of employees moving between companies also comes the threat of former employees’ misuse of valuable trade secrets, confidential information, and other competitive advantages.
That said, it is unlawful to hire employees from a competitor in order to access a rival company’s trade secrets. On this point, departing employees may owe post-employment and fiduciary duties to their former employer which, even without a contract in place, prohibit the disclosure of confidential information acquired during their employment.[1] Similarly, those unscrupulous companies attempting to gain access to confidential trade secrets through such hiring practices face the prospect of litigation under various torts including unlawful interference with economic relations, conspiracy, and inducing breach of contract.
In order for a company to protect against the unlawful disclosure of its trade secrets, it must first identify what information is considered to be its confidential proprietary information. Some helpful questions to begin this process may include:
- What information is considered to be a trade secret?;
- Where is such information stored?;
- How is such information being protected by the company?; and
- What are the secrets worth to the company?
Generally speaking, identifying trade secrets involves identifying the information that the company believes its competitors do not know. In Warnes v Army & Navy Department Store Ltd.,[2] the Saskatchewan Court of Queen’s Bench identified three features of confidential information:
- The information would provide an advantage to rival companies;
- The information is not already in the public domain; and
- The information and confidentiality thereof must be decided in light of the usage and practices of the particular industry or trade concerned.[3]
Some of these factors may carry more weight than others, and the absence or weakness of one factor, in some circumstances, may be overcome by a strong showing of another.[4]
Those confidentiality obligations that survive the end of employment –either through a well drafted agreement or common law– are typically what employers rely upon when suing a departing employee for improper disclosure of confidential information. Although fiduciary employees cannot directly solicit former co-workers, customers, or clients,[5] there is little to prevent such employees from accepting opportunities posed by those customers or clients who seek them out. On this point, it may be argued that a former employee will inevitably disclose confidential information when they compete directly against their former employer; however, this doctrine of “inevitable disclosure” (employed with varying degrees of success in the United States) has not been adopted in Canada.[6]
So absent evidence of actual disclosure or misuse of confidential information, a properly worded non-competition covenant or non-solicitation clause is essential for employers seeking to protect their competitive advantage in the face of departing employees. Notably, courts routinely scrutinize the reasonableness of non-competition covenants. This is not surprising in light of the strong public policy considerations against restricting a person’s livelihood. Four non-exhaustive factors are typically assessed in determining the enforceability of such covenants, namely:
- Does the employer have a proprietary interest worthy of protection;
- Does the non-competition clause contain reasonable temporal and geographic limitations so that it does not extend beyond the reasonable protection of an employers’ interest;
- Is the non-competition covenant reasonable as between the parties; and
- Does the non-competition covenant violate public policy against the unreasonable restriction of competition generally?[7]
In making such assessments, courts will not rewrite overly broad non-competition clauses in order to bring them back within acceptable parameters.[8] As a result, non-competition clauses are often found to be unenforceable. Such restrictive covenants should contain explicitly defined limits on their breadth and scope. These limitations should include restrictions on territory, duration, and subject matter of the agreements. Further, the restrictions should be specific to the employee and not simply represent a standard clause included in a company’s employment contract.[9]
It is also important that a non-compete or non-solicitation agreement allow maximum protection at the outset which would include provisions permitting employers to seek immediate injunctive relief, solicitor-client costs, and liquidated damages. These agreements should also be reviewed with employees upon their departure.
Non-solicitation clauses preventing departing employees from soliciting business from former clients –as opposed to preventing departing employees from doing business with clients generally– are more likely to be found enforceable.[10]Therefore, where the primary concern of an employer is the poaching of clients by a departing employee, a less restrictive non-solicitation agreement is preferable.
The rise in technological capability and employee mobility have increased the threat of unfair competition for employers. But with proper procedures, policies, and agreements in place, companies can reduce the possible disclosure of trade secrets and the improper solicitation of customers by departing employees.
[1] RBC Dominion Securities Inc. v Merrill Lynch Canada Inc., 2008 SCC 54 at para 18.
[2] 1996 CarswellSask 412.
[3] Ibid at para 12.
[4] Ibid.
[5] Sharp Mechanical Ltd. v Downing, 2012 SKQB 36 at para 24 & Brandt Engineered Products Ltd. v Rockford Engineering Works Ltd., 2014 SKQB 339 at para 49.
[6] ATI Technologies Inc. v Henry, 2000 CarswellOnt 4612 at para 10.
[7] Thienes v Godenir, 2011 SKQB 271 at para 37.
[8] KRG Insurance Brokers (Western) Inc. v Shafron, 2009 SCC 6 at para 39.
[9] EMW Industrial Ltd. v Good, 2019 SKQB 47 at para 31.
[10] Ibid.
This article is for informational purposes only and does not constitute legal or accounting advice and does not create a solicitor-client relationship. W Law LLP does not make any guarantee about the accuracy or completeness of the information contained herein.
