How To Protect Business Property And Information In Commercial Transactions - July 2016

Introduction: The Importance of Protection

A sustainable competitive advantage in today's crowded business environment requires a combination of several factors, including sound market awareness, innovative business ideas, and customer loyalty. A competitive advantage also requires staying one step ahead of the competition, meaning opportunistic companies are constantly trying to gain the upper hand by uncovering and exploiting the business property of their competitors.

In order to try to prevent the exploitation of their business information and property interests, prudent organizations safeguard such interests through a variety of different legal and other methods. This is particularly true in the case of mergers, acquisitions, and other commercial transactions, pursuant to which a high volume of sensitive and confidential information typically changes hands.

This paper will discuss various legal methods that parties can use to protect their proprietary interests in the context of commercial transactions, including confidentiality agreements, non-competition and non-solicitation covenants, and intellectual property assignment and licensing agreements. As will become apparent, it is crucial that the need for and appropriateness of such legal protections be carefully identified and considered on a case-by-case basis, taking into account such factors as public policy, reasonableness, and - most importantly - enforceability.

Confidentiality Agreements

Confidentiality agreements (also referred to as non-disclosure agreements or "NDAs") are often entered into during commercial transactions, particularly at or prior to the negotiation and due diligence stages, in order to reduce the risk that confidential information will be improperly disclosed.

Confidentiality covenants are also commonly included in various employment or commercial agreements pursuant to which, for example, the purchaser may terminate its relationships with certain of the seller's executives, employees, suppliers and others following closing.

As a starting point, parties to a commercial transaction have a general and mutual duty of confidentiality under the common law. In this regard, the common law test for misuse of confidential information was confirmed by the Supreme Court of Canada in International Corona Resources Ltd v LAC Minerals Ltd.1 According to the Court, the following three factors must be present in order to establish a breach:

the information must "have the necessary quality of confidence about it"; the information must have been imparted in circumstances importing an obligation of confidence; and there must be an unauthorized use of that information to the detriment of the party communicating it.2 The courts have confirmed that the common law duty of confidentiality also extends to executives, employees, suppliers, and other similar third parties who are exposed to confidential information, such as pricing data or customer lists.

A related consideration is a potential duty as a fiduciary. Where a fiduciary relationship exists between employer and employee, such as in the case of senior executives and certain key employees, the duty of confidentiality may be "larger" and "more exacting".3 For example, the courts have held that in addition to refraining from improperly using trade secrets and confidential information belonging to the employer, fiduciaries must refrain from using knowledge regarding the relationships between the employer and its customers, suppliers and others in order to interfere with those relationships.4

Despite the common law duty of confidentiality and possible fiduciary duties, parties to a transaction should insist on written confidentiality agreements. First, confidentiality agreements permit the parties to define the scope of protection and permissible disclosure.

Second, the parties may establish procedures for the handing of confidential and proprietary information, including requirements regarding the return or destruction of information upon completion of its use. Third, the parties may establish the duration of the confidentiality obligation. Finally, the parties may prescribe the appropriate remedy in the event that confidentiality is breached.5

While confidentiality agreements are generally readily enforced, parties must take care to resist the urge to define confidentiality overly broadly, as this could lead to a finding by a court or tribunal that the agreement is an unreasonable restriction on the ability to carry on business or trade. If the court or tribunal makes such a finding, the agreement may be held to be unenforceable, and only the less onerous common law duty of confidentiality would govern a misuse of confidential information.

Non-Competition Covenants

Non-competition covenants may be used in an effort to protect business property and interests. A non-competition covenant precludes an individual from engaging in activities that compete with the business of the party receiving the covenant.

It is fundamentally important when considering non-competition covenants to recognize the distinction between such covenants entered into in the context of a sale of a business or in an employment relationship.

In the employment context, the courts have generally taken the view that non-competition covenants are an unnecessary restraint on trade. To that end, such covenants are often held unenforceable unless they arise in exceptional circumstances and are reasonable in both duration and scope. In addition, the party seeking to enforce the covenant will bear the onus of providing that the restriction is reasonable.

On the former point, the leading case of Lyons v Multari6 established that the courts will generally not enforce a...