Restrictive Covenants On Employees Must Be Used With Caution

Restrictive covenants are a tool sometimes used by innovative companies that want to protect their intellectual property (IP) from leaving with employees. They are also often used between sophisticated companies that are business or R&D partners, but this article will focus on the employment context. Although two parties are typically free to enter a contract on whatever terms they wish, there is a public interest in discouraging restrictions on trade. Courts have become understandably leery of employment restrictive covenants as a result of reviewing many overly broad restrictive covenants with wide geographic scope and long durations. Many restrictive covenants have been found unenforceable as a restraint on competition.

The Ontario Court of Appeal, has pronounced restrictive covenants as enforceable only in "exceptional" circumstances1. A restrictive covenant will not be enforced where a non-solicit clause will be sufficient to protect a company's interest. These decisions, like many other restrictive covenants cases, were made in the context of sales and/or business, not in the context of the IP of a technology company. In the case of Mason v. Chem-Trend Limited Partnership (2011), 2011 ONCA 344, the Court invalidated a clause that was a complete prohibition on competing with the employer for a year. The employee was in a large sales force, not the president or chief financial officer, where there might be more justification for a broader prohibition on competition. The employee was prohibited not just from soliciting former customers, but from dealing with them in any way in competition with the company. The former employee was in a difficult spot because he would not even have access to a list of all of the company's present and past customers for the past 17 years of his employment, so he would not have a way to know if he was complying with the clause.

Despite the risk of invalidity, confidentiality clauses can still be used where possible. Non-solicit clauses should be used where the company has customers vulnerable to solicitation by a departed employee. Confidentiality clauses are also useful to protect IP and business information. In the Mason v. Chem-Trend case mentioned above, the Court did recognize that the employer would have some protection through a clause that protected trade secrets and confidential information. Assignment of IP clauses should be used to ensure that the...