A Little Healthy (Non)Competition
By Siobhan Donovan, Cox & Palmer
What is a non-competition clause/agreement (also known as a “non-compete”)
A non-compete prohibits one party to an agreement from engaging in any business that would compete with the business of the other party. Non-competes are commonly found in both employment and commercial agreements.
In the employment context, a non-compete prohibits employees from competing with the business of the employer, directly or indirectly, for a specific period of time after the employment relationship has ended.
In the commercial context, a non-compete prohibits one party to the agreement from competing with the business of the other party for a specific period of time (typically, after their business relationship has concluded). Non-competes may arise in shareholder agreements, buy-sell agreements, and various other agreements.
Are non-competes always enforceable?
The short answer: no.
To be enforceable, a non-compete must be reasonable with respect to scope, time, and geography.
The scope of a non-compete cannot be any wider than is reasonably required to protect the legitimate business interests at play (whether it be the business of an employer or a corporation). Non-competes also need to be clear and unambiguous. They may be found unreasonable if they fail to precisely define the exact type of business being restrained. For this reason, blanket prohibitions restraining all work that is “similar” to that of the relevant business will likely be found unenforceable. To avoid this pitfall, non-competes should be drafted as narrowly as possible.
The duration of a non-compete must also be reasonable. What is considered reasonable will often depend on the facts and circumstances of the situation. For example, the parties’ history could impact how long a non-compete can reasonably be in force, as could the nature of the business being restrained.
Finally, a non-compete that applies outside the territory in which the business operates is contrary to public order and, therefore, likely to be unenforceable. For example, a company that carries on business only in Newfoundland and Labrador would probably not be able to enforce a non-compete that applies throughout Canada.
Employment versus commercial context
Non-competes are treated differently in the employment and commercial contexts. Because of the power imbalance that exists between employers and employees, non-competes are presumptively unenforceable in the employment context.
This means that an employer who tries to enforce a non-compete has the burden of proving that it is reasonable. Whether an employee is given the opportunity to seek independent legal advice prior to signing a non-compete may also impact its enforceability.
Commercial non-competes, on the other hand, are lawful unless one of the parties establishes that the scope is unreasonable. Unlike employment non-competes, commercial non-competes do not need to address power imbalances, so the priority is to enforce the parties’ ability to contract freely.
Who can benefit from having a non-compete in place?
A non-compete can help any business owner or employer protect their interests. Non-competes can be particularly helpful for new businesses seeking to ensure that privileged information or “trade secrets” are not used against them in the future by current employees or business partners. Non-competes, however, are only as useful as they are enforceable. For this reason, it is imperative to ensure they are drafted narrowly and reasonably with respect to scope, time, and geography.
When preparing non-competes, the specifics are essential:
Limit their scope, time, and geography
Tailor them to the circumstances (keeping in mind whether the relationship is of a commercial or employment nature).
Ensure they are not overly broad and restrict only what is necessary to protect legitimate business interests.
Siobhan Donovan | Associate, Cox & Palmer
Siobhan Donovan is an associate in the St. John’s office of Cox & Palmer, where she is developing a general legal practice with a focus on corporate commercial law and wills and estates law. She has experience with incorporations and amalgamations, purchase and sale agreements, and other corporate transactions, as well as the preparation of wills.
If you have questions about non-competition agreements, please contact Siobhan at 709-570-5337 or sdonovan@CoxAndPalmer.com.