Cunning Law assists entrepreneurs and small business owners with reviewing, drafting, and enforcing non-compete agreements.
When two parties share sensitive information, there is potential for one party to exploit that information to gain an unfair competitive advantage. This can be highly detrimental to your business interests. Businesses often use non-compete agreements, otherwise known as non-competition agreements, to protect their intellectual property, trade secrets, proprietary information, and procedures used to produce or market their goods and services.
The purpose of non-compete agreement is to maintain your business’s competitive advantage. If there was no contract in place, then many businesses would lose their competitive advantage due to people using the information that they gained to compete against the business.
Non-compete agreements are often used to protect an employer’s business. Specifically, employees who have gained access to knowledge of the employer’s business could use this information to help a new employer when their employment ends. Moreover, a former employee might be able to launch their own business using information they gained from working for their former employer. Therefore, many business ensure that employees sign non-compete agreements or an employment contract that contains a non-compete clause. This a “restrictive covenant” that restricts a former employee from working for a competitor or launching their own competing business when their employment terminates.
Besides the employment context mentioned above, there are a few other instances where a non-compete agreement should be put in place:
Similar to employees, independent contractors can share the knowledge they gained during their involvement with your business to give an unfair competitive advantage to others. Or, they could launch a competing business themselves.
In the coaching industry, a client could turn around and become a coach themselves. A non-compete agreement would prevent them from using the information they learned from you to compete against you in the same industry.
If you are seeking funding for your invention or idea, then your pitch will likely involve disclosing confidential information. If the funding doesn’t go through, then the potential investor would be able to turn around and share that information to your competitors. As such, a non-compete agreement should be used when you are disclosing your intellectual property. This would particularly be relevant to high tech companies.
Consider using a non-compete agreement for commercial negotiations such as the purchase or sale of your business. If the deal falls through, then the prospective purchaser of your business wouldn’t be able to turn around and compete against you.
Here are some key elements that should be included in every non-compete agreement or clause.
Typical non-compete periods are between six months to two years. The shorter the length of restrictions, the easier it is to enforce.
This is the area in which the non-compete clause or agreement applies. The smaller the geographic area, the easier it is to enforce.
Your competitors need to be defined in the non-compete agreement. Not every single competitor needs to be listed in the definition, but the non-compete agreement should give a general idea of the industry and types of businesses that it applies to.
It should be clear as to what the ex-employee or party can or cannot do.
The non-compete agreement should explicitly state the damages that the business is entitled to receive if the party breaches the non-compete agreement. For example, the Supreme Court of British Columbia recently ordered a real estate school tutor to pay $50,000 in damages for breaching a non-competition agreement when he set up his own competing school.
The jurisdiction under which the non-compete agreement will be governed.
This clause restricts the party from recruiting or hiring employees or independent contractors away from your business. The purpose of this clause is to prevent the party from interfering with your relationship with your employees. This can also apply to clients or prospects.
This clause prohibits a party from sharing any of your business’s confidential information to unauthorized parties. It is particularly important when a party has access to sensitive or proprietary information. In such cases, it may be worth it to have non-disclosure agreements in place.
This clause prohibits the party from making negative or disparaging statements about you or your business. Such clauses can apply to public statements, private conversations, and even online reviews.
Inspire more innovation Non-compete agreements prevent ideas and information from spreading which encourages competitors to innovate in order to keep up with other businesses.
Protect trade secrets Non-compete agreements prevent employees, independent contractors, potential investors, clients, and other parties from using your business’s proprietary information to compete against you.
Reduce employee turnover Non-compete agreements can reduce employee turnover because they tend to restrict other employment options.
Courts generally enforce non-compete agreements or non-compete clauses if they are clearly and carefully drafted.
However, the court may not enforce it if the geographic scope is unreasonably broad. It will consider if such a scope is really necessary to protect your business. The court will also not enforce the non-compete clause if the specified period in which the restriction applies is unreasonable. It will be found to be unreasonable if it overly restricts the party or employee’s freedom.
Moreover, the court will not enforce the non-compete clause if the restriction would cause undue hardship. For example, if it makes it too difficult for the party to find a new job or make money. Another reason why a court may not enforce it is if the effect of the non-competition clause could be harmful to the public interest. For example, if it restricts commerce and depresses the economy. Finally, the court will not enforce the agreement or clause if it is illegal in that particular jurisdiction.
This is why it is necessary to consult a lawyer who will examine the non-competition clause in relation to the common law (i.e., case law) and current laws. Some provinces, such as Ontario, refuse to enforce non-compete agreements. However, there are some exceptions and agreements that were signed before a certain date are still legal.
When crafting a non-compete agreement, keep the following best practices in mind:
A contract lawyer can advise on whether a non-compete agreement or non-compete clause is enforceable in court or should be revised to protect your best interests. A contract lawyer can also advise on additional protective considerations so that you can focus on building your business with peace of mind.
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