You just landed a new job and received a non-disclosure agreement (NDA) to sign. Before you dot the i’s and cross the t’s, do you know exactly what you’re agreeing to?
Often, there is a non-competition clause in the NDA. A non-competition clause places restrictions on your other business relationships during, and for a specified period, after the term of your employment. As a result, this clause can affect where you work after you are no longer employed by the employer.
Why do employers use non-competition clauses in NDAs?
Employers use non-competition clauses in NDAs as an extra layer of protection. NDAs confine the use of confidential information to within the company, but non-competition clauses restrict the employee’s ability to compete with the company’s business. Competing with the company’s business can involve the use of information that may not meet the definition of “confidential”. For example, having knowledge of the procedures within a company may not meet the definition of “confidential” but this knowledge can still be very helpful to a competing company.
When will non-competition clauses be enforced?
While you’re employed, non-competition clauses are fairly dormant, unless you wish to engage in other competing business activities at the same time. In this case, it is important to carefully review the non-competition clause to see if it also prohibits owning shares or lending money to competing businesses.
But what happens if you want to jump ship to work for another company? A non-competition clause can potentially be enforced against you if it is unambiguous and reasonable.
(1) The non-competition clause must be unambiguous
Non-Competition clauses must be unambiguous – otherwise, how else would you know what you are agreeing to, or that you are breaching your contract? In Shafron v KRG Insurance Brokers, the Supreme Court of Canada stated that restrictive covenants, especially in employment agreements, must be unambiguous. In that case, a restriction on competing within the “Metropolitan City of Vancouver” was considered ambiguous (the employee opened a competing business in Richmond B.C.), and the entire clause was struck down.
If the restrictions are not clear and unambiguous, then the reasonableness of the restriction cannot be determined, and the starting point will be that the restrictions are unreasonable. It is important to note that if the restrictive covenant is ambiguous, the courts will not ‘fix’ it to make it clear.
(2) The Restrictions Must Be Reasonable
The reasonableness of the restrictions depends upon the particular facts surrounding the agreement. The courts have stated that the restrictions must be reasonable with respect to time, geography, and scope of activities.
- Temporal restrictions. This is the period of time that must pass before you can compete again. Whether the limitation is reasonable depends on the business and industry, and what is necessary to protect that particular business in that particular place. Restrictions for employees will be much shorter than for persons who have sold their business and as part of the sale price have agreed not to compete with the business. Employees must not be prevented from earning a living in their chosen occupation or profession.
- Geographic restrictions. This is the geographic area where you cannot engage in a competing business. Courts will look at the size of the city, the existing competition, and whether the former employee will be precluded entirely from entering the industry. The definition must be clear and unambiguous.
- Limitations on the scope of activities. These are the type of activities that you may not be engaged in following termination. Courts will look at the former employee’s role within the company and the duties previously performed in comparison to the duties that the former employee is precluded from. Bans from the industry in its entirety could be overbroad, since it may not be required to protect the employer, and it may unreasonably limit the employee’s ability to make a living.
Overly broad restrictions may be unenforceable
It is very tempting for employers to include very broad non-competition restrictions in employment agreements and NDAs, in an effort to protect their business.
Courts will only enforce non-competition clauses if they are
necessary to protect the employer’s proprietary interests; and
if they are unambiguous and reasonable with respect to time, geography and scope; and
if the employee is not prevented as a result from earning a living in their chosen profession/occupation.
It is up to the employer to justify the restrictions. If less restrictive approaches could have been taken, the courts will render a non-competition clause unenforceable – and as a result there will be no restriction on competition by the employee.
For NDA templates and sample non-competition clauses, check out Clausehound’s Small Business Law Library!
This blog was co-authored by Vi Vo.
– – –
This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.