Or for too long. For this reason, judges are highly suspicious of non-competition clauses, and the clauses are complicated for employers to enforce.
Most companies treat non-competition clauses as a bluff and do not enforce them, knowing their efforts will be unsuccessful (and expensive). Some very aggressive employers will threaten legal action or take legal action, even though they know the chances of success are minimal. They do this to scare other employees away from competing with them. If you receive a “cease” letter from your former employer, you should seek legal advice right away.
When is a non-competition clause enforceable?
The British Columbia Court of Appeal set out a test for assessing whether a non-competition clause is enforceable in a case called IRIS The Visual Group Western Canada v Park. To assess enforceability, courts will take the following steps:
Determine how intensely to scrutinize the non-competition agreement.
Courts do not always use the same level of scrutiny when reviewing a non-competition clause. Clauses in a commercial setting, such as the sale of a business or a shareholder’s agreement, are more likely to be enforceable. The employment context is different because of the imbalance of power and the disproportionate impact on employees. Non-compete terms in employment agreements are presumed to be unenforceable.
Determine whether the employer has a legitimate interest, worthy of protection.
The courts have recognized that employers have several legitimate interests worth protecting. These include protecting trade secrets, confidential information, and trade connections. A clause specifically protecting these interests is more likely to be enforceable, though the presumption of unenforceability is still strong.
Determine whether a non-competition clause is actually necessary to protect the interest.
When an employer has an interest that deserves protection, the courts will consider whether that interest could have been protected using some mechanism other than a non-competition clause. Specifically, the court will consider whether a confidentiality or non-solicitation clause would have been sufficient, as they are less restrictive than a non-competition agreement. A non-solicitation clause prevents an employee from soliciting business from the employer’s clients, not from operating in the industry generally.
Determine if the scope of the non-competition clause is reasonable.
The court considers whether a non-competition clause is reasonable based on three categories:
- Geographic scope: The larger the area covered by the non-competition clause, the more likely it is unenforceable. The courts are particularly concerned that the area is easily identifiable and that the employer operates in that area. For instance, the Supreme Court of Canada found a clause referring to the “Metropolitan City of Vancouver” was unenforceable, as there was no area with that legal name.
- Duration: The courts will also find a non-competition clause is unenforceable if it lasts for too long. For instance, in a case where the employer’s interest was in protecting its reputation and its current clients, a three-year non-competition clause which prevented a lawyer from working in the legal profession at all was deemed too long.
- Activities restricted: A non-competition agreement may also be unenforceable if it is too restrictive regarding the activities it prevents. This means, first, that the activities must be restricted to the employer's specific field. Second, this means the restricted activities must intersect with the work you did for the employer. An example of this is a case where the employee was restricted from working in “general insurance and financial services.” While the employer offered services in all insurance areas, the employee had only worked in the group benefits department. There was no risk to the employer if the employee worked in a different, non-competing area of practice. The non-competition clause was held to be unenforceable for overbreadth.
Conclusion
Although courts are reluctant to enforce non-competition agreements, the consequences can be significant when they do. The employer may be able to get an injunction in court, preventing you from competing further. You may also be held liable for the employer's business losses due to your competition. If you are concerned about your next steps due to a non-competition agreement, give us a call. We will advise you on the risks you face and help you begin your fresh start.
Dan Howitt
