Information is the corporation's most important asset.
Executive employees are well aware that they enhance their value to
competitors if they leave with their employer's key competitive
information. Mediocre performance is enhanced in the eye of
the competitor if the executive performer is able to deliver a
competitive advantage. Whether it is a formula or just a
customer list it will significantly enhance a departing
employee's value to a potential employer, particularly if that
employer is plowing the same field where a seed of information
turns into a winning competitive crop.
A large US pharmaceutical company was losing its most mobile
executive employees to small competitors who set up satellite
operations that replicated their best products. The
ex-employees departed with key, confidential information, formulas,
plans, customer and supplier lists that they shared with their new
employers making them a valuable acquisition, no matter the
Most departing employees have signed employment agreements that
contain standard restrictive covenants; non-solicitation,
non-compete and confidentiality clauses. Their departure to a
competitor is clearly in breach of their contractual obligations to
their employer. Restrictive covenants like non-compete
clauses, are, by their nature, overkill. The restriction is
usually too broad covering too much territory and too long in
duration, i.e. two years and that often means the individual is
unemployable in his or her area of knowledge and expertise for that
lengthy term. Courts have grown reluctant to enforce such
clauses apart from the confidentiality commitment which they see as
a common law duty that is enforceable.
Senior executives may be restricted by their fiduciary duty to
their ex-employer which duty need not be in writing to be
enforceable against the interests of the departing executive
employee. Courts are more willing to find a breach of
fiduciary duty than support a restrictive covenant that may be
contrary to public policy.
Employment agreements that are carefully constructed and which
do not overshoot reasonable restrictions are enforced by the
courts. Unfortunately, corporate employers too often demand
too much when restricting departing employee's future
activities, thereby ending up with little or no restriction at
Rather than the threat of dire consequences if an ex-employee
breaches his or her agreement, a better route is to enhance the
golden handcuffs in place to encourage valuable employees to stick
around and not jump ship. Staggered bonuses and equity
participation that is triggered after three years employment is a
more positive approach to the retention of key employees who have
access to competitive information.
Better yet, a combination of reasonable restrictive covenants
that are enforceable and golden handcuffs with equity or bonus
provisions combined with clear communication to executive employees
of their fiduciary duties to the corporation is more likely to
succeed in limiting the growth of harmful departures.
Fear does not restrain the loss of competitive
information. This is particularly so when the new employer
offers to indemnify the departing employee from the legal
consequences of such a departure. If the corporation's
most important asset is to be protected, it must be done with
careful consideration in advance of the potential departure and not
afterwards once the executive employee has sold himself and his
information to the highest bidder.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Unfortunately, reasonable accommodation for employees in the workplace continues to be the source of significant litigation and even today we continue to see outrageous examples of employers behaving badly.
We are now beginning to see reported cases involving charges and subsequent fines laid against employers for failing to provide information, instruction and supervision to protect a worker from workplace violence.
On October 13, 2016, the Supreme Court of Canada denied leave to appeal an Ontario Court of Appeal decision which ordered an employer to pay a former employee 37 months of salary and benefits following termination.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).