Canada: In Defense Of Restrictive Covenants

Restrictive covenants are a tool sometimes used in employment contracts by innovative R&D companies.  This type of clause typically prohibits a former employee from working for a competitor for a certain limited time and/or geography.  The goal of the clause is to temporarily limit competition, and also reduce the risk that intellectual property (IP), such as trade secrets, will leave the company with the employee.  Although this type of clause is also often used between sophisticated companies that are business or R&D partners, this article will focus on the employment context. 

The pendulum may have swung too far against restrictive covenants.  In an earlier article, I discussed how the Ontario Court of Appeal, had recently reinforced that restrictive covenants were valid and enforceable only in "exceptional" circumstances1.  That is not an easy test to meet.  The Supreme Court of Canada previously stated that an exceptional case may exist, for example, where it is reasonable to prohibit a former employee, "from establishing his own business or working for others so as to be likely to appropriate the employer's trade connection through his acquaintance with the employer's customers."2 A restrictive covenant will not be enforced where a non-solicit clause will be sufficient to protect a company's interest. 

These court decisions, like in many other restrictive covenants cases, were made in the context of sales and/or conventional business issues, not in the context of the development of IP by a technology company. It is not known if protection of IP would be an "exceptional" circumstance if the effect fell short of effectively appropriating a business.  In some cases, the appropriation of IP takes features of innovative products, such as software or a manufacturing process for a chemical composition, not taking sales of the business itself.   For some start-up technology and biotech companies, non-solicit clauses are virtually useless as a fallback because these companies are in heavy R&D mode and often do not have customers.  An early stage company's value is in its intellectual property.  It takes a lot of money and time to develop IP.  These companies are extremely vulnerable if a departing employee goes to a competitor and springboards the competitor's R&D program or products forward.  In trying to preserve the departing employee's right to earn a living, the courts should be aware that misappropriation of IP can be a severe blow to the company that generated and owns the IP.  When drafted with a reasonable, focused scope, restrictive covenants for key employees can be fair and justified to protect a company's hard earned IP.  Confidentiality and assignment of IP clauses should also always be in the original employment agreement. 

If the company has registered a patent for the IP, it may have some legal recourse against the departed employee and new employer if the technology is taken.  Likewise, if trade secrets are misappropriated or if surviving confidentiality clauses from the terminated employment contract are breached, there may also be recourse.  Both patent litigation and confidential information litigation are very expensive and complex.  It is difficult to collect evidence to prove misappropriation of information since the only readily apparent evidence before litigation starts may be that another company hired one's employee and then its product development seemed to jump further along.  It is also difficult to assess pre-litigation, what the other company may have known before it hired one's employee and how and if the employee springboarded the research program.

If a reasonable scope of restrictive covenants could be enforced, the main issue to be proven in litigation would be the relatively distinct issue of whether the employee was performing the temporarily prohibited employment duties in the restricted time and geography.  As one example where a narrow, focused restrictive covenant could have been useful and fair (likely none was used), the pharmaceutical company, Apotex many years ago developed a bacterial fermentation process in Manitoba to produce a very valuable heart drug called lovastatin.  Determining the best chemical conditions for growing bacteria to produce large amounts of a drug can be a challenge.  Apotex decided to keep its process secret, rather than filing patent applications.  A departing scientist left to join a competitor, Novopharm (now Teva Canada), and used knowledge he obtained at Apotex to springboard the Novopharm fermentation process for lovastatin.  To prove misappropriation of confidential information, Apotex:

1) Obtained an Anton Piller (search and seizure) order allowing it to search Novopharm offices to seize information, and

2) Had to prove that the information Novopharm used was Apotex's confidential information. 

It can be a factually difficult task to demonstrate that one's company information was integrated into another company's complex, ongoing research and development.  It is not a small cost or effort to obtain a search and seizure order and then go into the detail of a court discovery process.  Given the uncertainties and expense, most small companies would probably find it difficult to litigate to protect their IP in similar circumstances. 

Apotex apparently did not have a non-competition clause with the departing scientist, which is a common situation that we don't criticize here.  As a constructive suggestion, a potential non-competition clause could have been narrowly drafted to allow the scientist to use his general skills and knowledge for competitors but to prevent the employee from working on the exact same drug and process (i.e. lovastatin fermentation projects) for competitors.  As a more aggressive approach, if the scientist worked on new projects for Apotex during employment, these projects could have been added to the restrictive covenant.  To ensure consideration for the amendment to the employment agreement, it could be made at a time when the employee was receiving fresh consideration such as a discretionary pay increase, a bonus or extra time off.  The author is not aware of this practice being used in the pharma industry.  It would take some effort to initiate and manage.  However, the cost-benefits and value of executing this type of restrictive covenant and employment agreement updating may be justified for key employees and very valuable IP.   

In summary, there appears to be a practical application for non-competition clauses in IP-intensive industries that rely on R&D for their competitive advantage.  Different types of restrictions, such as non-solicit clauses, confidentiality clauses, and assignment of IP clauses, should also continue to be used for protection.  Draft these clauses separately, so that clauses at risk of unenforceability may be readily severed.  It remains to be determined whether courts will find that protection of IP, in some cases, falls within the exceptional circumstances where a well-drafted, reasonable non-competition clause would be enforceable.    

Footnotes

1 H.L. Staebler Company Limited v. Allan, 2008 ONCA 576, involving commercial insurance, where the unenforceable  clause stated, "you will not,  for a period of 2 consecutive years following said termination, conduct business with any clients or customers of H.L. Staebler Company Limited that were handled or serviced by you at the date of your termination." (No geographical limit).  See also Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 involving a chemical company sales representative. Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72 in the context of an employee and minority shareholder signing restrictive covenants in conjunction with a sale of a business.

2 Elsley Estate v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions