In today’s highly competitive ‘e-economy’ the internet has created unprecedented access to global markets. It has also created unprecedented challenges in protecting a successful business’s position in the marketplace.
One way for employers and business owners to mitigate risk and protect their business interests is through non-competition clauses whereby a co-owner, business partner or employee agrees not to compete with the business once their employment or involvement ends. These clauses are also used in agreements for the purchase and sale of businesses to protect purchasers by limiting the ability of sellers to compete with their former business.
However, divergent trends regarding the enforceability of non-competition clauses in some common law and U.S. jurisdictions suggest that the realities of e-commerce will force the evolution of Canadian law in this area as businesses and employers seek to broaden the geographical scope of such clauses. The argument: global commercial interests cannot be adequately protected otherwise.
The Canadian approach to non-competition clauses stems from the leading English case of 1894, Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. Courts in Canada have been historically reluctant to enforce covenants that restrict the ability of a party to carry on his or her trade or earn a living, and will only enforce a non-competition clause if it is reasonable in that it goes no further than necessary to protect legitimate proprietary interests. Reasonableness continues to be measured in Canada by assessing:
- the activity the clause is restricting,
- the duration of the restriction, and
- its geographic scope.
Canadian courts have consistently held that an overly broad geographical scope will render a non-competition clause unreasonable and unenforceable, and that the non-competition obligation must have geographical limits. But with the reality of global commerce, is this adequate to protect the interests of Canadian businesses using e-trade to access global markets?
Courts in certain U.S. states and other countries have been receptive to upholding non-competition clauses with broad, national, international or no geographical limits. The U.S. approach varies among states. For example, in California employment non-competition clauses are outright unenforceable. However, many U.S. jurisdictions also recognize that the widespread use of the internet means the geographic scope of restrictive covenants must also expand.
The trend in American law has been to place less emphasis on geographical limits and accept that modern technology allows even a small company to reach global markets; thus broader or, indeed, global geographic restrictions may be justified. This raises the possibility that contracting parties may use ‘choice of law’ clauses [see the Spring 2017 issue of Letter of the Law for a review of these] to agree on a venue sympathetic to the intentions of the contracting parties.
Other jurisdictions, such as the Netherlands and Australia, have moved away from the traditional focus on geographical limits. In the Netherlands, the Dutch Civil Code sets out the conditions regarding the enforceability of restrictive covenants. Significantly, no restrictions exist in the Civil Code as to the duration or geographical scope of non-competition clauses.
Similarly, recent case law in Australia indicates courts there have accepted that a global competition restraint may be reasonable in certain industries and circumstances. For instance, in Pearson v. HRX Holdings Pty Ltd, the Federal Court upheld the enforceability of a two-year global non-competition clause for a senior employee who left the company, finding that the lack of geographical limitation was not unreasonable due to the competitive nature of the human resources recruitment industry.
Reflecting these developments, momentum may now be building to adapt the Canadian approach to non-competition clauses to reflect modern realities. In Globex Foreign Exchange Corp. v. Kelcher, the dissenting opinion acknowledged that if an employer is involved in a virtual business the geographic location of that business is of very little importance.
Businesses wishing to operate in international and/or e-commerce markets should be aware of these limitations in assessing the protections available to them, and seek advice as to practical options open to them to limit such exposure.
For more information on effective non-competition clauses, please contact Mark, Kelly Ann, or David.