Protecting Your Business: Trade Secrets and Employment Agreements
On October 25, 2021, Ontario introduced Bill 27, Working for Workers Act, 2021, which amends the Employment Standards Act, 2000 (the "ESA") to categorically ban non-competition clauses in agreements between employers and employees. In this blog post, we will briefly look into the implications of the legislation and how to prepare proper employment agreements in the context of protecting trade secrets.
There Were Never Shackles: Non-Compete Clauses
Under this legislation, a "non-compete agreement" is defined as follows:
A non-compete agreement is any agreement, or any part of an agreement, between an employer and an employee that restricts the employee from participating in any business, occupation, profession, project, or other competitive activity after the termination of the employment relationship.
There are 2 important exceptions to the statutory prohibition on non-competition agreements: (1) Where there is a sale of a business (or part of a business), and as a part of the sale, the parties enter into an agreement that prohibits the seller from engaging in any business (or work, occupation, profession, project or other activity) that is in competition with the purchaser's business after the sale and, immediately following the sale, the seller becomes an employee of the purchaser. (2) The employee is an "executive" as defined in the ESA. This does not mean that non-competition clauses with executives or vendors of a business are automatically enforceable, but simply that they are not prohibited by the ESA. It's important to note that the prohibition does not apply to commercial agreements outside the employment context or to agreements with independent contractors or individuals who do not fall under the ESA.
A non-compete clause in an employment agreement entered into before Bill 27 came into force is technically enforceable and will be interpreted under the common law principles. Before the amendments to the ESA, in order to enforce a non-competition clause, an employer had to prove that:
the non-competition clause was reasonably necessary for the protection of the employer's legitimate business interests;
the non-competition clause is "reasonable" in terms of duration, location, nature of activities prohibited and fairness to parties;
the terms are clear and certain; and
the clause is not otherwise contrary to the public interest, such as not restricting free trade and fair competition.
Courts frequently found non-competition clauses vague, ambiguous, overbroad, or contrary to public interest. Therefore, the statutory prohibition aligns with the long-standing common law presumption that non-competition covenants in employment agreements were generally unenforceable and viewed as contrary to public policy.
Before the enactment of Bill 27, employers commonly included non-competition clauses in employment contracts, often without an understanding of their limited enforceability. Some did so even with the knowledge that these clauses had a small likelihood of being upheld by the courts. This practice persisted because there remained a chance that employees might perceive them as binding, or there existed some likelihood the courts would find them enforceable under the common law criteria. However, after Bill 27, this approach is no longer advisable. From the initial court cases, such as Waksdale v. Swegon North America Inc. and Parekh et al v. Schecter et al., it appears that the consequence of including a non-competition clause invalidates all other, otherwise enforceable, clauses in the agreement. This is to incentivize employers to prepare lawful agreements.
The Evolving Landscape of Trade Secret Protection
Trade secret protection traditionally takes two primary forms: (1) restrictive covenants in employment contracts, encompassing non-solicitation and non-competition clauses, and (2) contractual confidentiality provisions. Notably, the legislation does not alter the enforceability of the latter category, allowing employers to continue safeguarding their trade secrets and confidential information through contractual agreements. Such provisions define the boundaries for the use and disclosure of confidential information and trade secrets.
Non-Solicitation Covenants: An Essential Tool
Non-solicitation covenants, a common mechanism in both employment and commercial contexts, prevent departing employees or vendors from soliciting potential customers, existing clients, or employees of their former entity. While the new legislation does not prohibit non-solicitation covenants, it is essential to remember that courts in Ontario have historically enforced them only when they are demonstrably reasonable in terms of scope, duration, and other factors.
It is crucial for businesses and employers to explore alternative methods, such as non-solicitation covenants and confidentiality provisions, to protect their trade secrets and confidential information. If you have questions or require guidance on safeguarding your business interests, including sending cease and desist letters, securing injunctions and other extraordinary remedies, please reach out to a lawyer of the ALF team.
Stay tuned for more legal updates.
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