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Confidentiality Clauses and Restrictive Covenants – Be Careful What You Include in an Employment Agreement

Written By:  Alexandra Manthorpe

Houser, Henry & Syron LLP

Toronto, Canada

What would happen if Coca-Cola’s “secret formula” were made public?

All businesses have a certain amount of sensitive information that should remain private. In the course of their work, employees often learn or have access to sensitive information about their employers’ businesses. This can include trade secrets, financial data, business plans, customer lists, and other confidential or proprietary information. Employees may also cultivate valuable relationships with co-workers and customers. These relationships can be critical to the success of their employers’ businesses.

If employees use that sensitive information or their close relationships with co-workers and customers in a manner detrimental to their employers, it can have disastrous consequences, sometimes irreparable. Employers have a legitimate interest in protecting sensitive information and guarding against the loss of customers and other employees. One way employers can protect themselves is by having employees sign employment contracts which contain confidentiality clauses and restrictive covenants.

Confidentiality Clauses

A confidentiality clause should be carefully drafted to include whatever information is particularly important to the employer. This will vary business to business, but it’s important to clearly identify any and all types to be considered for inclusion (i.e. trade secrets, financial data, client lists, etc.).

A well-drafted confidentiality clause serves to let an employee know what work-related information he or she can use or disclose. If an employee ever uses or discloses that information inappropriately, an employer can take the employee to court. Courts generally uphold confidentiality clauses, and may award compensation and other remedies to the employer (such as an injunction).

It is also important that the definition of confidential information include certain exemptions. For instance, if information is already publicly known through no fault of the employee, then the employee cannot be prevented from later using or sharing that information. Also, if an employee is ever ordered to give evidence by a court, then that employee may be permitted to disclose confidential information, so long as he or she does not disclose more than is required.

An employee should also be required to return any materials containing confidential information after he or she ceases to work for an employer.

Restrictive Covenants

“Restrictive covenants” literally restrict what a person may do after he or she ceases to work for an employer. To be enforceable, it must be reasonable both between the employer and employee, and with reference to the public interest in having a free, competitive marketplace.

In assessing “reasonableness,” courts look at three issues:

1. Does the employer have a legitimate interest entitled to protection?

2. Is the length of time or the geographic area of the restriction too broad?

3. Is the covenant unenforceable – being against competition generally, and not limited to preventing solicitation of customers or other employees?

The most common restrictive covenants in the employment context are “non-solicitation agreements” and “non-competition agreements.”

Non-solicitation agreements should only serve to prevent a former employee from attempts to “hire away” other employees, as well as attempts to “take business” from his former employer by approaching existing (or recent) customers with offers of similar goods or services. It should also have time and/or geographic limits (e.g. valid for a two year period after employee’s employment ends, valid within the Province of Ontario).

If a non-solicitation agreement is too broad, then it may be considered a “non-competition agreement.” For example, if a former employee cannot contact an existing (or recent) customer, even to offer totally different and non-competitive goods or services from those offered by his or her former employer, then this is unenforceable.

Non-competition agreements can severely limit an employee’s ability to find similar work after his or her employment ends. In Canada, courts are generally opposed to non-competition agreements, as they serve to lessen competition.

Generally, a non-competition agreement will only be upheld if there are “exceptional” circumstances. For example, if there is a sale of a business, the key person(s) involved in that business can be prevented from starting a competitive business for a certain period of time after closing. Further, such an agreement can be upheld against a manager or otherwise senior person in an organization.

Courts have made it clear that they will only enforce restrictive covenants when they are reasonable in their entirety. Courts will not enforce overreaching terms or interpret ambiguous terms. For this reason, it is very important for employers to review their proposed restrictive covenants with their lawyers.

If you would like to learn more about confidentiality clauses, restrictive covenants and the importance of employment agreements, please contact Michael Henry (416.860.8021, mhenry@houserhenry.com) or Roger Nainby (416.860.8017, rnainby@houserhenry.com).

For more information about Houser, Henry & Syron LLP, please visit www.houserhenry.com or the International Society of Primerus Law Firms.

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