Clarification on non-competition and non-solicitation clauses

Many employees who have direct contact with their employer’s clients as either sales representatives or customer service representatives are required to sign non-competition and/or non-solicitation agreements.
The company wants to protect their client base if an employee leaves for some reason. It does not want the employee to exploit the relationships with their customers that they paid that employee to build.
Simplified, a non-competition agreement is something like: “For one year after you leave, you will not be involved in any business that competes with us.”
A properly written non-solicitation agreement is something like: “For one year after you leave, you will not solicit any customer with whom you dealt in the last 24 months of your employment for the purposes of selling them a competitive product or service.”
A number of years ago, the Ontario Court of Appeal indicated that it would rarely enforce non-competition agreements that mere employees were forced to sign. Keeping the employee out of the industry all together is rarely permitted. If you were a business owner that sold your business, it likely would be enforced.
Peter worked for a chemical company for 17 years. When he got the job, he signed an agreement which stated, and I am simplifying: “If I leave for any reason, for one year I will not provide services or products to any company or solicit any company to sell them services or products which are competitive with my employer if that company was my employer’s client at any time during my employment.” Peter’s contract eventually ended up before the Ontario Court of Appeal.
Peter’s employer was a large multinational company. They had thousands of clients throughout the planet. Peter certainly didn’t know who they all were. The company was certainly not going to give him a list of all their clients throughout the world so he would know who not to call.
Peter had been with the company for 17 years. There were clients that he would have known about or dealt with that he had entirely forgotten by the time he left.
So there is Peter, terminated and out of work and all his skill sets are in the chemical industry. If he gets a job as a sales representative with another chemical company, he can never know whether he is violating the agreement. He simply doesn’t know who all his former employer’s clients are so he never knows whether the potential client he’s talking to is taboo to him.
In effect, the agreement the company made him sign when he took the job was not a non-solicitation agreement, it was a non-competition agreement. If you are prohibited from selling chemicals to a particular list of people, but you don’t know who all those people are, in order to avoid violating the agreement you have to get out of the industry. You are prohibited from competing at all.
The way Peter’s contract was written, even if a potential client called him and he did no soliciting, he could still be in trouble.
If a contract is properly written, the courts will allow an employer to protect the relationship their employee has established with their clients while on their payroll. If the employer tries to extend that prohibition to every client the employee has ever dealt with, no matter how long ago, it is going to get into trouble. If you haven’t dealt with a client for 10 years, there is no relationship to exploit. You are just another sales person competing for their business.
For all of these reasons, the Court of Appeal struck down the agreement and said that Peter was free to do what he wanted.
That does not mean that Peter was free to exploit truly confidential information. There were other sections of the agreement that he signed that were enforceable including a prohibition against disclosing or using truly confidential information. In this case, Peter might have known some confidential pricing structures but he was not privy to any secret formulas. Even if there’s nothing in writing, the law is that if you exploit information that is a true secret, no matter how long you do it after you leave your employer, you can be successfully sued.
Creating a legally enforceable non-solicitation agreement is not that difficult. Employers should take the time and effort to do it. Their clients are their business and those relationships are valuable. If you write something so broad and all-encompassing that it effectively tries to keep the departing employee from working in the industry, you will have wasted your time.
As published in the Hamilton Spectator, May 30, 2011
Ed Canning
Ed Canning
P: 905.572.5809