Startup and video game law, from a Canadian and U.S. perspective
Non-Compete Clauses – Common Questions
We are often approached with questions about non-compete clauses in the context of employment agreements and independent contractor agreements and asked whether or not the clause is enforceable in Canada or the US. While the enforceability of a non-compete clause is determined on a case-by-case basis, we thought it beneficial to provide an overview of common questions we receive:
- Are non-compete clauses enforceable? In many jurisdictions, yes, if drafted correctly. However, courts are always on the lookout for reasons to invalidate non-compete clauses. Indeed, in some US states, including California, non-compete clauses are effectively unenforceable. California courts will even invalidate employment agreements from other states if the employee is now working in California for a competitor. Elsewhere in the US, you typically need a legitimate business interest to ensure an enforceable non-compete clause. In Canada, courts will ask a similar question of whether the company has a proprietary interest worthy of protection.
- What interest is worthy of protection? In both the US and Canada, the analysis is similar. Courts will ask if a company is protecting trade secrets, confidential information, trade connections or goodwill through the non-compete clause. If a company is simply trying to prevent competition, the non-compete will likely be unenforceable.
- What about independent contractor agreements? It is possible to apply non-compete clauses to independent contractors but there is a much higher likelihood that such a clause is unenforceable. Additionally, the likelihood that a contractor will agree to a non-compete is significantly lower as contractors are working multiple jobs at the same time and signing a non-compete clause may cause them to lose out on work. Finally, some courts may interpret the non-compete clause as indicating an employer-employee relationship, which may lead to material labor law issues.
- What is a reasonable non-compete? A company cannot have a non-compete that stops an employee from working entirely except in extreme circumstances, which usually involves a large severance package (for example, applied to a CEO). Typically, a company needs to limit any non-compete clause by length of time, geographic location and type of work prohibited and to tailor these limits very specifically to the work that a company actually does.
- What about a non-solicit or non-disclosure clause In Canada, and some other jurisdictions, courts will invalidate a non-compete clause if there are other less restrictive means to enforce company goals. Often a non-solicitation clause or a confidentiality/non-disclosure clause will operate to accomplish the same objective.
By keeping the above in mind, you should be able to avoid the pitfalls of unenforceable non-competes or avoid them entirely through other clauses.