How NOT to Draft an Enforceable Non-Competition Agreement

By: Jeremy Schwartz

Some organizations subscribe to the close your eyes and think good thoughts school of drafting, when it comes to non-competition agreements in employment contracts.  That’s like crossing a major intersection at rush hour, blindfolded. 

Others prefer to draft agreements that are as restrictive as possible, regardless whether they would be enforceable, hoping to scare employees and minimize post-employment competition.  Such agreements may expose employers to legal costs should an employee challenge the agreement in court.  They are also relatively easy to spot, especially for your competitors and employment law counsel. So when push comes to shove, they will likely be ignored as your demands that employees and their new employers cease and desist fall on deaf ears.

When courts consider whether or not to enforce restrictive covenants, they begin by assuming that the covenant, as a restraint on trade, is contrary to the public’s interest in free competition and so unenforceable.  The party seeking to enforce the covenant has to convince the court that it is necessary to protect its legitimate proprietary interests, and that it is only as minimally restrictive on competition as is required to achieve that end. Convincing a court to take that leap with you is not an easy thing to do – and it’s expensive.

To be enforceable, non-competition agreements must, as a general rule, be reasonable and unambiguous in terms of their geographic scope, the types of activities proscribed, and duration.  If an agreement is ambiguous, or if it is overly restrictive in any respect, the entire agreement is usually unenforceable. Courts will not re-write agreements or read-out offensive language.  They just strike the whole agreement down.

A Recipe for Unenforceability

The following is a recipe of ingredients, specifically formulated with reference to recent and landmark court decisions, to help ensure your non-competition agreements are UN-enforceable:

  • Don’t bother with consideration: Always have new employees sign non-competition agreements a few days or weeks after they start working.  They are less likely to ask questions or to be turned off that way. And don’t bother providing additional consideration when you impose new agreements on current employees – they’re lucky to have a job at all.          
                                                                                                                                                             
  • Make everyone sign: A shipper/receiver who goes to work for your competition could do just as much damage as your plant manager.  It wouldn’t suffice to prevent him from soliciting customers he dealt with at your company, or from leading an exodus of his co-workers.  That’s why it is so essential to make all employees sign a non-competition agreement.  Non-solicitation agreements just don’t cut it in most cases.
     
  • Use vague and cryptic language: The harder it is for an employee to determine who they are prohibited from contacting, where competition is proscribed, what activities are inhibited, and how long the restrictions apply, the better.  Don’t worry – courts always take the time to figure out what employers meant to say and enforce that instead.
     
  • Make the scope of the agreement contingent and indeterminate: It’s a best practice to include a formula for determining things like duration of the restrictions, and to tie that formula to external conditions unknowable at the time of signing.  For example, if a sale of business is contemplated, be sure to make the length of the non-competition agreement dependent on the actions of the, as yet unknown, third-party purchaser.  Why risk a prospective purchaser shying away from a deal because they fear competition from senior management?
     
  • Stake your claim as broadly as possible: You are based in Oakville, Ontario and you don’t currently serve markets in Hamilton, Vancouver, Tulsa and Tanzania.  But someday that could all change, couldn’t it?  You’re a growing company and you have a lot to offer.  Just in case, make all your non-competition agreements either silent as to geographic limitations, or expressly apply the restrictions to entire countries and even continents regardless whether you do business there.  And don’t limit geographic restrictions based on the scope of a particular employee’s access and activities during employment.  If you have an office in New York, just add that city to the list.
     
  • Don’t specify what activities are restricted: You put a lot of time and effort into training and development, so why should another employer reap the rewards?  Rather than protecting your business from unfair competition in activities and markets with which the employee was directly involved and poses a credible threat post-employment, leave out any reference to those in your agreements.  If you can’t have them as an employee, no one can.
     
  • Insist on several years free from competition:  Just because six months would be long enough to re-enforce client relationships and would carry you through a typically important sales cycle, that’s no reason not to insist on a three-year non-compete.  And don’t bother looking around to see what others in your industry are using in their agreements.  For better or worse, you’ve never been one to follow the crowd.

We often help employers draft, review and implement non-competition, non-solicitation, and confidentiality agreements.  If protecting your organization from post-employment competition is important, then ensuring your agreements are enforceable is critical.

 

 

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