- Biting the Hand that Fed You: Former Employees and Client Information
- June 23, 2015 | Authors: Stephen Berezowskyj; Mitch Dermer
- Law Firm: Singleton Urquhart LLP - Vancouver Office
- Most businesses have confidential client information, which can be an important and valuable asset. To protect this asset, businesses will often rely on restrictive clauses in their employment agreements that prevent this information from being improperly used by departing employees.
There are two basic types of restrictive clauses or agreements used to protect confidential information: non-competition agreements and non-solicitation agreements. A non-competition agreement seeks to prevent former employees from competing directly with their former employer, usually in a specified geographic area for a period of time. A non-solicitation agreement does not prevent the former employee from competing, but simply prevents him or her from soliciting clients of their former employer.
Because a non-competition agreement is more restrictive, it is given greater scrutiny by courts because it is seen to be contrary to public policy. This view was expressed by the Supreme Court of Canada in a 2009 case, Shafron v. KRG Insurance Brokers (Western) Inc., when it stated that NCAs “interfere with individual liberty of action” and that “the exercise of trade should be encouraged and should be free.”
A non-competition agreement is therefore presumed to be unenforceable unless an employer can show its restrictions are reasonable having regard to these elements:
- the nature of the interest that the employer wants to protect
- the time period and geographical area that the agreement covers
- the activities that it prohibits.
Because it is less restrictive, a non-solicitation agreement is more likely to satisfy the reasonableness standard. In fact, courts may refuse to enforce a non-competition agreement if a non-solicitation agreement would adequately protect the employer.
A proper non-solicitation agreement should not restrict solicitation of the previous employer’s customers in any kind of business whatsoever; rather it should be limited to the employer’s specific business.
Even without an agreement, there are certain obligations imposed by law that can prevent a departing employee from acting unfairly towards its former employer. The obligations that will be owed by a departing employee, with or without an express contractual restriction, can arise as a fiduciary duty, a duty of good faith, or a duty of confidence.
In each case, courts will consider a former employee’s conduct unfair if he or she has taken confidential customer lists to use for solicitation of business and/or if he or she wrongfully divulges trade secrets or seeks to wrongfully appropriate the former employer’s maturing business opportunities.
Courts will also consider a person’s position in a company. A court may prevent a company’s top managers or key employees from soliciting their former customers after they leave its employ. But a lower-level employee may compete with a former employer, provided he or she does not use that company’s confidential information such as recorded customer lists.
To protect against improper competition by former employees, we encourage businesses to have their standard form employment agreements reviewed by a legal professional so that they can be more confident that non-competition or non-solicitation clauses are reasonable and likely to be enforced. In addition, employers that suspect an employee is improperly soliciting former or current clients should consider consulting a lawyer to see if there is a remedy available. A court injunction may prevent an ex-employee from using confidential information soliciting clients. Employers may also seek damages from an offending former employee as compensation for the financial loss he or she has caused.