Northern Exposure

Making restrictive covenants enforceable

by Ralph N. Nero and Keri L. Bennett

Many of our recent articles have focused on decisions involving employees’ breaches or threatened breaches of restrictive covenants. Including restrictive covenants, such as nonsolicitation and noncompetition covenants, into employment contracts is important for employers to protect their business interests.

In order to be enforceable, however, such covenants must be tailored to the specific business needs of the employer and the context of the individual employment relationship. This article steps back and takes a look at the governing principles.

 

Is the restriction reasonable?

Restrictive covenants must be reasonable, unambiguous, and suitably limited in terms of scope, territory, and duration.

In order to determine if the covenant is reasonable, courts will examine both:

  • the circumstances regarding the nature of the business to be protected by the covenant, including confidential information and trade secrets;
  • the role of the person to be bound by the covenant, including whether he or she was an ordinary employee, whether his or her activities were integral to the business, or whether he or she was in a position of influence.

Noncompetition provisions more broadly prohibit competition with the employer’s business. Nonsolicitation provisions usually impose restrictions on solicitation of the employer’s customers or employees.

In the employment context, restrictive covenants are subject to stringent scrutiny as to reasonableness, and courts are less likely to enforce a noncompetition provision where a less intrusive nonsolicitation clause will suffice to protect the employer’s business interests.

Another element of the judicial analysis is that the (i) scope of the activities prohibited, (ii) territory covered by the covenant; and (iii) duration of the prohibition must all be seen to be reasonable. Restrictive covenants will be struck down if they are found to be unreasonable or otherwise contrary to public policy.

 

Is the restriction clearly defined?

Any restrictive covenant must also clearly define the prohibited activities, along with the territory and duration of the prohibition. Where a clause is found to be ambiguous, courts generally won’t remove or rewrite the offending language in order to give effect to the presumed intention of the parties. Rather, the entire provision will be found to be unenforceable.

The principle of severance is of limited assistance in the employment context. Courts won’t “read down” the contract to give effect to the supposed intention of the parties.  Canadian judges generally won’t rewrite a restrictive covenant or reduce the scope, subject matter, or duration of the restrictive covenant in order to make it reasonable and enforceable.

 

Takeaway for employers

One size doesn’t fit all when it comes to restrictive covenants in employment contracts.  In order to be enforceable, such covenants must be carefully crafted to the specific circumstances of the business and the employee in question.