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How To Protect Your IP Without Non-Compete Clauses In Ontario
If your employees are creating intellectual property for your business or are using confidential intellectual property in your business created by you (i.e., trade secrets), your ability to restrict them from working with your competitor after leaving your business may have played an integral role in protecting your intellectual property or confidential information. However, changes to the Employment Standards Act will impact how you manage the employment relationship with your employees to ensure the time and resources you have invested into establishing an advantage over your competitors remain protected.
How Does the Prohibition on Non-Compete Agreements Affect My Business?
A non-compete agreement is defined as:
An agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends.
In addition to provisions regarding ownership of intellectual property rights in the employment contract, non-compete agreements clarified the rights of employees at the outset of the relationship. Including a provision on non-compete in employment agreements mitigated the risk of a terminated employee revealing confidential information to your competitors.
As you evaluate how you carry out your business moving forward, it is important to take note of the following:
- Time limit – An agreement, or a part of an agreement, will be considered a non-compete agreement regardless of if you specify the amount of time the employee must refrain from working with your competitor. In other words, if you specify that the employee must wait six months after the employment relationship ends from engaging in work that is in competition with your business or if you do not provide an amount of time that the employee must wait after the employment relationship ends from engaging in work that is in competition with your business, it is still likely be a considered a non-compete agreement.
- Geography – An agreement, or part of an agreement, will be considered a non-compete agreement regardless of whether you place geographic restrictions. In other words, if you specify that the employee cannot engage in work within 100 km of your business after the employment relationship ends or if you do not place geographic restrictions, it is still likely to be considered a non-compete agreement.
- Restrictions may not be placed at any time during the employment relationship – Entering into non-compete agreements is prohibited at any time during the employment relationship. That is, before the relationship begins, during the course of the employment relationship, and after the employment relationship ends.
- Not retroactive – The prohibition does not apply to non-compete agreements entered into before October 25, 2021. If, for example, you entered into an employment relationship with a non-compete provision on July 1, 2021, your agreement is not automatically void. That being said, however, in the years leading up to the introduction of Bill 27, the Ontario Courts were generally reluctant to enforce restrictive covenants (that is, clauses in employment contracts that restrict or prohibit an employee from doing certain things). Clauses were found to be valid and enforceable only in “exceptional” circumstances, which could include, for example, where it is reasonable to prohibit a former employee “from establishing his own business or working for others so as to be likely to appropriate the employer’s trade connection through his acquaintance with the employer’s customers.”
- Exceptions – There are two notable exceptions to this rule. The first is if an employee is an executive of your business (i.e., the chief executive officer, president, chief financial officer, chief legal officer, and so forth). The second is where your business makes an acquisition and the following conditions are met: (1) you acquire a business or a part of a business that is being operated as a sole proprietorship or a partnership; (2) immediately following the sale, the seller becomes your employee, and (3) as a part of the sale, you and the seller enter into an agreement that prohibits the seller from engaging in any business, work, project or other activity that is in competition with your business after the sale.
Protecting Your Intellectual Property Without Non-Compete Clauses
Despite the prohibition on non-compete clauses, you can still include provisions in the employment contract that will aid you in protecting your intellectual property and trade secrets.
A non-disclosure provision
A non-disclosure provision for any employee that deals with confidential material or trade secrets in their work mandates that the information in question not be shared with anyone outside of the company, including but not limited to future employers. When in doubt, it is better to be specific and outline different situations that may occur. For example, you may want to specify that any confidential information the employee has access to should be used only for its authorized employment purposes. In defining your employee’s obligations, you should be sure to incorporate any confidentiality measures set out in your other workplace policies.
Care should be taken to ensure that a non-disclosure provision for any employee states that the employee’s confidentiality obligations survive after the employment relationship regardless of the reason for the termination (i.e., the employee elects to leave their employer or the employer terminates the employee’s contract). Examples of incorporating an employee’s obligation upon the end of the employment relationship can include requiring the employee to return or destroy copies of confidential information in their personal possession.
A non-solicit provision
A non-solicit provision mandates that the employee will not solicit or actively pursue the company’s stakeholders, including but not limited to clients, vendors, or other employees, during the course of the employment relationship or after the employment relationship has ended. If, for example, your business is a restaurant whose success is partly attributed to a secret sauce sourced from a particular vendor, use of a non-solicit provision can be helpful in ensuring that your former employee, who in the course of the employment relationship learned how to make the secret sauce, does not seek out that vendor to obtain that secret sauce.
When including non-solicit and non-disclosure provisions in the employment contract, you should consult a lawyer experienced in drafting these provisions. Restricting employee’s actions can be tempting to ensure your intellectual property and trade secrets are protected but drafting terms that go beyond what is reasonably necessary to protect your legitimate business interests will, if challenged, be found to be unenforceable.
A lawyer can guide you in finding a balance between contractually restricting the “indirect” use of the company’s confidential information and intellectual property without it being a full-blown non-compete provision.
Provisions regarding ownership of intellectual property rights
Inclusion of terms that provide for the assignment of all employee-created intellectual property rights to the employer throughout the term of employment is integral to ensuring you retain all rights to intellectual property. This can include, for example, terms that specify what happens when your employee creates intellectual property outside of work hours but uses your business’ resources.
To learn more about how to ensure your company’s intellectual property and confidential information are protected in an employment contract, contact us now for a complimentary and confidential initial telephone appointment with a member of our team.
