THE TERRITORIAL SCOPE OF NON-COMPETITION CLAUSES ON THE WEBMay 9th, 2017
Non-competition clauses are appealing tools that employers often use to protect themselves and preserve the company’s interests should one of their employees decide to leave. This practice is also commonplace in commerce, such as when a company delineates and restricts a shareholder’s and/or seller’s ability to compete with it.
This article will address the territorial aspect of non-competition clauses. In fact, over the years, the global market growth and prominence of sectors such as high technology, e-commerce, and the Internet, which flout borders, have led the courts to consider the territorial scope of such clauses in a different light.
Non-competition clauses in an employment context
In employment matters, in Quebec, non-competition clauses are strictly governed by Articles 2089 et seq. of the Civil Code of Québec. The legality of the non-competition clause is based on compliance with three separate yet cumulative limitations, i.e., the time, place, and type of employment involved. These should be limited to what is necessary to protect the employer’s legitimate interests. Generally, it is up to the employer to prove the validity of its non-competition clause, based on the three limitations mentioned above. In the event one of these limitations is deemed unreasonable, the non-competition clause will automatically be completely nullified.
In recent years, as a result of the emergence of high technology, e-commerce, and the Internet, we have noted that Canadian and American courts have increasingly upheld the validity of non-competition clauses with broader territorial scopes. In fact, since the borders of these new industries are almost indefinable or simply non-existent, the courts have, on numerous occasions, confirmed the validity of non-competition clauses in the context of employment agreements that provide for a broad territorial scope which may include several countries, provinces, or States. However, the individuals responsible for drafting these clauses must remain vigilant, because this more flexible approach to territorial scope taken by the courts in no way reduces the importance of properly limiting the nature of the activities that are prohibited and the duration of what is reasonable to protect the employer’s legitimate interests. We should also mention that employees who hold high-profile positions, who must frequently travel across an extended territory or who have access to highly sensitive and confidential information, are more likely to be bound by such restrictive clauses.
It is also important to mention that the employee’s acknowledgment and acceptance of a non-competition clause have no bearing on determining the reasonability and validity of such a clause.
Non-competition clauses in a commercial context
In commercial matters, the balance of power between the parties signing a non-competition clause is usually more even. In this context, the contractual circumstances surrounding a given transaction greatly influence the specific limitations stipulated in the non-competition clause being entered into. In other words, the situation between the parties and their negotiations can have a direct impact on the non-competition clause. As regards the territorial scope of the non-competition clause, the jurisprudence in commercial cases reminds us that its reasonability greatly depends on the nature and extent of the activities of the company benefiting from the clause, and that normally it must be limited to the territory where that company conducts business.
As in matters of employment, the exuberance surrounding companies that specialize in new technologies, for which the main business models are the Internet and e-commerce, gives the courts greater flexibility when it comes to analyzing the legality of the territorial aspect of non-competition clauses. Indeed, in commercial matters, a vast territory such as an entire continent could be justified where the recipient of the non-competition clause, such as a company conducting e-commerce over a web-based platform, sells products to clients across that entire continent. In today’s “electronic globalization era,” in certain exceptional circumstances, such as where a company has unique technology, expertise, or products, even a group of several continents could be conceivable in the context of a commercial non-competition clause.
It is obvious that the ease and accessibility of doing business online are currently revolutionizing the usual guidelines and criteria that apply to non-competition clauses. For any company with a business model that involves the Internet or web-based industries, we believe that the non-competition clauses stipulated in the shareholder agreements or upon the sale or purchase of a business should follow this trend.
Certainly, when it comes to determining the territorial scope of a non-competition clause, in both employment and commercial matters, the issue is magnified by the soaring growth of the Internet, e-commerce, and high-technology on a global scale. Whether it is for an employment agreement, a shareholder agreement, or a business sale or acquisition agreement, the person drafting the non-competition clause will, now more than ever, be required to refer to the current jurisprudence to be able to determine the true territorial scope involved. Remember, you only get one chance to have the courts rule that your clause reasonable!
BCF’s Internet strategic team, acting in concert with its corporate law and employment law professionals, can advise you on any questions you may have in connection with your non-competition clauses, whether current or future. . .
With the collaboration of Vincent Ebacher, articling student.