What is a non-competition clause?
Non-compete clauses are a form of [restrictive covenant].
Non-competition clauses provide a means to prevent direct competition from former employees and consultants, for the purpose of protecting the [legitimate interests] of the business.
Differences with other Restrictive Covenants
Non-solicitation clauses, non-dealing clauses and non-poaching clauses each protect a business from competition in their own particular way. Each focuses on a particular type of conduct and prohibit specific type of acts they are focused on. The methods to do so are refined and apply narrowly to acts which lead to what is seen to be unfair competition.
Competition clauses are wider in application.
It’s one thing to say that an employee or consultant won’t attempt to entice away another employee or consultant from a business protected by a restrictive covenant.
It’s quite another to say they the employee or consultant will not compete with the business after they leave employment or end the contract.
Background to Enforceability of Non-Compete Clauses
There are two main factors that prevent no competition clauses from being enforceable.
1. Public Policy: against Non-Competition Clauses
The public policy basis behind restrictive covenants. As a matter of public policy, courts favour competition amongst businesses: they’re pro-competition.
That public policy favours “the greater good” to foster competition amongst all businesses. It a recognition that free movement of employees and consultants between businesses that allows that to happen.
Non-compete clauses clash with that public policy objective, head-on.
There’s a collision between public policy and private contractual interests.
On the other hand, non-solicitation clauses and non-dealing clauses are seen to be:
- a reasonable and adequate step protect the legitimate interests of the business, and
- a more moderate way to address the competing interests between the public and private businesses.
That's because non-solicitation clauses and non-dealing clauses focus on the employee's or contractor's personal contacts and their influence with trade connections.
2. Limits to Protection of Confidential Information
The limits to protection of confidential information law. Not all confidential information is able to be protected by restrictive covenants
For the purposes of restrictive covenants, there are 3 types of information. Two can be protected, and the other can’t.
- Trade secrets and highly confidential information similar to a trade secret.
- Information which is confidential, but which does not fall into the class above, because it forms part of the professional expertise of the Leaver gained as part of an employment relationship.
That is, confidential information which forms part of the employee's:- stock of skill, knowledge and experience, or
- dexterity, manual or mental ability
The skills and knowledge of the employee are seen to be the employee’s. Not the employer’s. Where there’s an overlap, the employer usually loses.
- Information which is not confidential at all.
Where there are no restrictive covenants which apply post-employment, only trade secrets are protected.
Courts recognise that preventing disclosure of trade secrets can be “practically worthless” unless it is backed by accompanied by a restriction upon the employee possessed of secrets against entering into competition with the Protected Business.
With enforceable restrictive covenants, the Leaver can be prevented from using information in the information which is described above in the second category above as well.
Enter Non-Competition Clauses
Competition clauses are more likely to be justified to protect a legitimate interest and reasonable when:
- There is doubt whether the information to be protected qualifies as a trade secret or highly confidential or not
- Genuine disputes exist as to what information is confidential
- in the circumstances of the case, confidentiality clauses and prohibitions on solicitation or dealing are inadequate or will be difficult to prove or police
That is, non-solicitation, non-dealing clauses and measures to protect confidential information will not achieve the ends for each they are designed.
- Confidential information is easily transportable or memorable and not easily shown to have been taken, such as:
- searches for businesses in the industry to refresh memory,
- relevant information is a customer list or price list
When those situations arise, it is increasingly difficult to show that there has – or will – be a breach of the other flavours of restrictive covenant. Usually, it’s not impossible to show. Just very difficult.
That’s when non-competition clauses are more likely to be justified.
To rely on a non-competition covenant the employer must show which part of the business is entitled to protection, and set out in the no compete clause:
- the areas in which the employee can work
- competitive activity permitted after the end of the contract
- the time and geographical constraints of the restrictions
And after that, non-compete covenants are analysed for their broad anti-competitive effect, such as whether:
- a less restrictive form of restriction (for example, a non-solicitation clause) might not have given the employer sufficient protection
- another non-compete clause have been a more proportionate form restriction (for instance, a smaller geographical restraint)
- the extent to which the restraint agreed would diminish the Leaver’s prospects of employment
By working through this process, the court is finding a balance between: (see Office Angels at para 58)
- the extent of protection required to protect the legitimate interests of the business, and
- the extent that the employee’s knowledge and skill restricted, which deprives the greater public of legitimate competition
Example non-competition clause:
You agree not to directly or indirectly compete with the business of the Protected Business during the period of employment and for the leaving period and notwithstanding the cause or reason for termination.
The term "not compete" shall mean that you shall not own, manage, operate, consult or be employed in a business substantially similar to or competitive with, the present business of the Protected Business.
Related: Restrictive Covenants