Non-Competition Clauses: Enforceable or Just for Show?
When can a non-competition clause actually stop someone from working? Or are these clauses just for show?
Let's take a look at a couple of cases involving departing employees who find themselves in hot water with a former employer.
A US Federal Court judge recently reviewed an allegation by Google’s self-driving technology subsidiary, Waymo LLC, that one of its former star engineers was guilty of copying confidential intellectual property of Waymo and bringing the files to his new job with Uber. Uber, a major rival of Waymo, hired Mr. Levandowski, a former engineer with Google’s Waymo, who has been described as a "guru of autonomous vehicle technology." Learning that one of its lead engineers had been hired by a competitor, Waymo sued Uber seeking a temporary injunction that could have put the brakes on Uber’s autonomous vehicle program.
A Federal Court decided that Waymo showed "compelling evidence that its former star engineer, Anthony Levandowski, downloaded over 14,000 confidential files from Waymo immediately before leaving his employment there.” This implicated Uber as the new employer since "Uber likely knew or at least should have known that Levandowski had taken and retained possession of Waymo’s confidential files.”
Then, last month, Uber announced that it had terminated Mr. Levandowski's employment. Rather than battle to defend their star recruit, Uber apparently decided that it was better to mitigate risks in its lawsuit with Waymo.
This is the highest profile trade secrets employment case of the year in one of the most competitive industries in the world for the next decade. What about "average" non-competition restrictions for an employee who is hired by a competitor?
The (let's admit it, slightly less glamorous) case of 2158124 Ontario Inc. v Pitton, 2017 ONSC 411 (CanLII), dealt with an insurance broker who was hired by a competitor insurance brokerage in southern Ontario. In this case, Pitton, a successful broker who worked for StoneRidge for about 5 years, made an abrupt move to a competitor. Words were exchanged, and then a lawsuit was filed by StoneRidge, the first employer, claiming breach of the restrictive covenants in the employment agreement. Like Waymo, StoneRidge sought an injunction to prevent the alleged breach.
The Canadian court summarized the law as follows: "A restrictive covenant in an employment contract akin to a restraint of trade is voidable and will not be enforced unless justified as reasonable between the parties or in the public interest." It's up to the employer who is trying to enforce the restriction to show why it is "reasonably required to protect its valid proprietary interests." The court was clear that non-solicitation clauses are more likely to be enforced, whereas non-competition clauses are more likely to be struck down:
"…A restrictive covenant may restrain either competition or solicitation. A noncompetition clause restrains the departing employee from conducting business with former clients and customers whereas a non-solicitation clause merely prohibits the departing employee from soliciting their business."
Courts have been reluctant to uphold non-competition clauses in situations where a non-solicitation clause would do the trick. Even a non-solicitation clause must be clear enough that the ex-employee knows which customers are off limits.
In short, non-competition clauses are tricky, but not impossible to enforce, and non-solicitation clauses are more likely to withstand judicial scrutiny and be enforced against departing employees.