Non-Compete Agreements: Handle with Care
Davis LLP Employment & Labour Bulletin
Monday, 23 July 2012
Co-authored with Melissa Gaul, Summer Student
A recent case from the Québec Court of Appeal dealing with non-compete agreements has significant implications for employers, particularly in industries where these types of agreements are the norm as a means of protecting the company’s intellectual capital.
In Jean v. Omegachem, an employee challenged his dismissal from a pharmaceutical company. He had been dismissed based on his refusal to sign a non-compete agreement that had been discussed in his initial offer letter, but which was not presented to him until three years into the employment relationship.
In June 2002, Patrick Jean, a chemist, was offered a position with Omegachem. The offer was made via an e-mail, which requested that Jean sign a confidentiality agreement as well as a non-compete agreement. Jean agreed to the offer and went on to sign the confidentiality agreement shortly after accepting. The non-compete agreement, however, was presented to Jean for signature only three years later.
Omegachem asked that Jean sign a non-competition agreement with a duration of 24 months that would cover the geographical regions of Canada, the United States, and Europe. The non-competition agreement would also apply to certain set types of products and pharmaceutical companies.
Jean consulted with a lawyer and refused to sign the agreement. He demanded that the employer negotiate with him in order to determine an indemnity that would amount to a salary equivalent to the 24 months that the non-compete agreement would apply.
The employer then presented Jean with a modified agreement one and a half years later. This non-compete agreement was shorter in duration than the original (12 months instead of 24), but the scope had been extended to a global scale (from set geographical regions to “everywhere in the world”). Jean refused to sign unless Omegachem agreed to compensate him for the 12-month application of the non-compete agreement. Negotiations between the parties became strained and Omegachem dismissed Jean in April 2007, citing his refusal to sign the non-compete agreement as just and sufficient cause.
The Commission des relations du travail (CRT) rejected Jean’s claim of unjust dismissal. The Commission held that the employee had violated an essential condition of his employment contract and, therefore, that the employer had just and sufficient cause to dismiss him. This decision was confirmed upon judicial review by the CRT. The Superior Court then rejected the motion for judicial review of the decisions of the CRT.
Court of Appeal Decision
The Québec Court of Appeal unanimously ruled that Jean’s refusal to sign the non-compete agreement proposed by Omegachem did not constitute just and sufficient cause for his dismissal.
The Court held that Jean should have been asked to sign the non-compete agreement at the beginning of his employment contract. In order for an agreement of this type to be valid, the Court maintained, it cannot merely be referred to in the abstract as part of the initial offer letter. The agreement must be express and written. The judgment is firm in stating that a clause in the abstract cannot be regarded as a legally valid contractual obligation since a party cannot legally agree to an obligation without knowing the content of the obligation itself.
Moreover, according to the Court, the final non-compete agreement that was presented to Jean was overly broad in terms of its geographical application. In Québec, the Civil Code stipulates that these types of agreements must be limited in terms of the duration, geographical location(s), and type(s) of work that they prohibit. The Court held that the clause was unreasonable with regard to geographical application given that it purported to apply "everywhere in the world."
On the subject of dismissal, the Court emphasized that dismissing an employee is a serious act with dramatic consequences. Although it is possible for an employer to put an end to an employment contract without notice, this must be done for a serious reason – a just and sufficient cause. In the circumstances of this case, the Court held that dismissing Jean without notice because he refused to sign a non-compete agreement that was presented to him for the first time three years following his initial employment offer was "clearly not a just and sufficient cause."
The Court of Appeal remitted the case to the Commission des relations du travail so that the Commission could determine the appropriate remedy.
In light of the Omegachem decision, employers should ensure that employees sign non-compete agreements at the beginning of the employment relationship. Based on the outcome of this case, it may be difficult for employers to add non-compete agreements to existing employment contracts without providing some form of compensation to the employee.
Employers should also be cautious about the manner in which their initial offer is presented. If the offer is presented via e-mail, employers should be aware that elements of the contract that are vaguely defined at this point may not be upheld in court in the event that a dispute arises. The elements of the employment contract should be set out clearly upon hiring an employee. Careful planning is needed to ensure that the employee’s obligations, both during and after the termination of the employment relationship, are clearly established.
Employers should carefully weigh the scope of non-competition agreements or clauses issued to new employees and ensure that they are carefully drafted. In Québec, in order for a non-compete agreement to be enforceable, it must be limited in terms of time, place, and type of employment to only that which is necessary for the protection of the legitimate interests of the employer. These limits must be set out in writing and in express terms. The burden of proof that such an agreement is valid will be on the employer. It is always preferable to have an enforceable clause with a more limited scope of application in place of a broad clause that may not hold up under judicial scrutiny. This will go a long way towards protecting the interests of your business.
Employers who would like more specific information about the use of non-compete clauses in the context of their business operations should consult with us.