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Non-competition clauses – Language should be clear and unambiguous

Non-competition clausesThe recent Ontario Superior Court decision in Ceridian Dayforce Corporation v. Daniel Wright 2017 ONSC 6763 is a reminder to employers that non-competition clauses should be no broader than is necessary to protect their legitimate interest. Otherwise, courts will not “fix” it, and it will be worthless.

Background

The Plaintiff, Ceridian Dayforce Inc. (“Ceridian”) is a provider of a cloud-based software as a service application that provides a human capital management solution to companies. The Defendant, Daniel Wright (“Wright”), was a member of the Ceridian software development team. He designed, programmed and tested parts of the computer software at the heart of Ceridian’s human capital management business.

Wright was originally hired by Dayforce HCM in August 2011. His employment agreement with them contained a non-competition clause. The key provisions of the clause were summarised by the Court as follows:

“(1) The non-competition period, defined as the “Restricted Period” means the period up to 12 months from the date the employee cease to be employed by the Company as determined by the Company in its sole unfettered discretion, provided that the Company informs the Employee of the length of the period within 5 business days of the Employee ceasing to be employed by the Company.
(2) The Employee shall not, “directly or indirectly provide services, in any capacity, whether as an employee, consultant, independent contractor, owner, or otherwise, to any person or entity that provides products or services or is otherwise engaged in any business competitive with the business carried on by the Company or any of its subsidiaries or affiliates at the time of his termination (a “Competitive Business”) within North America”;
(3) The Employee shall not “be concerned with or interested in or lend money to, guarantee the debts or obligations of or permit his name to be used by any person or persons, firm, association, syndicate, company or corporation engaged in or concerned with or interested in any Competitive Business within North America,”
(4) Nothing restricts the Employee from holding less than 1% of the issued and outstanding shares of any publicly traded corporation.
(5) During the Restricted Period, the Company is to pay the Employee his or her base salary, less applicable deductions.”

In April 2012, Dayforce was acquired by Ceridian HCM Holding Inc. and its name was subsequently changed to Ceridian Dayforce Inc. Wright’s employment continued on the same terms and conditions.

In August 2016, Wright ended his employment with Ceridian and accepted new employment with one of Ceridian’s competitors, Ultimate Software Group, Inc. (“Ultimate”). At the time of his resignation, Wright was one member of a team of two software developers working on a major update to the Real Time Engine for the Ceridian software.

As a result, Ceridian brought a motion for Summary Judgment seeking a declaration that the non-competition clause in the employment agreement with Wright was binding and enforceable. Ceridian argued that the means by which the real time calculations are accomplished is a Ceridian trade secret known by Wright and a technological innovation not yet implemented by Ultimate.

As a general rule, non-competition clauses in employment agreements are unenforceable and will only be considered in exceptional cases, where a non-solicitation or non-disclosure provision will be insufficient to protect an employer’s proprietary interest.

Ceridian argued that because of the specialized knowledge held by Wright, a lesser restriction would be insufficient to protect their proprietary interest.

Judgment

The Court held that, although this was a unique situation, the non-competition clause was “overly broad and unreasonable” as it prevented Wright from working in any capacity for any business competitive with Ceridian or any of its subsidiaries or affiliates. The Court felt that the restrictive covenant was a “blanket prohibition which unreasonably restricts Mr. Wright’s economic interests and goes beyond that reasonably necessary” to protect Ceridian’s proprietary interest.

The Court said that Ceridian was unreasonable in seeking to prevent Wright from working in areas completely unrelated to the work he did with them. The Judge noted that the clause, if upheld, would prevent Wright from even working as a janitor for a rival company. On this basis alone, the Court felt that the non-competition clause must be “declared to be unenforceable.”

The Court held that the definition of competitive business was ambiguous, since it would have been impossible at the time of hiring for Wright to know the number and kinds of other businesses the employer might have or acquire during the period of his employment.

The twelve month temporal scope was also held to be unreasonable as the evidence did not establish the duration of the software development lifecycle or tie it to the duration of Ceridian’s proprietary interest. It was also held to be ambiguous, since it did not set a time period for the restriction until after Wright ceased to be employed.

Consequently, the Court found that the non-competition clause was unreasonable and unenforceable.

Takeaways

As this case makes clear, employers should avoid using language that may introduce ambiguity and is broader than necessary to protect the employer’s legitimate interest. Courts will not fix a clause that they find to be ambiguous or overreaching – they will simply strike them out. The language must be precise and clearly identify what the employee may or may not do, and those limits must be justifiable. Otherwise, the employer runs the risk of having no protection at all.

Authored by Anique Dublin (Law Clerk) and Stuart Runder

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Stuart Rudner, Rudner Law

Employment Lawyer and Mediator at Rudner Law
Stuart Rudner is a leading HR Lawyer, mediator and a founding partner of Rudner Law, a firm specializing in Canadian Employment Law. At Rudner Law, their approach is simple. They want to understand your circumstances, your concerns, and your goals. They will then ensure that you understand the legal regime along with your rights and obligations. Once that is done, they work with you to design a cost-effective strategy that meets your needs. They want to be your trusted advisor.Read more
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