All Tied Up: Restrictive Covenants After Sale of a Business

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Restrictive covenants attempt to tie up a business person who sells a business, in order to restrict that person from competing against the business they just sold. In an earlier post (Are Non-Competition Restrictions Enforceable?), we reviewed restrictive covenants in the context of employment agreements. The Supreme Court of Canada recently weighed in on the topic of restrictive covenants in the context of a commercial transaction. While this is not specifically an intellectual property law topic, it is a very common issue faced by technology companies.

In Payette v. Guay Inc., 2013 SCC 45, the court reviewed the enforceability of non-competition and non-solicitation clauses in an asset purchase and sale agreement. While there was also a restrictive covenant in place in an employment agreement, the case really turned on the enforceability of the restrictions arising from the purchase and sale agreement. The court was clear that different rules apply to each type of agreement. The court provides the following guidance for those negotiating restrictive covenants:

  • “In the commercial context, a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable having regard to the context in which it was negotiated.”
  • “A non-competition covenant will be found to be reasonable and lawful provided that it is limited, as to its term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted.” In this case, a five year period was reasonable in light of the highly specialized nature of the business.
  • “While it is true that in the case of a non-competition covenant, the territory to which the covenant applies must be identified, a determination that a non-solicitation covenant is reasonable and lawful does not generally require a territorial limitation.” In this case, there was no territorial limitation in the case of the non-solicitation clause, but the clause was still upheld as reasonable.

This decision is good news for buyers who are acquiring a business and wish to impose enforceable non-competition and non-solicitation restrictions on the seller. The Supreme Court of Canada is clear that different rules apply in the employment context and anyone negotiating these agreements should take note.

Topics:  Restrictive Covenants, Sales, SCC

Published In: General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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