Non-compete suits hard to win: lawyers

Non-compete clauses are difficult to uphold, said Rick Powers, business law professor at the University of Toronto and former in-house counsel to Honda of Canada…"If an employer is too greedy, they'll lose it and the courts will strike it down," said Knight.

The Toronto Star
October 22, 2005

Non-compete suits hard to win: lawyers
Not likely to be upheld by courts. Clauses ‘contrary to public policy’.
Sharda Prashad

Taking over the top job at Nortel Network's Corp. on Monday, Mike Zafirovski spoke of not being able to "wait to get my fingernails dirty" as Nortel's new chief. Two days later his former employer slapped him with a lawsuit, hoping to block Zafirovski from working at Nortel for two years.

Motorola isn't concerned about whether Zafirovski has made the right career choice. Instead it is seeking an injunction to ensure Zafirovski doesn't pass on Motorola secrets to its competitor Nortel.

The lawsuit against Zafirovski might amount to nothing more than a nuisance or a distracter to Zafirovski and Nortel. Non-compete clauses are difficult to uphold, said Rick Powers, business law professor at the University of Toronto and former in-house counsel to Honda of Canada.

The former Motorola chief operating officer accepted the top job at Nortel on Monday, with a multimillion-dollar pay packet that included base salary of $1.2 million, annual bonuses worth up to $3.6 million, plus multimillion-dollar long-term bonuses and stock options.

On Wednesday, Motorola responded with a lawsuit attempting to block Zafirovski's employment for two years.

Yesterday a Nortel spokesperson said, "The parties are in discussion to attempt to resolve this matter."

Because non-compete and non-solicitation clauses are increasingly present in executive employment contracts, Powers said, Nortel and Zafirovski would have recognized a suit against him was a possibility and factored in that risk when Zafirovski was hired.

Zafirovski, who is 51 and left Motorola in January, would have received indemnity against such a suit by Nortel and agreed to a severance in the event of a successful suit by Motorola, Powers said.

Indeed, his compensation agreement did include details about termination pay that included $1.2 million base pay for two years.

However, the likelihood Motorola would have succeeded in blocking the move is slim.

"Courts in Ontario are often unwilling to honour or enforce non-compete because they believe they're contrary to public policy," said Jamie Knight, partner at Filion Wakely Thorup Angeletti LLP. "People should be free to leave their employer without being restrained by non-compete agreements."

Analysts this week agreed that it was unlikely the injunction against Zafirovski would be successful.

Such was the case two years ago, when Bell South chief operating officer Gary Forsee announced he was leaving Bell for competitor Sprint. Two days later Bell filed an order to block the move. Forty-eight days after Sprint attempted to lure Forsee away, an independent arbitrator ruled that Forsee could take the job, with restrictions, such as not being allowed to hire Bell or Cingular employees for one year.

Courts are more likely to uphold non-solicitation clauses that expressly state departing employees can't recruit former colleagues or clients to their new workplace than a broad non-compete clause. Because of their enforceability, non-solicitation clauses are becoming more common than non-compete, employment lawyer Barry Kuretzky said.

In either case, the more specific the terms, the more likely they are to be upheld by courts and former employees.

Although Jorg Reichert, Richtree Market's Inc. founder, has a non-compete clause with his former employer, he operates a restaurant similar to the company's Mövenpick Marche franchise. The agreement is being upheld, because Reichert was limited only to not compete in areas near current Richtree restaurants for 18 months, beginning Oct. 28, 2003.

"If an employer is too greedy, they'll lose it and the courts will strike it down," said Knight.

For example, a smaller geographical restriction and a short period for the clause to remain in effect make it more likely to be upheld.

Kuretzky said court cases involving non-compete and non-solicitation clauses are before the courts every week.

Unlike an injunction decision that can be reached in a matter of weeks or months, court cases can drag on for years. The employer would have to prove that the company lost money as a direct result of the employee leaving and present evidence of that.

Because of the sophisticated calculations needed, it could take two to three years for the courts to reach a decision, but most are resolved out of court, Kuretzky said.

In the high-profile case of former Microsoft Corp. executive Kai-Fu Lee leaving to run Google's Chinese operations, Microsoft sued both Lee and Google for violating the non-compete clause. The case was in court last week, and Lee received a temporary restraining order limiting work he could do for Google. The case is expected to go to trial in January, but the parties are already discussing a settlement.

Employers should ensure employment contracts complete with non-solicitation and non-compete terms are signed when a new employee starts a job, said Knight. Because contracts require consideration — money, stock options — to make the contract binding, an employee who is asked to sign a new contract after they are employed must receive something if the contract is to be upheld.

"If an employee signs without getting anything, the courts would say it's worthless."

For instance, a promotion would be an appropriate time because the employee would receive a raise at that time, and the monetary consideration would result in a binding contract.

And whether in a written contract or not, all employees have to maintain confidentiality of knowledge gained from employment after they've left a job, added Kuretzky.

Brought to you by

Risks: Non-compete restrictions defeated, Canada, 20051022 Non-compete suits

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License