A former employee leaves your company, sets up shop across the street and starts calling your staff and customers enticing them to the new enterprise.
Fortunately, you had a non-competition agreement in place, and your lawyers have provisions in the contract to limit the former employee's actions.
The former employee moves the business to a location where it won't negatively impact your business. You have been protected by your prudent steps to protect your hard-earned success.
Now imagine you are running an e-commerce business and the product is information, a concept or an idea that lives and breathes in the virtual world of the Internet. Suddenly, the need for a non-competition agreement becomes even more important, because no matter where your former employee goes, he or she could be taking your trade secrets and putting them to work as your competition.
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The notoriety surrounding the on-going legal saga surrounding Conrad Black and his Hollinger empire has put the spotlight on non-competition agreements and their role in businesses large and small. In the Black case, his legal battle centres on a dispute with shareholders around how $32-million in non-competition payments were diverted from Hollinger International.
The issue has the potential to make small business owners become jaded over the relative worth of non-competition provisions. That would be unfortunate, said Toronto lawyer Javad Heydary.
"People read about [Black and Hollinger's case] and they don't take them seriously," he said. "In the sense that to some people it's just a boilerplate provision in contracts, and 'oh yes, at times there people who will misuse it for other means.' "
"It doesn't do any good. The fact is, that this is something that businesses should take seriously," said Mr. Heydary.
Mr. Heydary is the managing partner of Heydary & Hamilton LLP, a Toronto business law firm. He specializes in e-commerce, privacy, general commercial law.
Non-competition agreements have become an extremely important part of the information technology fields. More and more start-up ventures include these provisions.
"It's big part, especially when it comes to players in the IT industry, where there are programmers, or different companies starting joint ventures with each other. It comes up in all sorts of places, and because lots of businesses are driven by information," explained Mr. Heydary.
"Whether it be another company or a prospective contractor or employee, when you have to disclose information, you always have to be concerned that it will be used against you if that person or that company comes to compete against you."
Last month, Internet giants Microsoft and Google squared off over just that situation. Google hired a man named Kai-Fu Lee from Microsoft to head its search operations in China. Microsoft sued Mr. Lee and Google, claiming he played a key role in its operations in China and led development of some of its search technologies.
A judge ruled that Mr. Lee can not perform work at Google that competes with what he did at Microsoft until at least September.
According to Mr. Heydary, the small business marketplace doesn't pay as much attention to non-compete provisions as they should.
"A lot of times, they are entering into contracts, where non-competition provisions are there, and they just sign off, like they do with a lot of other agreements without thinking it through," he said.
In old-fashioned industries, you could get away with this. "But if information technology is a big part of what you do, I think it is just reckless," Mr. Heydary said.
"It wasn't as much an issue in the old days, because of the role that information played in a business wasn't as high as it is now. A lot of businesses are getting into intellectual property, trade secrets, the confidential information is a significant part of their assets."
The need for non-competition agreements in traditional businesses usually dealt with client and supplier lists. Most agreements seek to prevent a former employee from contacting other employees, clients and suppliers with the purpose of setting up a rival business.
"It has changed dramatically in the sense that there is a lot more competition. Information plays a major role in how your compete. So when you combine those two factors, the fact that there is a lot more competition and information is a crucial part of that, if you going to win, protecting [your information] is crucial," he said.
In many cases, it would be better to include a non-solicitation agreement with the non-competition agreement. Mr. Heydary says that non-solicitation often yields the same results.
"[With a non-solicitation agreement] you are saying, once you leave, or terminate your relationship with us, you will not go and contact our employees with a view of recruiting them for your new firm, or our suppliers and our customers. Courts are much more likely to uphold non-solicitation provisions, then a non-compete provision. And that is the best kept secret when it comes to protecting your business in that area."
But how do you structure a non-competition agreement? According to Mr. Heydary, they are not created equal.
"You can't over reach," he explains. "It can't be too long or too broad. One of the most common mistakes is lawyers take the easy way out and make them very broad, and the time period too long.
"Courts won't rewrite your contract for you. They are not going to say, '10 years is too long, why don't we go with five?' They just strike it out. That's the danger. Why didn't you start with something reasonable?"
Mr Heydary advises his clients to keep the non-competition agreement short and spell out geographical limitations.
"Be very reasonable so if you have to appear in front of a judge and try to explain this away, you can. You don't want a non-compete provision to be used in anti-competitive behaviour. You want to encourage healthy competition, fair competition. Once you crossed that line, you are using it as a tool to ward off your competitors, then courts have a problem with that.
"Courts don't mind new businesses coming and competing with existing ones, that is what our society is all about. The point is, are they doing it in a fair manner. If I come and take your secrets away and start a competing business with you that isn't very fair. If I come and start a competing business without using your trade secrets in information, there is nothing wrong with that. That is what we want to see actually."
