Can you enforce a restrictive covenant against a cross-border executive?

Ellie Kang (00:00:00)

Suppose your company, headquartered in Toronto, entered into a restrictive covenant agreement with an executive who worked remotely from Montréal. The executive is now leaving the company to join a competitor in the US. Can your company enforce the restrictive covenant agreement against this executive? In this video, we'll discuss some key factors to consider in this type of situation. Irfan, what are some of the threshold questions that the company should consider?

Irfan Kara (00:00:28)

Thanks, Ellie. As an initial matter, you'll want to consider whether the restrictive covenant agreement specifies governing law and forum for dispute resolution. You're also going to look at the scope of the covenant. For example, does it geographically cover the US? Under our scenario, suppose Ontario law and Ontario courts were chosen. An Ontario court applying Ontario law may enforce reasonable non-compete, non-solicit and confidentiality provisions.

What if the governing law was Québec law? Would the Ontario court apply Québec law? Yes, it may, if the issues have a real and substantial connection to Québec. Some other practical considerations on enforcement in Ontario: if you seek injunctive relief in an Ontario court, will you face recognition or enforcement barriers abroad in the US? There are also practical limits on policing compliance with injunctive relief if you obtain it when the competitive activity or solicitation is occurring across borders. Corina, is the analysis different if the restrictive covenant agreement specified Québec law and Québec courts?

Corina Manole (00:01:27)

The criteria that are applied to determine if a restrictive covenant is reasonable are similar in Québec as in Ontario. However, in Québec, the threshold question is going to be what law governs the employment relationship? Even if there's a choice of law clause designating Ontario law as the governing law, the Civil Code of Québec states that notwithstanding such a choice, Québec employees cannot be deprived of the public order protections that apply to employees in the place where they “habitually carry on work”.

If the worker does not habitually carry on work in any one place, then the public order protections of the law of the state where the employer has their domicile or establishment will apply. So the first question becomes where does this employee habitually carry on their work? If the answer to the question is that the employee habitually works in Québec, then you need to consider the circumstances that led to the employee leaving their employment. If they were terminated without serious reason or constructively dismissed, the Civil Code of Québec states that employers cannot enforce non-compete clauses in such circumstances. Ellie, under our facts, the executive is competing in the US. Would a US court respect the contractual choice of law reform selection clauses?

Ellie Kang (00:02:38)

It depends on which state the executive has relocated to. You would then look at whether the relevant state has enacted non-compete legislation, or has a strong public policy regarding employment-based non-competes. There is a significant divergence in how states analyze this issue. For example, New York courts will generally honour the contractual choice of law and forum provisions. However, California courts will generally apply a California law, regardless of the contractual provisions. And some states like Delaware, have trended against enforcing a choice of law provision that doesn't have a material connection to the disputed issue.

Irfan Kara (00:03:17)

With an increasingly mobile workforce and varied approaches to non-compete laws in different jurisdictions, it is important for companies to be proactive when drafting restrictive covenant agreements. Although companies cannot control the outcome of restrictive covenant litigation or the evolving nature of jurisprudence in this space. Companies can increase the likelihood of the covenant’s being enforced by paying attention to the choice of law and forum selection clauses, and staying abreast of legal developments.

Finally, companies should consider strengthening other types of covenants, such as the protection of confidential information and trade secrets as a way to protect the company's legitimate business interests.

Ellie Kang (00:03:55)

Thank you for watching. Please reach out to any one of us for any questions.