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Confidentiality,
Non-Competition, and
Non-Solicitation
Agreements:
Traps for the Entrepreneur
Jay A. Lefton
Senior Partner
[email protected]
416.216.4018
Presentation at the
Sault Ste. Marie Innovation Centre
September 15, 2009
Confidentiality,
Non-Competition
and Non-Solicitation Agreements
All of these are different forms of “restrictive
covenants”
 As such, need to ensure that they are not void
as being “unreasonable restraints of trade”
Always consider reasonableness, in the
particular circumstances, of the provisions of
such agreements
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Confidentiality,
Non-Competition
and Non-Solicitation Agreements
 Consider fundamental principles of
contract law:
 Consideration
In order for a contract to be enforceable, the
party providing the agreement must receive
some “consideration”
 Past consideration is no consideration
 No consideration makes an agreement
unenforceable
Consider the timing of when the contracts are to
be entered into
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Confidentiality and
Non-Disclosure Agreements
What is an NDA?
 Agreement between parties to keep
specified information confidential for a set
period of time
 Sometimes called “confidentiality” or
“secrecy” agreements
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Why Use an NDA?
They perform several functions:
Protects sensitive information
Defines what is considered confidential
Limits the use of confidential information
Can prevent the forfeiture of patent rights
Forms a record in case of a later dispute
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The Content of a
Typical NDA
An NDA should contain the following terms:

Definition of Confidential Information
 The existence of the agreement
 The fact that negotiations are ongoing?

Identification of the Confidential Information
 Exceptions

Requirements for safeguarding Confidential
Information
 Permitted access/distribution

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Permitted uses
The Content of a
Typical NDA (cont’d)
An NDA should contain the following terms:

Duration of the obligations

Non-solicitation of employees
 Standstill arrangements (in an M&A context)?

Terms addressing breach of the obligations
 Damages
 Equitable relief: injunction
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
No warranties relating to information
provided

Obligations upon termination
Content (cont’d)
 The content of an NDA is critical
 The scope and wording of its terms will depend
on whether you are the disclosing or receiving
party
 Content of NDAs are becoming an important
focus of negotiation
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Typical occasions to use
NDAs and/or
Non-Competition Clauses
 Employment, contracting or consulting
arrangements
 Post-employment obligations of a typical employee
may not be meaningful in the absence of a
contractual arrangement
 Can’t always rely on employee’s implied duties
 Trade secrets vs. confidential information
 In the case of an executive, it is more likely that a
court will find a heightened common law obligation
absent a contract
 Licensing, financing or merger/acquisition
negotiations (due diligence)
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Is an NDA Mandatory?
 No, a duty of confidence may arise even in
the absence of a written contract
 Some companies do not wish to receive
confidential information
 They want to avoid conflicts in areas they are
already working on
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But…
 Sharing confidential information requires a
high degree of trust
and…
 A written agreement is a serious reminder of
obligations
 An NDA can form the basis for a legal action
in the case of misuse
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Consequences of breaching
an NDA
 The remedy is generally based in contract
against the person who signed the NDA
 May include monetary damages, an
injunction preventing the use of information,
or even a “constructive trust” to reverse any
profits of the misuse
 Importantly, however, confidential
information can be traced into the hands of
knowing or innocent third party recipients
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Public Policy in Favour of
Enforcement
Two recent Ontario Superior Court
decisions suggest a heightened trend in
Ontario in the enforcement of NDAs as a
matter of public policy:
 Certicom Corp. v. Research In Motion
Ltd., [2009] O.J. No. 252 (Ont. Sup. Ct.)
 Gold Reserve Inc. v. Rusoro Mining Ltd.,
[2009] O.J. No. 533 (Ont. Sup. Ct.)
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Certicom v. RIM
 RIM tried to buy Certicom
 Friendly, unsuccessful negotiations
 Certicom disclosed confidential information (“CI”)
to RIM pursuant to 2 NDAs:
February 2007 NDA
 Limited use of CI to assessing/establishing some
form of “business combination” between the
parties
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Certicom v. RIM
(cont’d)
 Contained a standstill provision (12 month bar on
RIM making a hostile take-over)
 RIM mounted a hostile bid for Certicom and
acknowledged it had used Certicom’s Confidential
Information in its assessment of the bid
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Certicom v. RIM
(cont’d)
Certicom successfully moved for an
injunction
 RIM argued
Its use fell within the defined purpose for
which CI could be used under the 1st NDA
 Court said
Not a form of “business combination”
without Certicom’s consent
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Certicom v. RIM
(cont’d)
 RIM argued
The confidentiality provision should not be
interpreted to extend the standstill provision
 Court said
Confidentiality provision was distinct from the
standstill provision providing for separate
obligations
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Gold Reserve v. Rusoro
 Rusoro, a Russian mining company, hired
Endeavour as financial advisors in
connection with their hostile bid for Gold
Reserve
 Endeavour already acted for Gold Reserve
and still had its CI in its possession
 Gold Reserve sought an injunction to prevent
the takeover based on the misuse of its CI
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Gold Reserve v. Rusoro
(cont’d)
 Court granted the injunction, holding:
 Endeavour
Prima facie breach of negative covenant in
its advisory agreement
Reasonable to infer it would be impossible
not to rely on the CI
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Gold Reserve v. Rusoro
(cont’d)
 Rusoro
Can follow CI into the hands of a noncontracting third party
Rejected notion that principals of Rusoro
could compartmentalize CI
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Gold Reserve v. Rusoro
(cont’d)
Cummings J. wrote:
“Absent special measures such as
institutionalized ethical walls the reasonable
presumption is that confidential information will
be taken into account and used whether
intentionally or inadvertently, to the
disadvantage of the provider of the confidential
information”.
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The Similarities
In Both Cases:
 The court granted permanent injunctions
preventing hostile take-over bids from proceeding
based, in part, on findings related to the misuse of
confidential information in formulating the bids.
 The court acknowledged that, while standstill
provisions provide better protection against
unsolicited bids, confidentiality provisions can
achieve the same goal.
 The court was concerned about maintaining a
level playing field in the securities market.
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The Obligations Arising out
of the Receipt of Confidential
Information
In both the Certicom Decision and the Gold
Reserve Decision, the Court:
Rejected any notion that recipients of the
confidential information could disabuse
themselves of the knowledge gained from the
disclosures and
Looked for the use of strategies on the part of
the recipients to prevent misuse of the
information.
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Do you have Strategies in
Place?
Accordingly, in the context of a potential
acquisition, parties receiving confidential
information subject to obligations of confidence
should consider using strategies that aim to
prevent misuse of confidential information,
including:
 Institutionalized measures (confidentiality
provisions in employment contracts; company
policies about CI)
 Physical and electronic protection
 Use of clean design rooms
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Practical tips
 Make records of what was disclosed at
meetings and to whom
 Mark documents (and every page thereof) with a
Confidential legend (not required, but helpful)
 Keep good records of the negotiations
surrounding the drafting of the NDA (it may be
relevant to its interpretation if there is a dispute
down the road)
 Don’t use or accept “boiler plate” NDAs; every
NDA should be drafted to fit the circumstances
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 What to do with unsolicited information?
Non-Competition
Agreements
 Non-comps in employment and M&A contexts
are exceptions to the general rule against
covenants in respect of restraint of trade if the
terms are “reasonable”
 It is in the public interest to enforce them
 Courts give more latitude to non-comps entered
into in M&A contexts than in employment contexts
 The “consideration” which is given is greater
 Freedom of contract among people of equal
bargaining power
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 Importance of ensuring the buyer gets certainty
and something of value
Non-Competition
Agreements
 Must be reasonable in terms of:
 Nature of the Prohibited Activities
 “what can’t I do?”
 Territory
 “where can’t I do it?
 Duration of the Covenant
 “how long can’t I do it?”
 “Blue pencilling” is not generally implemented by
the Courts
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Non-Competition
Agreements
 Bias in the Courts in favour of striking down
a non-comp provision when a non-solicitation
clause would adequately protect the
employer’s interest
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Jay A. Lefton
Ogilvy Renault LLP
Suite 3800 – 200 Bay Street
Royal Bank Plaza, South Tower
Toronto, Ontario, Canada M5J 2Z4
416.216.4018 (o)
416.998.1818 (c)
[email protected]
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