25
JUL
2013

Further Thoughts on the Validity of Inserting Non-Competition Covenants in Typical Commercial Non-Disclosure Agreements

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Prompted by my own reflections the other day to think further on the relationship between non-disclosure obligations under the typical “NDA” and non-competition obligations sought to be included in the same agreement  (outside the context of sale-of-business or employment-related situations), I looked for guidance in international common law sources.  I found an important case decided by the High Court of Australia in 2001, Maggbury Pty. Ltd. v. Hafele Australia Pty. Ltd.   The Court, which is Australia’s top appellate court, affirmed the decision immediately below by a 3:2 vote holding amongst other things that the doctrine of restraint of trade applies to confidentiality agreements.  The case concerned a manufacturing design for an ironing board for which a patent had been applied, details of which had been communicated to Hafele with the hope of developing a manufacturing relationship.   The envisaged relationship did not result and Hafele, which had signed a NDA, later  produced its own similar product.  At some point during the parties’ negotiations, Maggbury had exhibited its design at a trade show.   The first court granted an injunction prohibiting defendant from using the information it obtained from Maggbury to make a similar product but the higher courts reversed.  The ground was that it would restrain trade unduly at law to enforce the covenant since the information had been made public by Maggbury (the patent application and trade show exposure).    Also, the High Court held that common law restraint of trade reasonableness rules apply to non-disclosure and non-use obligations since a confidentiality covenant can foreclose competitive activity.  Maggbury had not sought to enter evidence that the core NDA obligations were reasonable, and e.g., the covenant by Hafele not to use the process was without time limit.  (Many currently employed NDA templates read similarly).

There was a strong dissent, especially from Mr. Justice Kirby, who considered that restraint of trade reasonableness rules should not apply to contracts, freely entered into by parties of similar bargaining power, which favour enterprise and innovation.  The learned justice also adverted to Australia’s competition (anti-trust) legislation and questioned whether there was a continuing purpose to applying common law restraint of trade rules to this area.

Such high Commonwealth authority would be persuasive in Canadian courts.  I do not know at this time if the same issue has been addressed here or how Maggbury if at all has been treated by our courts (it’s something I may look into in the future).  Suffice it to say that unless there is clear Canadian authority post-Maggbury the other way (or possibly high English or American authority),  the court’s ruling is something to ponder and may hold implications for the effective drafting of NDAs.  There is no harm certainly when drafting these to try to make them as reasonable as possible from the optic of restraint of trade reasonableness rules.

Maggbury does not itself in my opinion affect the question I raised earlier, whether a non-competition obligation inserted in the typical commercial NDA is valid as such as a matter of public policy .  One might argue by implication that the decision favours the view that express non-competition obligations included in a NDA are not prohibited by public policy as such, but the court did not decide that and in my view, the two issues are not co-extensive.  Admittedly there will be overlap in some cases between the respective obligations.  Perhaps for some kinds of situations the courts will approve express non-competition language, perhaps the core obligation not to engage in the same business using the confidential information disclosed but not, I would think, where public or other information is used to carry on such business, or possibly to finance such business.  The facts likely will drive how the courts will resolve these issues and particular categories of permitted and non-permitted situations may emerge.  At this juncture and based on my current knowledge, my advice would be to avoid using non-competition phraseology unless it can be shown nothing short of doing this protected the reasonable expectations of the discloser under the NDA.

Finally, I remind that these thoughts have been prompted by the need to resolve daily practical issues on a cost-efficient but also risk-aware basis.  Intensive research in Canadian legal sources might provide more detailed guidance for some of the problems addressed in these notes.

 

About the Author
Gary Gillman holds undergraduate law degrees in Civil Law and Common Law from McGill University in Montreal, Quebec. He is a member of the Quebec Bar and has been a member of the Ontario Bar since 1983. He was trained and practiced for many years in nationally-known law firms in Montreal and Toronto, principally in numerous areas of corporate and commercial law. In 1995, he obtained a Master’s Degree (LL.M) with Distinction in European Management and Employment law from the University of Leicester in England. His training in the law of European economic and political integration allows him to help clients understand international business and legal trends, the North American Free Trade Agreement and economic globality. Gary regularly attends and speaks at professional conferences and keeps current on all the legal areas he covers. Gary has authored during his career numerous legal articles and papers for professional or trade journals. Gary co-authors the quarterly Gillman Financial Regulatory Report, a business law and financial law newsletter of our firm.