For All Employers

Who Owns Client Lists - A New Twist on an Old Question?

With the proliferation of social media networking websites, the common issue arises for a company about the ownership of the client list that is now integrated into the former employee's LinkedIn, Facebook or other social media pages. The problem is that most of these connections or friends are listed on the former employee's personal pages on these websites 

Will the confidentiality agreements and non-competition agreements be sufficient to protect a company when an employee leaves? What if he uses his social media connections and friends to start his own business or to help the business of his new employer.

The courts are beginning to give us some indication of the range of possible answers. In a case out of New York, a judge held that a recruitment firm failed to take even the most basic of steps to protect its trade secrets, namely its client contact information. There were no confidentiality or non-solicitation agreements. The firm's database was wide open - no password protection or firewall or security software, unencumbered remote access for employees, no flags indicating what might be confidential or reminder that the database was a trade secret. The former employee indicated that she would have been able to get most of the information from Bloombergs or through the internet anyway. Most agreements exclude information that is available to the public, and the ability to identify key contacts through the internet only complicated the matter. The court allowed the former employee to use the client list as she saw fit in her new job with a competing firm. 

In the United Kingdom, the court took a different approach when a former employee started up a consulting business before he left employment, and then used his LinkedIn connections to get it off the ground (at the expense of his former employer's business, of course). In Pennsylvania, another U.S. court held that the company owned the LinkedIn account because its IT Department had set up the former employee's profile (and helped manage it), in order to grow the employer's business. When the employee left, the company claimed ownership rights over his LinkedIn account in order to prevent the former employee from using it to their detriment. The company was successful. 

The best advice for employers has not changed - build a solid non-solicitation or non-competition agreement, coupled with a confidentiality agreement. Regularly update your company policies so that they deal with developing issues such as company client lists accessible to former employees through social media. Be proactive, to save yourself the cost of a trip to court. 

The Disappearance of Enforceable Restrictive Covenants?

Restrictive covenants are clauses in employment agreements or in releases that attempt to limit the post-employment activities of former employees. Often, they are in the form of non-solicitation and non-competition agreements.

On May 3, 2011, the Ontario Court of Appeal, following a recent line of Canadian decisions from across the country, struck down a non-competition and non-solicitation agreement. The unenforceable provision stated:

I agree that if my employment is terminated for any reason by me or by the Company, I will not, for a period of one year following the termination, directly or indirectly, for my own account or as an employee or agent of any business entity, engage in any business or activity in competition with the Company by providing services or products to, or soliciting business from, any business entity which was a customer of the Company during the period in which I was an employee of the Company, or take any action that will cause the termination of the business relationship between the Company and any customer, or solicit for employment any person employed by the Company. [Emphasis added.]

While restrictive covenants are, on their face, contrary to public policy, many employers still work very hard with their lawyer in drafting a restrictive covenant that is reasonable, to increase the chances of a court enforcing it.

In this case, the lower Ontario Superior Court, had found the restrictive covenant to be reasonable, in both its geographic scope and its one-year time limitation. The lower court judge also recognized that the former employee (with 17 years of service) had wilfully disregarded the restrictive covenant and had actively pursued customers of his former employer and had attempted to sell them competitive products.

The Ontario Court of Appeal made several remarkable comments:

  1. there were other clauses that provided the former employer with sufficient protection, such as the clauses that protected trade secrets, trade contacts, and confidential information;
  2. the complete prohibition from dealing with customers of the former employer was overly broad and unreasonable, particularly because it included former rather than just current or recent customers (covering a 17-year period);
  3. the former employee was just one salesman in a large company's sales force, working in a limited territory, so the prohibition against competition on a world-wide basis was unreasonable;
  4. the former employer's extensive list of customers was unknown to the former employee, making the restrictive covenant clause ambiguous.

Restrictive Covenants remain one of the most difficult agreements to prepare in order to achieve a reasonable chance of acceptance by a court. The Ontario Court of Appeal decision has provided lawyers with some new ideas on how to better design and evaluate a restrictive covenant, and further limited the reliability of such post-employment agreements.

Is a Short-Term Physical Injury Protected by Human Rights Legislation?

A commission sales employee was dismissed for poor work performance on the first day of his return from a three-day absence due to a workplace injury. He claimed discrimination on the basis of disability, and later added other prohibited grounds to his complaint (i.e. race, creed).

An Ontario human rights tribunal decided that there was insufficient evidence that he was dismissed because of his injury, after the employer supported the stated reason for the dismissal (i.e. work performance) with his sales numbers. It also held that a twisted ankle requiring three days of rest did not constitute a disability under the human rights legislation.

While many employers are cautious about the human rights implications of dismissals associated with illness or injury, many employers are unaware of Section 44.2 of the Labour Standards Act that prohibits dismissal under certain conditions because of illness or injury to an employee or to a member of the employee's immediate family. Employers should be mindful when reading any decision from another province without checking out Saskatchewan legislation first.

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