Jay A. Lefton Senior Partner Confidentiality, Non-Competition, and Non-Solicitation Agreements: Traps for the Entrepreneur Presentation at the Sault Ste. Marie Innovation Centre September 15, 2009

2 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

3 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

4 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

5 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

6 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  Permitted uses

7 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  No warranties relating to information provided  Obligations upon termination

8 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

9 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)

10 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

11 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

12 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

13 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.)

14 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

15 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

16 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 1 st NDA  Court said Not a form of “business combination” without Certicom’s consent

17 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

18 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

19 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

20 Gold Reserve v. Rusoro (cont’d)  Rusoro  Can follow CI into the hands of a non- contracting third party  Rejected notion that principals of Rusoro could compartmentalize CI

21 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”.

22 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.

23 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.

24 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

25 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  What to do with unsolicited information?

26 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  Importance of ensuring the buyer gets certainty and something of value

27 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

28 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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