As of June 23, 2023, under subsection 45(1.1) of the Competition Act (the "Act"), agreements between unaffiliated employers not to solicit or hire each other's employees may constitute an offence punishable by imprisonment for a term not exceeding 14 years, a fine in the discretion of the court, or both.
But what about IT commercial contracts?
What is the use of a non-solicitation clause in an agreement between a customer and an IT service provider?
It is common to find mutual non-solicitation clauses in agreements between an IT service provider and a customer, the purpose being to prevent either party from soliciting the other's employees during and after their business collaboration.
Non-solicitation clauses, essential to the stability of the business relationship, help preserve team integrity while reducing the risk of departures that could disrupt service continuity. In addition, the employees of an IT service provider have access to sensitive information, internal processes or specific technologies. The use of a non-solicitation clause prevents customers from recruiting the supplier's key employees with privileged knowledge of the contracted services. This would have the effect of protecting the confidentiality of certain information and know-how. Non-solicitation clauses also prevent customers from contacting employees directly to obtain contracts similar to those obtained in the past from their employer.
The Competition Bureau, the agency responsible for enforcing the Act, is aware of the importance of non-solicitation restrictions in many commercial contracts, particularly IT service contracts. This includes computer consulting contracts, computer integration contracts and software development contracts.
Does the inclusion of a mutual non-solicitation clause in an IT services contract comply with the law? And if so, under what conditions?
Yes, the inclusion of a mutual non-solicitation clause in an IT services contract complies with the Act, but only if the clause meets the criteria of the ancillary restraint defence (the "Defence") set out in subsection 45(4) of the Act. The Defence can be used when certain desirable business transactions or collaborations require restrictions on competition to be effective, or even feasible.
This defence can be invoked when it is likely that:
A) the restriction is ancillary or arises from a broader agreement between the same parties;
B) the restriction is directly related to, and reasonably necessary for giving effect to, the objective of that broader agreement;
C) the broader agreement, considered alone of the restriction, does not contravene subsection 45(1.1).
Thus, to be eligible for the Defence, the mutual non-solicitation clause must be ancillary to a broader agreement between the parties. To determine whether the Defence is applicable, the Competition Bureau will evaluate the following elements:
- whether the mutual non-solicitation clause is "directly related and reasonably necessary" to give effect to the objective of the broader agreement. Indeed, if it had been possible for the parties to reach an equivalent or comparable agreement by using significantly less restrictive practical means, which were reasonably available to them at the time the agreement was concluded, the Competition Bureau will consider that the restriction was not reasonably necessary;
- the duration of the mutual non-solicitation clause, its purpose and its geographical scope (for example, whether or not it applies to employees who have no connection with the business collaboration in question), in order to determine whether it is reasonably necessary to give effect to the objective of the broader agreement;
- if, in the absence of the mutual non-solicitation clause, the agreement could only be implemented under significantly more uncertain conditions, at a significantly higher cost, or over a significantly longer period.
To conclude, the mutual non-solicitation clause may be added to an IT services contract if it is ancillary to the main agreement and reasonably necessary for its performance. However, the parties to the contract must ensure that such clauses are not too broad in duration, scope or object, or risk being investigated by the Competition Bureau. Thus, to avoid the imposition of the penalties cited in the introduction, it would be prudent to limit the duration and employees covered by the mutual non-solicitation clause.
It should be noted that subsection 45(1.1) applies only to mutual non-solicitation clauses and not to unilateral non-solicitation clauses. Unilateral non-solicitation clauses, i.e. those in favour of the customer only or the service provider only, and not both simultaneously, are not subject to the restrictions of subsection 45(1.1). They remain, however, subject to the general principles governing such clauses. It should be noted that it would not be possible to overcome the limitations of subsection 45(1.1) by having two separate agreements, each containing a unilateral non-solicitation clause in favor of each of the parties, since this is likely to be considered a bilateral arrangement by the Competition Bureau.
How can Cain Lamarre help you?
Every case is different, and the drafting, analysis or negotiation of a mutual non-solicitation clause requires a precise and compliant assessment of the provisions of the Act. Cain Lamarre's team of professionals is ready to help IT service providers and clients draft and negotiate their non-solicitation clauses. If you have any questions regarding the above, please contact our business law team.
