On June 23, 2023, new prohibitions on non-solicitation agreements will come into force based on amendments to s. 45 of the Competition Act (the “Act”). Under ss. 45(1.1)(b) and 45(2) of the Act, unaffiliated employers who agree not to solicit each other’s employees may be guilty of an indictable offence and liable on conviction to imprisonment of less than 14 years, a fine in the court’s discretion, or both. We have previously written about how these amendments apply to commercial agreements generally here, and here. In this blog post, we highlight these amendments in the context of commercial IT agreements.

Uses of Non-Solicitation Clauses in Commercial IT Agreements

Non-solicitation clauses are often used in commercial IT agreements to prevent parties from soliciting each other’s employees in the course of working together.

From the perspective of a service provider, the services they provide a customer under a commercial IT agreement may give the customer an ability – that the customer would not have had but for the commercial arrangement – to assess and poach the service provider’s personnel. As such, since service providers invest time and effort in training and supporting their personnel, they may seek to use non-solicitation clauses to prevent customers from hiring key personnel responsible for providing the contracted services.

Customers may also seek to prevent service providers from hiring their personnel, as customers may have a smaller IT team than the service provider and may have invested significant time and effort in training their personnel and educating them on the customer’s particular business. Customers may also be concerned that losing key employees to service providers will increase their dependency on those service providers.

Consequently, non-solicitation clauses may be seen in various types of commercial IT agreements, including:

• IT consulting contracts;
• IT integration agreements;
• software development agreements; and
• software-as-a-service agreements.

Effect of s. 45(1.1) of the Act on Commercial IT Agreements

Notably, s. 45(1.1) of the Act only prohibits bilateral and not unilateral non-solicitation clauses. Thus, unilateral non-solicitation clauses (i.e., in favour of the customer or the service provider, but not both) can still be used in commercial IT agreements. That said, service providers and customers should be aware that “separate arrangements” resulting in parties agreeing to not solicit each other’s employees may be subject to enforcement by the Competition Bureau. Thus, two unilateral agreements may be considered as one bilateral arrangement by the Competition Bureau, in potential violation of the provision.

Bilateral non-solicitation clauses may also be used in commercial IT agreements if they meet the “ancillary restraints” defence available under s. 45(4) of the Act. This defence is available when the transaction or collaboration in question requires restraints on competition to make it efficient, or even possible – specifically, the defence is available when:

• the restraint is ancillary to, or flows from, a broader agreement that includes the same parties;
• the restraint is directly related to and reasonably necessary for achieving the objective of the broader agreement; and
• the broader agreement, when considered without the restraint, does not violate s. 45(1.1) of the Act.

In assessing whether the defence applies, the Competition Bureau may consider, among other factors:

• whether the restraint is “directly related and reasonably necessary" to give effect to the objective of the broader agreement;
• the duration of the restraint, the subject matter of the restraint and its geographic scope (e.g., whether it applies to employees unrelated to the commercial transaction in question); and
• whether, in the absence of the restraint, the agreement could only be implemented under considerably more uncertain conditions, at substantially higher cost or over a significantly longer period.

It is not yet clear whether the Competition Bureau will consider that the “ancillary restraints” defence applies in the context of commercial IT agreements and, if so, in what circumstances. Moreover, ancillary restraints only serves as a defence in criminal legal proceedings, and it does not shield parties from potentially being the subject of a Competition Bureau investigation.

Finally, another important consideration is the possibility of follow-on lawsuits. Violations of s. 45(1.1) can result in class action lawsuits, with aggrieved parties (such as IT employees who think their labour mobility was unlawfully restricted by a no-poach agreement) seeking to recover losses arising from the agreement.

If you’d like to learn more about how these changes will affect your business and your approach in negotiating commercial IT agreements, please contact our Cyber/Data or Competition/Antitrust & Foreign Investment groups.