Ex-Canadian National CEO Hunter Harrison - Date unknown Christinne Muschi.

17 January 2012

The Problem with Non-Compete Clauses

Wellington Florida USA - Hunter Harrison, the retired chief executive officer of Canadian National Railway Co., has been paying close attention to the fine print of his CN contract lately. So has his former employer.
 
It all has to do with his desire to go back to work, for CN's rival, Canadian Pacific Railway Ltd. U.S. activist shareholder Bill Ackman has been badgering the resistant CP board with demands that it crown Mr. Harrison its new CEO.
 
In an November e-mail exchange with CP chairman John Cleghorn, Mr. Ackman said Mr. Harrison couldn't meet CP officials just yet because of a "non-compete clause" in his contract with CN.
 
As the dispute between Mr. Ackman and CP's board became public in recent weeks, that fine print has been front and centre, along with the question of whether it forbids Mr. Harrison, who now trains race horses in Florida, from saddling up at CP. Last week, CN took the unusual step of publicly warning him to abandon any thought of taking over CP, and cautioned Mr. Ackman to stop inducing him to do so.
 
Mr. Ackman said his lawyers have dismissed CN's warning as "absolutely frivolous," and denied any wrongdoing.
 
However, it is increasingly common for companies to try to restrict the activities of former employees, particularly high-powered ones, once they leave. Employment lawyers say litigation over non-compete clauses is also growing rapidly, as the contents of an employee's head become more and more valuable in a knowledge-based economy.
 
Whatever the reason, in the eyes of courts in Canada and the United States, the fine print in such contracts is nowhere near as ironclad as some employers might like to think.
 
In Mr. Harrison's case, Montreal-based CN issued a statement earlier this month saying that a clause in his contract explicitly forbidding him from working for a competitor expired at the end of 2011, two years after his retirement in 2009. A separate provision attached to his pension and retirement arrangements says he also cannot compete with CN, the company said.
 
But last week, as talk heated up of a coup that would install Mr. Harrison in the CEO's office, CN said it was asking its former boss to reconsider coming out of retirement to lead its rival, noting that Mr. Harrison was "bound by a broad range of confidentiality and multiyear non-competition and non-solicitation provisions."
 
CN said its board was "closely reviewing all developments concerning these matters with a view to enforce Mr. Harrison's contractual obligations to CN and take all actions necessary to protect the legitimate interests of the company."
 
Legal experts saying that enforcing such contracts is often an uphill battle. In Mr. Harrison's case, his CN contract falls under the law of Illinois, where he was based. Mr. Ackman has said that blue-chip law firms Kirkland & Ellis in Chicago, Sullivan & Cromwell in New York, and Davies Ward Phillips & Vineberg LLP in Toronto have all reviewed the issue and dismissed CN's claims.
 
Samuel Estreicher, an employment law professor with New York University, said any CN case against Mr. Harrison would appear to be a long shot, although the former CN boss might lose his pension benefits under his contract.
 
Then there is the confidentiality issue. Mr. Harrison's explicit no-compete clause may have expired, but regardless of what is written in black and white, under the common law, departing employees, in particular senior executives, still owe a duty to their former employers not to disclose confidential information from their old job.
 
Jeff Gray.