The enforceability of non-competition and non-solicitation covenants in employment agreements often arises as an issue for employers following the departure of an employee who engages in a competitive business enterprise.
A series of recent British Columbia court decisions serve as an important reminder to employers that following the departure of an employee, a non-competition covenant is likely to be upheld only in very limited circumstances. The decisions also confirm that although non-solicitation covenants are more likely to be enforced by a court, this may not be the case if the provision goes beyond what is strictly necessary to protect the legitimate business interests of the former employer.
These recent BC court decisions follow the lead of the British Columbia Court of Appeal in an earlier decision Valley First Financial Services Ltd. v. Trach. The court in Valley First considered the duties and obligations of former employees of a general insurance agency who left their employment to establish a competing business. Each of the employees had signed a non-competition and non-solicitation covenant.
In holding that both the non-competition and non-solicitation covenants were unenforceable, the court in Valley First emphasized that following the end of an employment relationship, a non-competition covenant will be upheld only where the employer can show the existence of a proprietary interest which is entitled to protection and where the restrictions in the covenant are no wider than is necessary to protect that interest. The Court also stated that a non-competition covenant will generally not be enforced in circumstances where a non-solicitation covenant will adequately protect the employer, or in circumstances where the restriction would be against the public interest. Finally the court stated that non-competition covenants are more likely to be upheld following the sale of a business than in an employment relationship.
The court in Valley First also held that the non-solicitation covenant was overly broad and hence unenforceable, since it prohibited the solicitation of any customers of the former employer. The court observed that if the non-solicitation covenant had been restricted to customers with whom the departing employees had business dealings, the covenant would likely have been found to be reasonable and thus upheld.
The legal principles which were set out in Valley First have subsequently been first followed and applied by British Columbia courts in a number of recent decisions.
In MacMillan Tucker MacKay v. Pyper (2009) the BC Supreme Court considered a non-competition provision which restricted an employed lawyer from competing in the practice of law for a period of three years within a five-mile radius of the office of his employer. The court held that this restriction, which completely prohibited the employee from engaging in the practice of law within a specific locale, was unreasonable since it went beyond what was necessary to protect the legitimate interests of the employer in its own client relationships. The court suggested that a more limited covenant which restricted the employee from soliciting clients of the law firm may have been considered reasonable.
In a 2010 decision, Phoenix Restoration Ltd. v. Brownlee, the BC Supreme Court considered non-competition and non-solicitation provisions signed by a project manager employed by an insurance property restoration business. The court held that the non-competition provision was overly broad and hence unenforceable since it prevented the employee from working in the insurance property restoration business generally, even though his employer was involved only in a specific niche market of that business. The court also held that the non-solicitation provision was unenforceable since it prohibited the employee from soliciting any customers or prospective customers of his former employer, including those with whom the employee had no business dealings at all during the course of his employment. The court stated that if the non-solicitation clause had been restricted only to the customers with whom the employee had dealt during the course of employment, that such a clause would have likely been enforceable.
In a 2011 BC Supreme Court decision, Edward Jones v. Mirminachi, in issue was the enforceability of a non-solicitation clause which prohibited the employee, who was a financial advisor employed by a brokerage firm, from soliciting any client of the firm for a period of one year following termination “…who you served or whose name became known to you during your employment…”. The court held that since the prohibition against solicitation did not apply to all clients or perspective clients of the brokerage firm, but only to those clients whom the employee had served or whose names became known to the employee, that the non-solicitation clause was not unreasonable, and hence was enforceable.
What lessons should be learned by employers from these cases? First, the use of “boilerplate” language which seeks to cast as wide a net as possible should be avoided. Instead when negotiating either a non-competition or a non-solicitation covenant, employers should take a more targeted approach to specifically identify the proprietary or business information which must be protected. Second, since a non-competition covenant may be held to be unenforceable by a court no matter how narrowly worded, employers should consider whether a well drafted non-solicitation covenant will be a better solution. Finally, employers should take care to ensure that any non-competition or non-solicitation covenant is clear and unambiguous; otherwise the agreement will almost certainly be determined unenforceable by a court.