Employers often place great faith in restrictive covenants to protect their assets when hiring key employees. However, in Canada non-compete clauses have generally been very difficult to enforce outside of the context of a sale of business. Non-solicitation clauses have also been carefully scrutinised by judges even though they are more readily enforced.
Courts have also been traditionally suspicious of 'hybrid clauses' preventing the acceptance of certain business and 'damages clauses' providing for a pre-set payment from a departing employee. Employers will be happy to know that two recent decisions out of Ontario and Alberta have favoured more relaxed interpretations of restrictive covenants.
2158124 Ontario Inc v Pitton(1)
In Pitton an insurance brokerage firm asked the Ontario Superior Court to grant it an injunction against its former employee, Pitton. To do so, the court needed to determine whether Pitton had breached his non-solicitation covenant when he left StoneRidge and began working for a competing brokerage.
The employee had two strong arguments. First, he argued that the clause entitled 'Non-Solicitation' was in fact a non-compete clause. The last sentence of this clause required the employee to pay StoneRidge double the annual commission for any client that followed him to a new employer, regardless of whether solicitation of that client had occurred. The employee argued that this sentence was an unreasonable non-compete clause since it had no geographic limitation, meaning the clause as a whole was not enforceable.
Second, the employee argued that the clause was overly broad because it lacked any definition of 'client'. He argued that this failure to define or limit 'client' meant that it prevented him from soliciting clients from other StoneRidge offices where he had never worked.
The court disagreed with the employee on both counts. First, it affirmed that the non-solicitation clause was not a non-compete clause. It did not actually prevent Pitton from working in the insurance industry. Rather, it only limited his ability to solicit with certain StoneRidge clients. As a result of this, no geographic limitation was necessary.
Second, the court ruled that a lack of a definition for 'client' was immaterial. Looking at the contract and the surrounding circumstances, the court was "persuaded that the Agreement [was] limited" solely to customers of the particular office where the employee worked.
A partial injunction was granted in the employer's favour, but only with respect to the use of confidential information and not the non-solicitation piece.
Jones v Gerosa(2)
In Jones the Alberta Court of Queen's Bench also dealt with the enforceability of restrictive covenants. The action concerned a Fort McMurray dentist, Robert Jones and two of his former associates, Mary Gerosa and Jack Phan. Before commencing work with Jones, Gerosa and Phan both signed agreements making them – in essence – independent contractors.
A restrictive covenant clause within the agreements required them to pay a fee of C$90,000 to Jones if they left him to commence another practice in the same small city. When Gerosa and Phan did in fact leave to start their own joint practice, Jones sued to recover those fees.
The associates argued that the restrictive covenant was unenforceable as it did not specify a duration and was too broad in geographic range (a 50-kilometre radius from Fort McMurray). In response, Jones argued that the clause was not a restrictive covenant and such limitations were therefore irrelevant.
The court disagreed with both parties' reasoning but ultimately found in favour of Jones. The court noted that the clause did not amount to an "outright prohibition" on competition, but a restriction on competition. Relying in part on expert testimony regarding the potential loss of goodwill – which Jones could suffer in this scenario and similar practices in other industries – the court found that it could lead to a loss of goodwill for Jones.
As far as the geographic scope and duration of the clause were concerned, both were deemed to be reasonable. Specifically, the 50-kilometre geographic limitation was reasonable. As for the temporal limit of the covenant, the court employed a fair reading of the clause and determined that the lack of a temporal limit was not fatal. The covenant would apply for a reasonable period, according to the court. As the two associates had started their own practice immediately after terminating their arrangement with Jones, they clearly had not respected a 'reasonable period' after the end of their previous arrangement, whatever it was.
Pitton and Jones are important cases in employment law. Against a background of previous decisions requiring employers to have tightly worded restrictive covenants, these cases suggest that the courts may be taking a more flexible approach.
That being said, it is important to note that these cases are still new. Time will tell if they represent the start of a real shift or if they are outliers. In the meantime and for the best chance of enforcement, employers are advised to draft their restrictive covenants with the clearest possible wording and to restrict the scope of their covenants as much possible. Ensuring that restrictive clauses are properly drafted may mean a rosier picture going forward.
For further information on this topic please contact Kyla Stott-Jess and Stefan Mirkovic at Fasken Martineau DuMoulin LLP by telephone (+1 403 261 5350) or email (firstname.lastname@example.org or email@example.com). The Fasken Martineau DuMoulin LLP website can be accessed at www.fasken.com.
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This update was reprinted with permission from Northern Exposure, a blog written by lawyers in the labour, employment and human rights group at Fasken Martineau, and produced in conjunction with HRHero.com.