The Ontario Superior Court of Justice's recent ruling in Stress-Crete Limited v Harriman provides a helpful reminder of the factors that courts will assess when determining the enforceability of agreements not to compete with an employer or solicit its customers after the end of an employment agreement.
Such agreements regarding post-employment activities are called 'restrictive covenants'. They are notoriously difficult to enforce and often viewed with scepticism by the courts.
Mr H worked as a sales manager with Stress-Crete Limited and King Luminaire Company Inc (collectively Stress-Crete) – a company carrying on business internationally in manufacturing and supplying lighting solutions. After working for Stress-Crete for several years, H resigned from his employment to accept a sales position with Cyclone Lighting, a direct competitor. H's employment agreement with Stress-Crete contained non-competition and non-solicitation clauses which aimed to prevent him from working with competitors like Cyclone. Stress-Crete sought a permanent injunction to enforce these restrictive covenants.
The employment agreement contained a non-competition clause that prevented H from being employed by a competitor within a "750-mile radius of any [Stress-Crete] production facilities" for two years following the termination of his employment.
The agreement also included a non-solicitation clause that prevented H from contracting "any person, firm, corporation or governmental agency who was a customer of [Stress-Crete] at any time during [his] employment with [Stress-Crete]" for two years.
H claimed that the restrictive covenants in the agreement were vague, overly broad and unreasonable. He also claimed that the restrictive covenants were unconscionable as he had never been encouraged to seek legal advice before signing the agreement.
The court reiterated the general rule that post-employment restrictions in employment agreements are unenforceable unless they are reasonable between the parties and not adverse to the public interest. The court also reconfirmed that if a restrictive covenant is ambiguous with regard to time, activity or geography, it will probably be found to be unreasonable and unenforceable.
In applying these principles, the court concluded that the non-competition clause in the agreement had been unenforceable because the geographical area described in the clause had not been clearly defined. The court found that the geographic restriction of a "750-mile radius of any production facilities" had likely intended to only apply to its headquarters in Burlington, Ontario, but instead, had been drafted to encompass a much broader geographical area.
On the other hand, the two-year non-solicitation clause was found to be enforceable. It was reasonable, clear and in line with general industry norms. The court also stated that where a non-solicitation provision is limited to an employer's customers or clients, a geographic limit is irrelevant and not required.
The court rejected H's claim that the restrictive covenants were unconscionable. The court found that H had been given the opportunity to seek legal advice before signing the agreement but had failed to do so. Stress-Crete had not rushed or pressured him into signing.
The court issued an injunction order based on the non-solicitation clause. It found that Stress-Crete would suffer irreparable harm if the injunction was not granted. H's knowledge of proprietary and confidential information concerning Stress-Crete's business processes and sales operations could be used by Cyclone, or any competitor, and would create an unfair competitive advantage that would significantly undermine Stress-Crete's business. The harm could not be remedied by an award of damages; thus, an injunction was appropriate.
The narrower the better
Restrictive covenants should be drafted as narrowly as possible in terms of time, activity restricted and geography. In order for a restrictive covenant to be enforceable, an employer must be able to justify it as being no more than is reasonably required to protect its valid proprietary interests. In this case, Stress-Crete's geographic restriction had been much broader than necessary and, therefore, resulted in its non-competition clause being unenforceable.
Clearly define geographical limits
The scope of the restrictive geographical limit should be defined as clearly as possible. Employers should consider including the specific cities and municipalities within which a departing employee is prohibited from competing.
Do not rush employees to sign agreements
Employers should give employees adequate time to review and seek legal advice before signing an employment agreement with restrictive covenants. Where an employer does so, like Stress-Crete, it is more likely to defeat a claim that the restrictive covenant is unconscionable and, therefore, unenforceable.
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