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Non-competition, non-solicitation covenants

B.C. case provides practical approach that would provide some certainty to parties seeking to enter such an agreement

By Stuart Rudner

It’s no secret organizations want to prevent employees from moving to the competition and going after their customers. At the same time, society requires that people be free to work without unreasonable restraint. Our courts have grappled for years with the burden of trying to balance an organization's right to protect its legitimate business interests with an individual's right to earn a living. 

Like many aspects of employment law, there are no absolute rules when it comes to how much an employee's conduct can be restricted after the employment relationship ends. 

As a starting point, most commentators will agree “regular" employees will not be held to non-competition covenants that have the effect of precluding them from working in the industry where they have all of their knowledge, experience and contacts. 

At the same time, courts will generally be inclined to enforce non-solicitation covenants, so long as the terms are reasonable. In other words, it will often be impossible to prevent a former employee from remaining in the industry and joining a competitor; however, a properly drafted non-solicitation clause can be used to prevent her from pursuing customers she dealt with while at her former employer. 

That can be done by contract, and the terms must be reasonable. It also goes without saying that even without any contractual terms, individuals cannot use confidential information they obtained while employed for their benefit, or for the benefit of their new employer. 

One of the issues that has risen in recent years is whether an organization can prevent a former employee from doing business with customers he had previously dealt with. This is largely a response to the inherent challenges of enforcing a non-solicitation covenant. 

A true non-solicitation covenant prevents the individual from soliciting the customer, but does not prevent him from accepting work if the customer approaches him. Savvy parties will ensure all communications are verbal and there is no evidence of a breach of the duty not to solicit. Often, employers are left frustrated by an inability to enforce the clause they put in place to protect themselves. 

As a result, many organizations attempted to impose covenants that were labelled "non-solicitation" but went further by precluding the individual from doing business with or accepting business from those same customers. That is generally seen as being too onerous a restraint of trade. 

Recognizing it may be impossible to prevent formers employee from doing business with their customers, some employers have attempted to approach the situation from a more creative perspective. Rather than precluding the individual from doing business with their customers, they have simply established “fees" the individual will have to pay in such circumstances. 

For example, they may have to pay 15 per cent of the revenue generated to their former employer, or some other fixed amount. The question arises as to whether this is an unfair restraint of trade, and whether it will be enforced by the courts. The answer appears to be that the courts will accept such a provision, and enforce it, as long as the terms are reasonable. 

B.C. looks at non-compete clause 

Recently, the British Columbia Court of Appeal considered the case of Rhebergen v. Creston Veterinary Clinic Ltd. In that case, the plaintiff was a veterinary associate working at a veterinary clinic in a rural part of British Columbia. In the employment agreement, there was a clause that required that Stephanie Rhebergen pay a specified lump-sum payment if she competed with the clinic within a 25-mile radius. She then left to provide competing services through a mobile clinic, and her previous employer sought to enforce the covenant she agreed to. 

The British Columbia Court of Appeal was divided in its decision, but the majority found that while the clause was in fact a restraint of trade, it was not ambiguous nor unreasonable. One of the issues was whether this type of liquidated damages clause could be enforced, and the court, in a decision that runs contrary to several past decisions in Ontario, found that while the clause imposed a financial cost to post-employment competition, it was not a true restraint of trade. It was therefore different than a pure non-competition clause. 

The court went on to assess the payments required by the clause, finding that they were calculated based upon the investment the clinic made in training the new associate and the anticipated loss of goodwill and business if she left to compete against them for their clients. The court concluded the amounts were not unreasonable. 

Ultimately, the clause was upheld, though some of the reasoning in the decision is troubling and open to disagreement. Nevertheless, the judgment appears to be a practical approach to a common issue that would provide some certainty to parties seeking to enter into an agreement that would govern the relationship after the period of employment ends. 

The use of non-competition and non-solicitation covenants is extremely limited.  Non-competition covenants are unenforceable in the vast majority of circumstances. Non-solicitation covenants will be enforced if the terms are reasonable but, of course, it is often difficult to prove such solicitation. The approach described above can be a strategic and effective way to address the concern that individuals will take business away from their former employer, and is one many organizations should consider.


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Stuart Rudner

Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw. He can be reached at srudner@rudnermacdonald.com.
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