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Understanding restrictive covenants

Employers will continue to test the waters by expanding the traditional wording of non-solicitation clauses, and smart employees will challenge them.

By Stuart Rudner

There is a seemingly never-ending battle between the rights of employers to protect their legitimate business interests and the rights of individuals to pursue their livelihood. It often comes as a shock to organizations that one of their employees could leave, join their fiercest competitor, and immediately begin pursuing their clients.

However, that is the reality, unless they have taken the precaution of having the employee agree to be bound by some sort of restrictive covenant (such as a non-solicitation or non-competition agreement). Interestingly, even when individuals have agreed to be bound by such a covenant, they are often surprised to be told that this may impede their ability to "go across the street" and take all of their clients with them. That is often the case because they didn't bother to read what they signed, or assumed that it will not really be used against them.

For previous blog posts on this topic, see here, here and here. From a judicial perspective, courts struggle with this balancing act. As a starting point, there is a presumption against unreasonable interference with an individual's ability to earn a living. Restrictive covenants will only be enforceable where they are deemed to be reasonable. There must be a legitimate business interest to be protected, and the terms and scope of the covenant must be reasonable.

In most cases, non-competition clauses, which prevent an individual from working for a competitor, will not be enforceable. They are usually seen as too much of an interference on the individual's ability to earn a living in the industry where they have their friends, knowledge and contacts.

Rather than barring someone from the industry altogether, courts would prefer to see a non-solicitation clause, which prevents the employee from going after clients of their former employer, but would not stop them from working. However, even a non-solicitation clause must be reasonable in order to be enforceable.

In most cases, the critical term will be the length of time during which it is to apply; as I often tell clients, if you ask for too much, you get nothing. That is because the courts will not "fix" an overreaching clause: if the clause is found to be unreasonable, the organization will have no protection at all.

A true non-solicitation clause would prevent the individual from pursuing customers of their former employer. Employers and their counsel are always trying to push the limits and see how far they can go in restricting a former employee's ability to take business away from them. In the recent case of Donaldson Travel Inc. v. Murphy, there was a dispute over the enforceability of the following clause:

Mary agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by Uniglobe Donaldson Travel, directly, or indirectly.”

The issue before the court was whether clause was enforceable, or whether it went beyond scope of a true non-solicitation clause and was unreasonable in the circumstances.

The motions court judge found that since the clause purported to restrict the individual not only from soliciting,  but also from accepting work, it was tantamount to a non-competition clause and there unenforceable. The company appealed.

Decision

The court of held as follows:

|We see no error in this conclusion. The motion judge’s interpretation was available based on the plain wording of the clause…Further, given that the restrictive covenant is a non-competition clause (as opposed to a non-solicitation clause) and also because it contains no temporal limitation, there is no basis on which to interfere with the motion judge’s conclusion that the clause is unreasonable and therefore unenforceable… Finally, and in any event, we note that the record before the motion judge failed to establish that the departed employee had solicited any of the appellant’s clients.”

This case is another stage in an ongoing battle. Employers will continue to test the waters by expanding the traditional wording of non-solicitation clauses, and smart employees will challenge them. The Court of Appeal sent a clear message in this case: just because you call something a non-solicitation clause, does not mean that it is one and will be enforced. It is not unusual for our firm to review contracts which contain clauses labelled “Non Solicitation” but contain far more expansive restrictions.

Doing so is misleading and may allow the employee to get around the clause on that basis alone. Furthermore, a court will examine all the terms of the clause and assess whether it is reasonable in the circumstances. If not, it will be null and void.

Organizations should only use restrictive covenants where they are necessary (and not as a matter of course for every employee) and draft them conservatively. Employers that over-reach often end up with no protection at all. That is why we work with our corporate clients to draft clauses that are defensible if challenged. As the Rolling Stones say, “You can’t always get what you want, but you get what you need.”

Stuart Rudner

Stuart Rudner, Employment Lawyer and MediatorStuart Rudner is the founder of Rudner Law (RudnerLaw.ca), a firm specializing in Employment Law and Mediation. He can be reached at stuart@rudnerlaw.ca, (416) 864-8500 or (905) 209-6999, and you can follow on Twitter @CanadianHRLaw.
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