How to make your non-compete stand up in court

While non-competes are not often upheld, a B.C. employer recently was successful enforcing its terms, with the court decision highlighting what’s needed to make these kinds of restrictions stick.

“Quite frankly, it's pretty rare that these types of cases go all the way to a trial on damages,” says Ed Montague, an associate at Campbell Froh May & Rice in Vancouver, who represented the plaintiff.

“They tend to end at the point of the injunction application, and if the injunction is granted, in many cases, that's all that is really needed to address the concern of the employer about the non-compete.”

But a key focus of this employer's time was on the non-compete, he says, “because the defendant had literally left his contract with our client and then set up a competing school within our client’s territory immediately after leaving; in fact, he already had incorporated a company to do that, while he was still under contract with our client.”

Competing business

For more than 10 years, Benson Wang has provided tutorial services to students looking to attain their real estate licence in Vancouver and the surrounding area.

Classes at Quick Pass Master Tutorial School helped predominantly Mandarin-speaking students study for exams administered by the Sauder School of Business at the University of British Columbia (UBC). 

In June 2016, Wang hired Li Min Zhao as an independent contractor to assist in the provision of tutoring services, and he signed two contracts: an Independent Contractor Agreement and Non-Competition Agreement. 

But in September 2017, Zhao incorporated his own real estate school and advised Wang that he was terminating his contract at the end of October. He then told Wang that he planned to set up a competing tutorial business nearby and he had no intention of complying with the confidentiality clause.

When Wang requested that all training materials be returned to comply with the non-compete clause, Zhao said he also considered that clause unenforceable. He started doing business in the new location on Nov. 1, 2017.

In May 2018, Wang was granted a one-year interlocutory injunction to restrain Zhao from competing with him in three B.C. regions.

Wang also decided to pursue damages for breach of non-competition, non-solicitation and confidentiality agreements, along with a permanent injunction from using Wang’s extensive teaching materials.

Non-compete clause

Zhao contended that the non-compete clause was unenforceable because its terms were ambiguous and overly broad and, therefore, unreasonable. This included being “engaged in”, “concerned with” or “interested in” a “business which is the same as, or competitive with” Wang’s business in Vancouver, Burnaby, and Richmond, B.C. 

But Justice Gordon Weatherill disagreed in his October decision. For one, there was no issue of ambiguity and Wang’s business was “expressly defined” in the clause. In addition, the clauses “make clear that [Wang] had a proprietary interest worthy of protection that, in all of the circumstances, could not be adequately protected by a less restrictive measure,” he said.

Read together, the clauses are also reasonable in terms of restricting Zhao’s ability to compete with Wang in the business of pre-licensing real estate training and education in those three cities for 18 months, “particularly given the fact that [Zhao] negotiated and was paid an additional $15 per hour as consideration for his agreement to accept the restraints imposed by the non-compete clause,” said Weatherill

As a result, the court decided that Zhao breached the non-compete clause, and it was “deliberate and calculated.”

The clause was effective for several reasons, says Montague, such as naming key pockets in the greater Vancouver area because of the “fairly niche market in terms of the client base.”

There was also a real risk that Zhao would develop a reputation as a good teacher and draw students to a new school “because he had had some experience already in the field and developed a reputation,” he says.

And offering consideration of $15 per hour was also a good move, says Montague.

“That was something that was referenced by the judges, both at the injunction hearing and at trial, and it certainly was, I think, an important factor.”

The non-compete also had an 18-month time limit, which was reasonable, he says.

“Some employers ask you to draft a clause and they want a five-year non-compete; I think you have to be very clear that that's not going to be enforceable. Regardless of how much you'd like to have it… you're going to have to limit that language,” says Montague.

“Of course, some employers simply put them in there because they expect it may be a deterrent. They may never get to a court, and that's fine, too. But if you want to enforce it, you're going to have to be quite restrictive in your language.”

Restraint of trade

Restrictive covenants are often difficult to enforce because they’re described as a restraint of trade, says Cory Sully, an associate in the Labour, Employment and Human Rights Group at Lawson Lundell in Vancouver.

“They're putting significant restraints on an employee's ability to find employment once their employment has been terminated. They're seen as prima facie unenforceable, so the onus is on the employer… to show that they are reasonable,” she says.

“That's not an easy task, which is why they're so tricky and difficult to enforce. It's a high burden on the party seeking to enforce them to prove that they are reasonable and necessary in the circumstances.”

But in this case, Quick Pass had reasonable geographic restrictions, plus it included a good definition of its business, says Sully.

“There are many restrictive covenants that I look at where there is either no definition of business or it's poorly defined. And so the employee’s looking at it and going, ‘Well, if I can't compete with the business, what's the business?’ Especially when you have a company that has a variety of businesses, that operates in numerous jurisdictions — it's important to clearly define terms like that. And so I think [avoiding] ambiguity is a big one.”

Ontario recently introduced a ban on non-competition clauses.

Non-solicitation clause

The non-solicitation clause stipulated that Zhao would not, for two years after the termination date, attempt to solicit “away from [Wang] any business [Zhao] had enjoyed, solicited or attempted to solicit from its customers” before the termination date.

But the judge agreed with Zhao, saying the clause was unenforceable and overly broad “because it effectively restricts [him] from soliciting anyone, regardless of whether [Wang] had any prior dealings with the individual. Moreover, [Zhao] would have no way of identifying a person as a customer of [Wang].”

Unfortunately, the language in the non-solicit was not upheld, and that was primarily because there was no specific geographic region, so it was too broad, says Montague.

“It is interesting because, in many cases, I find the courts are more lenient about granting or enforcing non-solicits than they are about non-competition. In this case, the opposite applied.”

When employment ends and someone's looking for a new job, a non-competition clause is going to be a lot more onerous on the employee, says Sully.

“For that reason, courts usually evaluate those with a lot more scrutiny than a non-solicit and if a non-solicit clause or non-disclosure confidentiality clause is going to be sufficient to protect a business's interests, courts are going to say, ‘You don't need a non-compete. And if you include a non-compete, you're overreaching.’”

So employers really need to be carefully considering if they need all of them, she says.

“Do you need a non-compete? Do you need a non-solicit? Do you need a confidentiality clause? In this case, the parties, they did have all three, but that shouldn't be the default because they are so heavily scrutinized and they serve different purposes.”

In 2018, an Ontario employer had to share liability with two new employees for breaching the employees’ non-solicitation clause with their previous employer for encouraging them to contact former clients.

Confidentiality clause

As for the confidentiality clause, this was also breached, said the judge, because Zhao “did not simply use the ‘know-how’ he acquired in his new enterprise; he appropriated to himself the actual work product he had created while employed by [Wang].” 

Zhao’s training materials were “substantially identical” to those used while working for Wang, said Weatherill.

The court did a fairly detailed review and comparison of the teaching materials that Zhao was using, says Montague, “and came to a fairly clear conclusion that [he] had simply taken those materials that he had used at our client’s school, and used them to the benefit of his own school. “

Prince Edward Island has become the first jurisdiction in Canada to limit the use of non-disclosure agreements in cases of discrimination and harassment

Assessing damages

In assessing damages, the court had to decide whether Wang could establish that his business would have been in a more favourable position but for the breaches. Taking into consideration various influences on the business, such as losing other teachers, inflation, raised fees and an inferior location, the judge awarded $50,000 in compensatory damages.

The difficulty with these cases is how to prove damages where there may be multiple factors that account for a change in the employer’s revenue, says Montague.

“Our client was quite candid in effectively conceding, when he was getting his evidence, that there were a number of factors, apart from the defendant’s breach of contract, that could have also potentially accounted for some change in revenues.”

But the judge did not grant a permanent injunction in the end.

The period of time that had elapsed while Zhao remained in business and had made incremental changes to the training materials meant it would not really be feasible “or perhaps unfair to grant a permanent injunction, which would have forced him to recreate all his own materials from scratch,” says Montague, “so it wasn't granted at that point.”