Piling on the restrictions

A non-competition agreement in addition to a non-solicitation agreement is overkill and neither is valid if an employee is wrongfully dismissed, the Alberta Court of Appeal has ruled.

David Kelcher, Luciano Oliverio, and Mark MacLean were currency traders who worked for Globex, a currency exchange company. All three left Globex in March of 2005 and went to work for one of its competitors. Kelcher and Oliverio left voluntarily, but MacLean was fired.

Before leaving Globex, the defendants had signed agreements saying they would not compete with Globex nor would they solicit any of Globex’s customers for 12 months after their employment was terminated. MacLean signed the agreement before he started with Globex, but Kelcher and Oliverio signed after they had started working.

After they joined the competitor, Globex sued them for damages and asked the court to restrain their activities based on the restrictive covenants they had signed.

The Alberta Court of Appeal ruled that the restrictive covenants were not enforceable and dismissed Globex’s lawsuit.

In general, restrictive covenants will be upheld when they are reasonable. Reasonableness depends on many different factors, but courts will often find flaws with clauses that are capable of more than one interpretation. If the clause is ambiguous or vague, then it is automatically unreasonable.

“If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable,” said the court.

Usually, restrictive covenants are drafted by employers. Therefore, courts will place the burden of any error or discrepancy on their shoulders.

In Globex, the non-solicitation agreements were not reasonable because:

•The term “dealings” was unclear and ambiguous — the traders could not know what exactly constitutes a “dealing” and would not know which customers they “dealt with” within the past 12 months.
•The agreement was ambiguous because all it prohibited was soliciting customers “for” any client of Globex. While the Court of Appeal thought that this was a grammatical error, it demonstrated the agreement was difficult to interpret.
•The agreement was overbroad because it prohibited the former employee from soliciting “customers in any manner whosoever, in any business or activity.” In other words, it was not just restricted to currency trading.

The non-competition agreements were found to be overbroad. Courts generally view non-competition agreements unfavourably when non-solicitation agreements would suffice to protect the employer’s interests. Globex did not have any special proprietary interest that would require protection by a non-competition agreement rather than a non-solicitation agreement.

Wrongful dismissal and restrictive covenants

One of the employees, MacLean, was dismissed because he refused to sign a fresh non-competition agreement. The trial judge found he was wrongfully dismissed and he was no longer bound by any restrictive covenants.

After examining the case law on this subject, the Court of Appeal agreed, ruling that since Globex had repudiated the employment agreement when it terminated MacLean, MacLean was no longer subject to any part of the agreement, including the restrictive covenant.

“(T)o hold otherwise would reward employers for mistreating their employees. For example, an employer could hire a potential competitor, impose a restrictive covenant on the employee, then wrongfully dismiss her a short time later and take advantage of the restrictive covenant,” said the Court of Appeal.

Consideration lacking

The court also considered whether the restrictive covenants that Oliverio and Kelcher signed during their employment could ever have been enforceable, since Globex did not give them anything in return for signing the agreements.

Generally, in order for a contractual agreement to be enforceable, some benefit, known as consideration, has to flow to all parties to the agreement. Common examples include a raise, bonus or promotion. In this case, neither Oliverio nor Kelcher was given anything in exchange for signing the restrictive covenants.

Globex argued the consideration flowing to Oliverio and Kelcher was continued employment. In other words, Globex could have terminated them with proper notice had they refused to sign the agreements and not terminating them was the consideration.

The Court of Appeal rejected this argument. It ruled that continued employment is not consideration for an agreement that is signed after the employee has started working because “the employer is already required to continue the employment until there are grounds for dismissal or reasonable notice of termination is given.” Giving employees a contract extension for a definite period of time might qualify as consideration, but the extension would have to be very clear, which was not the case here.

Non-contractual obligations

Employees have a duty to act in good faith and not to compete with their employers. However, unless the employees are high-ranking members of the organization — known as fiduciaries — this duty usually ends when their employment ends, if there is not an enforceable restrictive covenant in place. Yet, even if they are not fiduciaries and there is a not a restrictive covenant, departing employees have a duty not to misuse their employers’ confidential information.

Globex claimed the employees breached this duty by:

•Developing sales and risk strategies that were largely identical to Globex’s
•Using a client brochure package identical to Globex’s
•Making a list of former clients they later used to do business.

The court rejected this argument because the employees did not take any confidential information with them. While they did make a list of former clients, they made it from memory and waited 12 months, until they thought the non-solicitation clause had expired, before contacting them. In addition, Globex’s business practices were not “sufficiently unique to be proprietary.”

For these reasons, Globex was unable to establish that the employees had breached their common law duty not to misuse confidential information.

Implications for employers

This decision illustrates five key principles of interest to employers:

•A restrictive covenant must be clear and unambiguous to be enforceable against an employee. If it is unclear, a court will probably find it to be unreasonable and will not enforce it.
•A non-compete clause is not likely to be enforceable if the employer can adequately protect itself with a non-solicitation clause.
•If an employee has already begun working and the employer wants him to agree to a restrictive covenant, the employer will have to give fresh consideration. Continued employment is not sufficient to change an employment contract or the terms and conditions of employment. Something of clear value, such as a raise or a promotion, would be more likely to amount to sufficient consideration.
•A restrictive covenant will not be enforceable against an employee who is dismissed without cause and without proper notice.
•In the absence of an enforceable restrictive covenant, a departing employee who takes and uses confidential information such as client lists with him may be in breach of common law duties. However, this is less likely if the employee re-creates the list from his own memory and makes a sincere effort not to contact any of the clients until a reasonable time has passed.

For more information see:

•Globex Foreign Exchange Corp. v. Kelcher, 2011 ABCA 240 (Alta. C.A.).