Contractual limits on terminated salesman’s competing with global employer invalid: Court
A restrictive covenant intended to restrain a former sales employee from having any dealings with his former employer’s clients has been found to be overbroad and invalid by the Ontario Court of Appeal.
Tom Mason was a salesman for Chem-Trend, an international manufacturer of processing chemicals for use in rubber and other products based in Howell, Mich. Over the course of his 17 years of service, Mason “acquired knowledge about the company, its products and its customers, including the Chem-Trend products that each customer used and the prices it paid.” Mason’s sales territories were mainly located in North America, but many of Chem-Trend’s clients operate globally so he was able to get information about them beyond their North American operations. He also had inside knowledge about Chem-Trend’s sales, sales targets, market opportunities and potential areas for business development.
Mason’s employment contract contained the following clause which tried to restrict his activities in case his employment ended: “I agree that if my employment is terminated for any reason by me or by the company, I will not, for a period of one year following the termination, directly or indirectly, for my own account or as an employee or agent of any business entity, engage in any business or activity in competition with the company by providing services or products to, or soliciting business from, any business entity which was a customer of the company during the period in which I was an employee of the company, or take any action that will cause the termination of the business relationship between the company and any customer, or solicit for employment any person employed by the company.”
Chem-Trend let Mason go, and Mason asked a court to find that the restrictive covenant could not be enforced because it unduly restricted him in finding new work.
Restrictive covenant must be targeted to the employer’s needs
The court reviewed the law of restrictive covenants. In the 2009 decision of KRG Insurance Brokers (Western) Inc. v. Shafron, the Supreme Court of Canada reiterated that since a restrictive covenant is a restraint on trade, it generally goes against public policy. Nevertheless, an unambiguous restrictive covenant may be found to be valid if it is reasonable in the circumstances.
In 2008, the Ontario Court of Appeal reviewed the test of reasonableness and set out the three factors to consider (see H. L. Staebler Company Ltd. v. Allan):
•Did the employer have a proprietary interest entitled to protection?
•Are the limits too broad in terms of length of time or geographic area?
•Does it prohibit competition generally, not just solicitation of the employer’s customers?
In this case, the court found four reasons why the restriction was not reasonable:
•There was another clause in the employment contract that prevented Mason from using Chem-Trend’s confidential information.
•The restrictive covenant was to last for one year, after which the information Mason might have access to would presumably become stale. Yet, the restrictive covenant also purported to stop Mason from contacting any former customers. Since he had worked there for 17 years, this was overreaching and inconsistent with the one year restriction.
•The restrictive covenant tried to stop Mason from dealing competitively with any of Chem-Trend’s customers, not just to stop him from soliciting them. This extra-broad restriction might be suitable for an executive, but not a salesperson.
•The covenant restricted Mason from contacting “any business entity which was a customer of the company during the period in which (he) was an employee of the company.” This was so broad that Mason would not know who or what he was prohibited from contacting.
Tips for employers
When drafting restrictive covenants, employers should make sure to only ask for what they need. Overly broad restrictions are not likely to be enforced by the courts. In particular, they should pay attention to geographic restrictions, time restrictions and restrictions on who the employee may contact after leaving.
It is also worth noting that the restrictive covenant must be clear and unambiguous. If it is drafted in a way that leaves doubt as to where, when or to whom it applies, a court is likely to find it to be ineffective.
For more information see:
•Mason v. Chem-Trend Limited Partnership, 2011 CarswellOnt 2856 (Ont. C.A.).
•KRG Insurance Brokers (Western) Inc. v. Shafron, 2009 CarswellBC 79 (S.C.C.).
•H. L. Staebler Company Ltd. v. Allan, 2008 CarswellOnt 4650 (Ont. C.A.).
