Recent Ontario case a reminder for employers to avoid agreements 'construed as overly broad,' say experts
Back in 2021, Ontario moved to ban non-compete clauses. While rarely enforceable, they had still been problematic so the government pushed for their demise as part of its Working for Workers Act.
And yet non-competition clauses with non-solicitation clauses are often confused – purposely or not – and many provinces and territories don’t have the same ban.
So it’s important for employers to understand the differences to avoid costly court decisions, as seen in the recent Giacomodonato v. PearTree Securities.
In this May 2023 decision, the Ontario Superior Court of Justice found the non-competition and non-solicitation clauses were unenforceable, calling them “contrary to public policy and are overly broad.”
“I find that the non-solicitation clause is in fact a non-competition clause. It is over-broad and unreasonable on any standard. I would not enforce the clause.”
Further, Justice Robert Senta said the non-solicit was not targeted at protecting only PearTree’s legitimate interest in trade secrets or customer data and was “a camouflaged non-competition clause designed to eliminate competition.”
“In general, a non-solicitation clause, suitably restrained in temporal and spatial terms, is more likely to represent a reasonable balance of the competing interests than is a non-competition clause. An appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person’s ability to work in their chosen field. PearTree’s clause, however, goes far beyond a typical non-solicitation clause.”
The problem there arose from the fact that the non-compete was so broad and basically applied to all clients and all customers, says John Hyde, a specialist in labour law based in Toronto.
“That's not what employers should be doing,” he says. “Peartree went awry simply because really what they created is a hidden non-compete because they didn't think to limit it; it was, number one, ambiguous and, number two, could be construed as overly broad.”
Banning non-competition clauses
In common law, it’s almost impossible to enforce a non-compete clause, which is why the Ontario government came said, “We're going to be more clear and ban them,” says Andrew Monkhouse, founder and managing partner at Monkhouse Law, “which was obviously a good move.”
“Ontario got rid of non-competition clauses but non-solicitation clauses... those are still allowed. And so that's something where it's probably going to be more and more common, because non-competition clauses are banned.”
However, there are companies that try to “slip in” or “craft” non-solicitation clauses that are effectively non-competes, he says.
“One takeaway from the case is just that if you want to have non-solicitation option clauses, they have to be very narrow, and they can't be non-competes dressed up as non-solicitation clauses.”
In this case, there was a $2-million claim against the ex-executive, says Monkhouse.
“For the average person, having a $2-million claim against you — even though it ends up being considered frivolous by the judge — is obviously something that is disconcerting to have hanging over your head,” he says.
“That’s the reason why the government banned non-competes is that you wouldn't want companies threatening employees with non-competes — they're obviously going to be invalid. And so seeing those same harms occur through a non-solicit is unfortunate and takes away from some of the benefits of it.”
What are the key differences between a non-compete and non-solicit?
A non-compete basically says a person cannot go back into the marketplace within a specific area for a specific term, says Hyde, while a non-solicitation clause is more focused.
“A proper non-solicitation says, ‘You don't touch our clients, our customers, our employees in a specific area, for a specific period of time, post employment.’”
Of course, in Ontario, non-competes are banned, with exceptions for chief executives or agreements that are part of the purchase or sale of a company, says Hyde.
“The courts have become far more interventionalist. And in so doing, they're more and more constraining freedom to contracts. And that constraint is to the benefit of the employees on this perceived imbalance of bargaining power. I'm not sure if I would agree necessarily about an imbalance of bargaining power anymore, because anyone that's tried to hire anybody these days, I sometimes wonder if the pendulum has swung.”
However, even without non-competition causes, employers aren’t without protections, he says.
“There may be common law duties as well; with regard to non-solicit, for example, if the employer is relying upon a particular salesperson, and full reliance upon that person to develop leads and whatnot, that person may have common law duties to act in good faith. And those duties may extend, particularly if the individual becomes a fiduciary [so] it's a more senior level where there's a very close relationship of reliance.”
Recently, the Alberta Court of King’s Bench found a worker liable for more than $100,000 after the worker lured a key client from his former employer.
Best practices for both types of agreements
In considering a non-solicit or non-competition agreement, employers really need to consider, first, “What do we want in terms of protection?” And second, “What do we minimally need?” says Hyde.
For example, in PearTree, they mentioned all their customers instead of saying “Any customer that you have directly dealt within the past 12 months,” he says, possibly adding “any prospective clients or customer you’ve been engaged with… in an attempt to secure them on behalf of the employer, as a new client or new customer.”
The key is not to go overly broad in terms of geographic scope or length of time, says Hyde.
“If you don't do business in the US, why have it as geographic coverage? If you don't do business outside the GTA, and your intention is not to move beyond the GTA, why have it?” he says.
“Always look at the minimum requirements because if you don't, then an armchair quarterback called the judge is going to question that.”
It’s only a rare situation that would require a non-compete, says Hyde, and only if the individual is an executive or there’s an acquisition involved.
“Outside of that, if you are hiring from the market, I would stay away from non-competes unless you absolutely had to.”
Finally, always question “Could this non-solicit be deemed a non-compete? Is it sufficiently narrow?” he says.’
“What's important here is the clients don't let their lawyers simply write the agreement. Clients have to work in partnership with their lawyers to determine the business case, and then draw down on the business case as to what is mentally needed to protect the company's interests.”
