Clause deemed enforceable as it was limited to employer's specific business interests, clients
“While non-solicitation clauses are often not enforceable, a reasonable and narrowly drafted provision might be upheld by a court.”
It’s a key point to remember for employers, according to Kayla Ueland, a labour and employment lawyer at McLennan Ross in Calgary, after the Alberta Court of King’s Bench upheld such a clause and found a worker liable for more than $100,000 after the worker lured a key client from his former employer.
Catch Engineering Partnership is an electrical engineering and design company in Calgary. A large part of Catch’s business involves seconding engineers to third-party companies who need temporary or contract workers.
In 2012, a company called CNRL became a client of Catch. CNRL formed an agreement for Catch to provide the workers it needed on a contract basis.
In February 2019, CNRL needed an engineer with expertise in a particular software program. The worker was an electrical engineer who had such expertise, so Catch submitted him as a candidate to fill CNRL’s need. CNRL agreed to pay Catch an hourly rate for the worker’s services from Feb. 25 to Dec. 20, 2019, if it hired him.
The worker signed a contract and a confidentiality agreement on Feb. 21.
Non-solicitation clause
The confidentiality agreement included a non-solicitation clause that required the worker, during his employment and for 12 months after his termination, to not act in a manner detrimental to Catch’s relations with its clients, suppliers, contractors, or employees. He could also not “directly or indirectly solicit any customers of [Catch] or any of its subsidiaries or affiliates with whom he or she has dealt” during that period. The 12-month period related to the length of Catch’s agreements with its clients.
The non-solicitation clause also prohibited the worker from soliciting, inducing, recruiting, or encouraging any Catch employees for 24 months after his termination of employment.
A couple of weeks before the end of his contract in December 2019, the worker approached Catch’s vice-president of engineering with a proposal that he become a contractor. The VP started negotiating a contractor rate for the worker.
After several days of negotiations, the worker agreed to an hourly rate as a contractor. The VP reminded him about his non-solicitation covenant and the worker denied that he was thinking of working directly with CNRL. However on Dec. 17 he submitted his resignation, stating that his last day would be Jan. 3, 2020.
A few minutes after emailing his resignation, the worker emailed his supervisor at CNRL asking if he could work for the company as a contractor through another agency.
Restrictive covenants should only be designed to protect an employer’s business interests, not stymie competition, according to a lawyer.
Another employer
On Dec. 19, the worker obtained a position with another agency. He joined the other agency on Jan. 6, when the new employer seconded him to CNRL to do the same work that he had been doing through Catch. CNRL then terminated its engagement agreement with Catch.
Catch sued the worker, claiming that he breached the terms of his employment agreement by using confidential information from Catch for his own gain and he breached the non-solicitation. The company also argued that the worker breached his duties of good faith and fiduciary duty owed to the company, causing Catch to suffer damages from the loss of its engagement agreement with CNRL.
The court noted that restrictive covenants such as non-solicitation clauses, “are prima facie void as being contrary to public policy.” However, the Supreme Court of Canada endorsed an exception for non-solicitation clauses if there is sufficient justification in special circumstances, said the court.
The court added that a restrictive covenant could only be enforceable if it was “narrowly focused on protecting a legitimate business interest, it must be clear and unambiguous and, considering all the circumstances, it must be fair and reasonable.”
The court found that Catch had a legitimate business interest that required protection, as its business model was providing skilled technical workers to clients. The company needed to protect its client relationships from being appropriated by the employees it seconded to those clients, said the court.
There is a presumption by courts that restrictive covenants are contrary to public policy, as they can keep a departing employee from working.
Narrow focus
The court also found that the non-solicitation clause was narrowly focused on Catch’s business interests and did not interfere with the worker’s ability to use his knowledge, skills, or experience in the job market. The clause was limited only to Catch clients with whom the worker had worked in the previous year and to 12 months after termination, the court said.
“Catch had a good explanation for why 12 months was reasonable, which was the fact that their clients renewed their contracts on a yearly basis,” says Ueland. “So 12 months would allow Catch to essentially solidify that relationship with their clients for one more contract rotation before the worker could go out and try to solicit that business away from Catch.”
The court noted that the clause didn’t include a geographic restriction, but because it only focused on Catch’s active clients, the lack of a geographic reference was not too broad, said the court.
“Sometimes we see these clauses broadly defined to include any customers or clients of a company and that's difficult to enforce because employees can argue that how can they possibly know all the clients and customers of a company,” says Ueland. “But when you restrict it to only the clients that they had interactions with in the past year, it becomes clear to the employee on what the prohibited activity is.”
The court found that the non-solicitation clause was enforceable and there was no ambiguity that would make the worker unaware of his obligations, the court said.
Breached non-solicitation clause
The court determined that the worker breached the non-solicitation clause, as he invited CNRL to discontinue its engagement with Catch and contract his services through his new employer while he was still employed with Catch. The worker also breached the confidentiality agreement, as he had information about CNRL and the nature of the work it required that he used for his own benefit to solicit CNRL’s business away from Catch, the court said.
All parties to contracts, employment and otherwise, have a common law duty of food faith, said the court, and the worker breached this duty. The worker was dishonest by “engaging in a calculated course of action designed to benefit himself at the expense of his employer, all while still employed and drawing a salary from Catch,” said the court.
“Every employee has a duty of good faith when performing their contractual obligations under an employment agreement – in essence, this is the duty to be honest with your employer and not to mislead them to the detriment of the employer’s interests,” says Ueland. “Sometimes it's lumped in with the duty of loyalty, just the typical things that we would expect employees to do, like not to compete during their employment.”
However, the court found that the worker did not have a fiduciary duty to Catch. He was not a manager and he didn’t have any decision-making responsibilities for Catch’s business. The worker was not in a position that required him to act in Catch’s best interest at all times, said the court.
Sales representatives who started their own business and solicited their former employers breached their fiduciary duty, an Ontario court ruled.
Fiduciary duty for key employees
A fiduciary duty is only found with higher-level employees like executives or who is considered a key employee, says Ueland.
“The fiduciary duty can include things like the duty not to solicit clients and customers, even in the absence of a non-solicitation clause,” she says. “It can also encompass the duty not to take advantage of corporate opportunities of the company.”
The court agreed that Catch suffered damages from the loss of CNRL’s business, which likely would have continued for years but for the worker’s actions, as it had already lasted for several years. Based on the existing agreements with CNRL, the court calculated Catch’s damages at $112,320. The worker was ordered to pay that amount for breaching his non-solicitation clause, confidentiality clause, and his duty of good faith.
“When drafting a non-solicitation clause, employers should consider exactly what business interests they're trying to protect and then draft the non-solicitation clause narrowly to cover only that business interest,” says Ueland. “And then keep restrictive covenants as simple and as clear as possible, in plain language, so that employees can clearly ascertain what the prohibition is on their actions.”
