Recent cases confirm courts reluctant to prevent former employees from plying their trade
Although they are common, non-competition covenants are often not worth the paper they are written on.
Canadian courts will only enforce non-competition clauses in very limited circumstances. More often than not, an employer should seek to protect its interests by using narrower covenants such as non-disclosure and non-solicitation clauses.
According to the Court of Appeal for Ontario, “the general rule in most common law jurisdictions is that non-competition clauses in employment contracts are void.” The underlying reasons for this are to protect the right of persons to earn a living in their chosen fields of employment and to avoid unnecessary restraint of trade.
One of the most recent examples of the court’s reluctance to enforce non-competition clauses was reported in January this year. The facts of the case, known as TAL Global Asset Management v. Wai-Ping, are not particularly unusual. Wai-Ping was an investment fund manager with a strong reputation in the industry. She had regular contact with retail brokers and other entities, although no direct contact with the unit holders of the TAL funds, which were conceivably TAL’s clients.
On April 3, 2002 Wai-Ping signed non-competition and non-solicitation agreements. At the outset of his reasons, Judge John D. Ground expressly found that Wai-Ping received proper consideration in return for signing the agreements. Otherwise — and this could form the subject matter of another commentary altogether — it would be open to Wai-Ping to argue that the agreement as a whole was unenforceable.
The agreement included these terms:
Non-competition — The undersigned covenants and agrees that if her employment terminates prior to Oct. 10, 2003, she will not, for the restricted period (as defined below), either as principal, agent, employer, employee, partner, beneficiary or in conjunction with any individual, firm, corporation, association or other entity, solicit, serve, be employed by or assist directly or indirectly, or be materially interested in or otherwise connected with, any person or company soliciting, serving or catering to any of the clients to TAL Global, TAL Private or Talvest, or wealth management clients of CIBC or its affiliates, at the time of the termination of her employment.
Non-solicitation — During the term of her employment and for the restricted period, the undersigned undertakes and agrees not to, directly or indirectly, offer to employ, retain or join in partnership or association with or solicit the employment, retainer of, partnership or association with or be in any way connected with any employee, officer or agent of TAL Global, TAL Private or Talvest, any employee, offer or agent of CIBC engaged in the wealth management business, or any employee, officer or agent of any companies in which one or more of CIBC, TAL, Global, TAL Private or Talvest holds a controlling interest.
The restricted period was one year. There was no specification whatsoever on the geographic area in which Wai-Ping’s actions would be restricted.
TAL sought an injunction restraining Wai-Ping from breaching the non-competition and non-solicitation covenants. Justice Ground agreed that the one-year period during which covenants would be in force was not unreasonable. However, he found that the non-competition and non-solicitation clauses that TAL was seeking to enforce were unreasonable both in terms of the scope of activities that they restrained and the unlimited geographic area they purported to cover.
Specifically, the judge found that the unlimited geographic area, which these covenants covered, which would presumably restrain Wai-Ping from being employed by any TAL/CIBC competitor anywhere in the world, was unreasonable. Justice Ground reached the same conclusion regarding the scope of restricted activities. As TAL was seeking an injunction, Justice Ground found that TAL had not established a strong prima facie case that the clauses were reasonable and enforceable.
Justice Ground’s decision confirms the approach of the courts in Canada. They will not enforce non-competition covenants unless the circumstances truly justify such a restriction on an individual’s freedom to pursue her livelihood. This is consistent with a 2000 decision by the Court of Appeal for Ontario, Lyons v. Multari.
In that case, the clause at issue read, in its entirety: “Protective covenant. 3 yrs. – 5 mi,” implying a non-competition clause that lasts three years and covers a geographical area five miles from the former employer. Having stated that the general rule is that non-competition clauses are unenforceable, Justice James C. MacPherson found no reason to depart from the general rule in that case.
The leading Canadian decision on this issue goes back to 1978, in the Supreme Court of Canada decision, J.G. Collins Insurance Agencies v. Elsley. Elsley was a representative of the company, and its customers dealt with him almost exclusively. Justice Dickson found that to the customers of J.G. Collins Insurance Agencies, “Elsley was the business.”
As a result, there was a very real concern in that case that the company required protection when Elsley left. In fact, although Elsley did not solicit any customers when he left, almost 200 customers chose to follow him and leave Collins. This represented approximately half of Collins’ client base. In that case, the Supreme Court agreed that a non-solicitation covenant would not adequately protect the employer’s interests, and upheld a restriction on competition that encompassed three separate communities and continued for a period of five years.
In his reasoning in Elsley, Justice Dickson confirmed that a restraint on trade must be reasonable in the interests of the parties and the public in order to be valid.
He referred to the competing interests at issue, acknowledging that there is a public interest in discouraging restraint on trade, while at the same time there is a reluctance to interfere with the right to contract.
Justice Dickson then set out some factors to be considered when considering the reasonableness of a restrictive covenant upon competition. These are:
Whether the employer has a proprietary interest entitled to protection:
The courts will not enforce non-competition clauses where the intention is simply to prevent a former employee from competing in the industry. The necessary proprietary interest relates to the relationship between the company and its clients.
In a case like Elsley, it is the employee who has the relationship with the clients; the clients have no real sense of attachment or loyalty to the actual company. As a result, the clients are more likely to leave and follow the employee if he joins a competing company, even if the employee does not actively solicit their business.
In such circumstances, a non-solicitation covenant would not adequately protect the employer, and a non-competition clause may be allowed in order to allow the company a reasonable period of time to rebuild the client relationship before the departed employee commences competing against it.
Whether the temporal or spatial features of the clause are too broad:
Simply put, a company that deals with clients in Hamilton does not require a non-competition clause precluding a former employee from working in the same industry anywhere in North America.
The geographic limitation must be directly related to the duties carried out by the employee during employment. Furthermore, the time period established by the clause must be only what is reasonably necessary to rebuild customer relationships.
Whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer:
The Court of Appeal for Ontario has explicitly stated “the courts will not enforce a non-competition clause if a non-solicitation clause would adequately protect an employer’s interests.” In another decision, this approach was expanded upon with the comment that a non-competition clause is only appropriate “where the nature of the employment will likely cause customers to perceive an individual employee as the personification of the company or employer.”
Although many employees are asked to execute non-competition covenants, employers should not proceed on the assumption that such covenants are enforceable. Employers should ensure that if they use such covenants, the restrictions do not curtail the individual’s right to pursue a living any more than is necessary to protect the employer’s proprietary interests.
Furthermore, employers’ interests should be protected by having non-disclosure and non-solicitation covenants in place, either in addition to or instead of the non-competition covenants. Otherwise, organizations may be out of luck when they see their employees moving to the competition. Finally, employers must remember that all contracts, including employment agreements, require consideration. An agreement will not be enforced if it is simply presented to an already-employed individual who is asked to sign it without receiving any benefit in return.
Stuart Rudner practises civil litigation and employment law in Toronto with Miller Thomson LLP. For more information contact (416) 595-8672, [email protected] or www.millerthomson.com.
Canadian courts will only enforce non-competition clauses in very limited circumstances. More often than not, an employer should seek to protect its interests by using narrower covenants such as non-disclosure and non-solicitation clauses.
According to the Court of Appeal for Ontario, “the general rule in most common law jurisdictions is that non-competition clauses in employment contracts are void.” The underlying reasons for this are to protect the right of persons to earn a living in their chosen fields of employment and to avoid unnecessary restraint of trade.
One of the most recent examples of the court’s reluctance to enforce non-competition clauses was reported in January this year. The facts of the case, known as TAL Global Asset Management v. Wai-Ping, are not particularly unusual. Wai-Ping was an investment fund manager with a strong reputation in the industry. She had regular contact with retail brokers and other entities, although no direct contact with the unit holders of the TAL funds, which were conceivably TAL’s clients.
On April 3, 2002 Wai-Ping signed non-competition and non-solicitation agreements. At the outset of his reasons, Judge John D. Ground expressly found that Wai-Ping received proper consideration in return for signing the agreements. Otherwise — and this could form the subject matter of another commentary altogether — it would be open to Wai-Ping to argue that the agreement as a whole was unenforceable.
The agreement included these terms:
Non-competition — The undersigned covenants and agrees that if her employment terminates prior to Oct. 10, 2003, she will not, for the restricted period (as defined below), either as principal, agent, employer, employee, partner, beneficiary or in conjunction with any individual, firm, corporation, association or other entity, solicit, serve, be employed by or assist directly or indirectly, or be materially interested in or otherwise connected with, any person or company soliciting, serving or catering to any of the clients to TAL Global, TAL Private or Talvest, or wealth management clients of CIBC or its affiliates, at the time of the termination of her employment.
Non-solicitation — During the term of her employment and for the restricted period, the undersigned undertakes and agrees not to, directly or indirectly, offer to employ, retain or join in partnership or association with or solicit the employment, retainer of, partnership or association with or be in any way connected with any employee, officer or agent of TAL Global, TAL Private or Talvest, any employee, offer or agent of CIBC engaged in the wealth management business, or any employee, officer or agent of any companies in which one or more of CIBC, TAL, Global, TAL Private or Talvest holds a controlling interest.
The restricted period was one year. There was no specification whatsoever on the geographic area in which Wai-Ping’s actions would be restricted.
TAL sought an injunction restraining Wai-Ping from breaching the non-competition and non-solicitation covenants. Justice Ground agreed that the one-year period during which covenants would be in force was not unreasonable. However, he found that the non-competition and non-solicitation clauses that TAL was seeking to enforce were unreasonable both in terms of the scope of activities that they restrained and the unlimited geographic area they purported to cover.
Specifically, the judge found that the unlimited geographic area, which these covenants covered, which would presumably restrain Wai-Ping from being employed by any TAL/CIBC competitor anywhere in the world, was unreasonable. Justice Ground reached the same conclusion regarding the scope of restricted activities. As TAL was seeking an injunction, Justice Ground found that TAL had not established a strong prima facie case that the clauses were reasonable and enforceable.
Justice Ground’s decision confirms the approach of the courts in Canada. They will not enforce non-competition covenants unless the circumstances truly justify such a restriction on an individual’s freedom to pursue her livelihood. This is consistent with a 2000 decision by the Court of Appeal for Ontario, Lyons v. Multari.
In that case, the clause at issue read, in its entirety: “Protective covenant. 3 yrs. – 5 mi,” implying a non-competition clause that lasts three years and covers a geographical area five miles from the former employer. Having stated that the general rule is that non-competition clauses are unenforceable, Justice James C. MacPherson found no reason to depart from the general rule in that case.
The leading Canadian decision on this issue goes back to 1978, in the Supreme Court of Canada decision, J.G. Collins Insurance Agencies v. Elsley. Elsley was a representative of the company, and its customers dealt with him almost exclusively. Justice Dickson found that to the customers of J.G. Collins Insurance Agencies, “Elsley was the business.”
As a result, there was a very real concern in that case that the company required protection when Elsley left. In fact, although Elsley did not solicit any customers when he left, almost 200 customers chose to follow him and leave Collins. This represented approximately half of Collins’ client base. In that case, the Supreme Court agreed that a non-solicitation covenant would not adequately protect the employer’s interests, and upheld a restriction on competition that encompassed three separate communities and continued for a period of five years.
In his reasoning in Elsley, Justice Dickson confirmed that a restraint on trade must be reasonable in the interests of the parties and the public in order to be valid.
He referred to the competing interests at issue, acknowledging that there is a public interest in discouraging restraint on trade, while at the same time there is a reluctance to interfere with the right to contract.
Justice Dickson then set out some factors to be considered when considering the reasonableness of a restrictive covenant upon competition. These are:
Whether the employer has a proprietary interest entitled to protection:
The courts will not enforce non-competition clauses where the intention is simply to prevent a former employee from competing in the industry. The necessary proprietary interest relates to the relationship between the company and its clients.
In a case like Elsley, it is the employee who has the relationship with the clients; the clients have no real sense of attachment or loyalty to the actual company. As a result, the clients are more likely to leave and follow the employee if he joins a competing company, even if the employee does not actively solicit their business.
In such circumstances, a non-solicitation covenant would not adequately protect the employer, and a non-competition clause may be allowed in order to allow the company a reasonable period of time to rebuild the client relationship before the departed employee commences competing against it.
Whether the temporal or spatial features of the clause are too broad:
Simply put, a company that deals with clients in Hamilton does not require a non-competition clause precluding a former employee from working in the same industry anywhere in North America.
The geographic limitation must be directly related to the duties carried out by the employee during employment. Furthermore, the time period established by the clause must be only what is reasonably necessary to rebuild customer relationships.
Whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer:
The Court of Appeal for Ontario has explicitly stated “the courts will not enforce a non-competition clause if a non-solicitation clause would adequately protect an employer’s interests.” In another decision, this approach was expanded upon with the comment that a non-competition clause is only appropriate “where the nature of the employment will likely cause customers to perceive an individual employee as the personification of the company or employer.”
Although many employees are asked to execute non-competition covenants, employers should not proceed on the assumption that such covenants are enforceable. Employers should ensure that if they use such covenants, the restrictions do not curtail the individual’s right to pursue a living any more than is necessary to protect the employer’s proprietary interests.
Furthermore, employers’ interests should be protected by having non-disclosure and non-solicitation covenants in place, either in addition to or instead of the non-competition covenants. Otherwise, organizations may be out of luck when they see their employees moving to the competition. Finally, employers must remember that all contracts, including employment agreements, require consideration. An agreement will not be enforced if it is simply presented to an already-employed individual who is asked to sign it without receiving any benefit in return.
Stuart Rudner practises civil litigation and employment law in Toronto with Miller Thomson LLP. For more information contact (416) 595-8672, [email protected] or www.millerthomson.com.
