Ontario's Court of Appeal confirms 4 important points in ruling on restrictive covenants
By Stuart Rudner
The issue of what an employee can and cannot do after the employment relationship ends (whether it ended because they resigned, they were dismissed for cause or they were dismissed without cause) is frequently a source of concern and misunderstanding.
A recent decision of the Court of Appeal for Ontario considered a situation in which an employee, formerly the owner of the company, resigned and took a binder containing materials regarding tenders the company had been involved in and a list of employees. He then started a new corporation and, a little over one year later, successfully bid against his former employer on a project.
In its decision, the Court of Appeal confirmed four important points.
•Restrictive covenants are prima facie unenforceable. A restrictive covenant will be upheld only where it is shown to be reasonable by the party seeking to enforce it.
•The courts will only “read down” an ambiguous or unreasonable restriction in a covenant in “rare cases where the part being removed is trivial and not part of the main purport of the restrictive covenant.”
•A former fiduciary cannot directly solicit the employer’s customers for a reasonable period of time, but is otherwise free to compete against the former employer provided he does not do so unfairly.
•Mere possession of confidential information belonging to the individual’s former employer does not constitute unfair competition.
In this case — Veolia AS Industrial Services Inc. v. Brule — Brule was the founder of Veolia AS Industrial Services. In 1999, he sold his shares but stayed on as president and CEO. His employment agreement contained a restrictive covenant that provided as follows:
5.1 Non-Competition. Subject to sections 1.2 and 2.3, and to any other provision of this Agreement, during the Senior Executive’s employment with the Employer and for a period of:
(a) Two (2) years following the termination of the Senior Executive’s employment for cause or, two (2) years from the termination of the Agreement pursuant to section 1.2, the Senior Executive covenants and agrees not to compete, either directly or indirectly, with the core Business within;
(i) the Provinces of Ontario and Quebec; or
(b) Two (2) years commencing on January 1, 2007 following termination by the Senior Executive’s employment without cause.
(c) Two years commencing on January 1, 2007 following termination by the Senior Executive pursuant to section 2.3(b). (emphasis added)
On July 7, 2004, Brule resigned from Veolia by providing 180 days notice, which Veolia waIved. The evidence showed Brule had an employee assemble a binder of 30 to 50 recent municipal tenders and related information, and took this binder along with a list of Veolia’s employees when he left.
Brule then incorporated Clean Water Works Inc. The evidence was this company was involved in rehabilitating water mains, and not sewers as Veolia did. However, in the fall of 2005, Clean Water Works had excess capacity and submitted a bid to the City of Ottawa for sewer work. Clean Water Works was awarded the tender, beating out Veolia. Veolia sued Brule and Clean Water Works.
At trial, the judge found the restrictive covenant was ambiguous and should be revised in order to make it clearer by severing the words “commencing on January 1, 2007.”
However, the Court of Appeal found it was inappropriate to do so. First, the court confirmed restrictive covenants are prima facie unenforceable and will only be upheld where they are shown to be reasonable by the party seeking to enforce them.
In this case, the court held the clause, as written, was “clearly unreasonable and unenforceable.”
Furthermore, the court found the facts showed that if Brule did compete with Veolia, it was not within the two year period commencing on Jan. 1, 2007. The court also found there was evidence the parties would not have agreed to remove the words “commencing on Jan. 1, 2007,” without varying other terms of the contract. As a result, the court held it would be inappropriate to read the clause down.
The second issue dealt with by the court was whether Brule breached his fiduciary duties to Veolia.
The court confirmed that after a fiduciary’s employment ends, he generally cannot directly solicit the employer’s customers for a reasonable period of time, but the fiduciary is otherwise free to compete against the former employer once his employment ends, provided he does not do so unfairly.
Veolia alleged Brule competed unfairly by taking the information referenced above. But the Court of Appeal found there was no evidence the information in the binder was confidential, and also no reason to conclude Brule used that information in making the bid in question.
Furthermore, although Veolia argued Brule had a duty to advise his former employer he was competing against them on the bid, the court found “a former fiduciary employee who is free to compete is not required to tell his former employer that he is about to do so.”
Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or email@example.com. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.