Enforceability of non-solicitation provision

Exclusive to Canadian HR Reporter from Rudner Law.

One of your best employees, Mitch, has resigned and is leaving at the end of the month. He managed your main clients and formed personal relationships with some.

A few days later you are advised that one of your competitors hired him. This same competitor has made repeated attempts to poach your main clients: the same ones that Mitch is responsible for taking care of.

Is there anything you can do? You check Mitch’s employment agreement and see a provision marked “Non-Solicitation” that your employment lawyer suggested you include when preparing the agreement. You see that it prevents Mitch from contacting any of the company’s 1,500 clients or employees for a period of two years.

Will this provision protect the company? To find out, we will review the concept and the law behind these. 

What is – and isn’t – a non-solicitation provision?

A non-solicitation provision is a restrictive covenant that limits an individual from contacting parties and attempting to have them cease their relationship with a company.

This can ensure that a departing employee does not attempt to induce a company’s existing clients or employees to leave.

It will also provide a means to obtain a remedy if breached, including a court order to cease contacting clients or for damages due to the employee's breach of the provision.

A non-solicitation provision that limits an individual from accepting business from their former employer’s clients, irrespective of how these clients contacted them, is likely to be found to be a non-competition agreement in disguise and unenforceable.

For example, if the clause prohibits “accepting business from” or “doing business with” customers of the previous employer, that goes too far.

How will the law evaluate a non-solicitation provision?

An employer that believes an employee has breached a non-solicitation provision can seek an injunction and/or sue for damages. If an injunction is granted, this will compel the employee to comply with the terms of the provision; failing to do so will mean that the employee is in contempt of court.

Courts start from the proposition that restrictive covenants are a restraint on trade and will not be enforced unless the limits can be justified as a reasonable restraint. A simple example of an enforceable restrictive covenant is one that prevents an employee from disclosing an employer’s confidential information: this benefits the employer without harming the employee.

Conversely, one that completely blocks the employee from taking a job in their field after leaving the employer may not be enforceable, as it creates an unreasonable restraint by removing the employee’s skills from the economy.   

The court will review the non-solicitation provision to determine if it is reasonable and therefore enforceable. This evaluation requires the balancing of competing interests: a company’s proprietary interest in maintaining its clients and staff, the employee's ability to make a living, and public interest in preventing an unnecessary restraint on trade.

This review will include examining what the provision prevents the employee from doing, including who the employee is not permitted to contact and for how long. The level of stringency in this review will differ based on whether the provision is in a commercial or employment agreement.

Evaluation of a commercial agreement (like the sale of a business) is based on the circumstances of the parties’ negotiations, including level of expertise and the resources to which they had access. Evaluation of an employment agreement is based on its reasonableness, recognizing the power imbalance between the parties.

Where the court finds a non-solicitation provision unenforceable it will strike it: it will not “fix it” to bring it in line with the law. By way of example, if the clause purports to limit the employee's actions for a period of nine months and the court feels that six is reasonable, then the entire clause will be struck out and the company will have no protection at all.

What needs to be included in a non-solicitation provision?

A non-solicitation clause is more likely to be enforceable where the duration for which the employee is prevented from soliciting parties is limited. This can protect an employer without unduly impacting an individual’s ability to work.

What then, does a non-solicitation provision need to include in order to be reasonable, and thus, enforceable? Unfortunately, the court has not provided its guidance of what an agreement that is “limited in its duration” that would be enforceable would look like.

Without clear guidance, drafting a reasonable non-solicitation provision requires consideration of first principles. An employer should consider what proprietary interests it is seeking to protect, and what harm the employee can do to these. A more senior employee may have a greater opportunity due to their status with a company to poach a client than a junior one. Accordingly, a longer duration (such as 12 months) may be more enforceable for a senior employee than a junior one (for whom six months may be more reasonable). An employer that asks for too much in terms of the duration of the clause may wind up with nothing.

There should be no ambiguity in the provision: the employee must know what they are not permitted to do. The type of clients that the employee is prevented from contacting must also be clearly outlined and be reasonable. A blanket declaration that the employee may not contact any existing or prospective client may be reasonable for a small company with a dozen clients; the same will not be true for an employee at a company with a thousand clients and ten locations.

Finally, a non-solicitation provision must only prevent soliciting: a non-competition provision “disguised” as a non-solicitation provision will likely be struck as an unnecessary restraint on trade. For example, a “non-solicitation” provision that reads as follows is likely to be unenforceable:

“You agree that for a period of 24 months after the cessation of your employment for any reason, you shall not directly or indirectly, solicit any customers or suppliers of the Company to secure their business for any future employer or business with whom you are associated.”

Preventing soliciting business from a company’s customers may be a reasonable restriction. However, preventing soliciting business from a company’s suppliers is a restriction on the employee's ability to work in their field. In addition, the duration of the provision may be excessive and held to be unreasonable.

Conclusion

A non-solicitation provision in an employment agreement can be a valuable tool for an employer. When properly worded, it can assist in preventing an employee from leveraging their past relationships with a company’s clients to benefit a new employer.

However, when this is overly broad, applies for too long, or is actually a non-competition clause in disguise, the chances are that a court will not uphold it, and the departed employee will be free to do as they please.

Geoffrey Lowe is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].