KPA Lawyers – October 16, 2019

Very frequently employers put clauses in their employees’ contracts that state that the employee is not permitted to engage in a competing business or seek employment from a competitor after they are let go or quit their job. In common industry parlance this is referred to as a “Non-Compete”.

Another clause that is almost inevitably coupled with a Non-Compete is a clause that states that the employee is not permitted to approach the clients, or even the potential clients, of the employer and solicit their business, for some time period following the end of the employees working relationship with the employer. These clauses are commonly referred to as “non-solicitation” or “Non-Solicit” clauses.                                                                                                                                                                Together these fall under a category of contractual clauses called “restrictive covenants”.

Naming conventions aside, the important thing to know is that while these clauses are as frequent in employment contracts as they are daunting to freshly terminated employees looking for new work, they are, more often than not, unenforceable.                                                                                                          Non-competes and Non-Solicits are regularly found to be of no force and effect by Ontario courts, but nevertheless they are a regular occurrence in employment contracts simply because it costs an employer next to nothing to put them in front of an employee and often departing employees will simply not question formal sounding legal verbiage that tells them that they cannot compete with their old boss.

This article takes a look at the various challenges Non-Competes and Non-Solicits have to go through to survive scrutiny by a court and bear any effect on a former employee.

Fired Without Notice or Pay? No Way.

Briefly first, if you are wrongfully dismissed, meaning that you are fired without being given the proper notice or pay-in-lieu, or you are constructively dismissed or any other form of what constitutes wrongful dismissal at law, you are not bound by these restrictive covenants at all, even if they were otherwise enforceable.[1] This is an easy way to determine if a restrictive covenant is a non-starter. Sometimes it is clear that you have been wrongfully dismissed, for example, in cases where you have not been provided even the minimum notice-period under the Ontario Employment Standards Act.

However, some instances require a closer legal analysis, such as where you may have been given your Employment Standards Act notice, but nothing more, or where there may be a potential allegation of discrimination based on a Human Rights Code violation.

For our article on wrongful dismissal in termination pay, click here.

Properly Dismissed? Proceed with Caution.

Otherwise, if you are lawfully dismissed, for a restrictive covenant to be enforceable, it must be reasonable in scope, time and geographic area.[2] The Supreme Court of Canada has also stated the legal test for determining enforceability of employee restrictive covenants is, broadly speaking, the question of “if it is reasonable between the parties and with reference to the public interest”[3]. The standard for what a reasonable Non-Solicit is, is far less strict than the standard for a Non-Compete. In fact, the courts have stated that Non-Competes are drastic measures, and should not be used where a Non-Solicit is enough protect the legitimate interests of the employer.[4] The use of Non-Competes should only be used in exceptional circumstances.[5]

The Non-Compete – What has the court found to be such exceptional circumstances?

There are a number of factors that increase the likelihood of the circumstances being exceptional enough to warrant a Non-Compete[6]:

The amount of personal service you have given to clients;

The threshold for permitting the Non-Compete on the grounds that you provided personal service to clients is very high. The personal attachment of the clients to you must be so great that they associate your name as essentially the poster-person of your employer. This must be to the extent that you merely operating your business elsewhere will cause existing clients of your former employer to abandon them and follow you simply based on the goodwill you built with them.[7] One example of a company legitimately protecting its business interests against competition was found in where an employee of an insurance broker departed from the that company and had many of the clients he brought into the brokerage follow him to his new place of employment. This employee was a farmer, selling farm insurance to other farmers. He was hired, primarily because of his relatability to the target clientele, used his own name instead of the company’s in selling the companies services and even branded the slogan “A Farmer Insuring Farmers”. In this case the court found these factors in favor of a determination that the company could enforce its Non-Compete.[8]

Whether the employee dealt with clients exclusively, or on a sustained or recurring basis;

The threshold for permitting the Non-Compete on the grounds that you were requested by clients is very high. To satisfy this threshold, the employer would have to show that clients have specifically been asking for you and only you to serve their needs throughout your employment with them.[9]

Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies;

This threshold is met if you are put in a position by your employer where you can obtain confidential information about clients, such as what their particular consumer needs and preferences are. The employer will have to show that it is unreasonable to assume that you would have acquired such knowledge without them putting you in touch with the client. For example, knowledge of a client’s desire to purchase a particular service and what price they are willing to pay has been considered to be confidential information where gathered during the course of employment.[10]

The length of service with the employer;

Courts have used length of service as a factor to amplify the other, more critical factors listed above. In cases where employees were employed for about 10 years, this fact was used to establish that those employees had formed special and long-lasting relationships with the employer’s clients which would be unfairly taken from the employers if the employees started their own separate business.[11]

However, even fulfilling the requirements above does not give an employer a blank cheque to impose a Non-Compete in whatever manner they wish: Even if a court found that there were exceptional circumstances in your case, warranting a Non-Compete, such a Non-Compete would have to be limited to restricting your ability to abuse only those exceptional circumstances and not be drafted in a broad manner to restrict competition generally. A Non-Compete can be no broader in time, geographic location or type of activity restricted than necessary to protect the employer’s legitimate proprietary interest.[12] Determining the nuances of whether a situation is within the scope of “legitimate proprietary interest” is beyond the scope of this article and should be assessed on a case by case basis by a lawyer.

The Non-Solicit – What is Reasonable? Considering that the Non-Compete will almost certainly not be enforceable, the remaining question is whether the Non-Solicit properly restricts your ability to communicate with your former employer’s clients. To answer the question of whether a Non-Solicit is reasonable, a court will attempt to answer the following three questions:

• Does the employer have a proprietary interest over the thing that is being restricted, which is entitled to protection?

• Are the temporal or spatial features of the clause too broad?

• Is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer?[13]

A Non-Solicit will almost invariably prescribe a class or classes of individuals that you must not solicit for business. Therefore, the first step is to determine whether each of these classes is a reasonable class to restrict from your solicitation. The following are a list of commonly included classes in non-compete clauses and a brief evaluation of whether they would lend themselves to an enforceable Non-Solicit: (a) existing customers of the Employer with whom you have dealt with while employed with the Employer,

Employers have a proprietary interest in their client base and the general relationship of goodwill that has been established between the employer and the clients.[14] The logic behind this is that an employee works to establish this relationship for the benefit of the employer, not the benefit of the employee. As such, this class in a Non-Solicit, would, on its own, be enforceable in many circumstances.

(b) previous customers of the Employer with whom you have dealt with while employed with the Employer,

In determining whether employers have a proprietary interest in previous clients, courts have typically required that, in the very least, Non-Solicits with respect to previous clients be limited to only those clients with whom the employee has had contact through their employment.[15] As such, this class would, on its own be enforceable in many circumstances.

(c) prospective customers that the Corporation is pursuing

The Supreme Court of Canada has found that Non-Solicits will be found to be unenforceable if they are ambiguous with respect to the time, geography and activity restricted.[16] In many cases this type of class restriction would be unenforceable as it is almost impossible for an employee to discern who is and who is not a prospective customer.

It is very important to note, at this point, that the severance clauses of the employment contracts are entirely unenforceable. A court will not come to the aid of an employer who drafts overly-broad clauses and then counts on the court to fix them by severing illegal provisions and reading in terms to bring the clauses within the realm of reasonability.[17]

Were the above clauses present in an employment contract, the very fortunate consequence, to an employee, of this would be that subclause (c) of the example Non-Solicit taints the two otherwise enforceable subclauses (a) and (b) of the example Non-Solicit, making them unenforceable as well.

Finally, no matter how reasonable the class and geographic restrictions are, a Non-Solicit cannot restrict competition indefinitely and must be limited by a reasonable timeline following termination. Ontario courts have held that, in assessing what a reasonable time period is for a Non-Solicit, the reasonable notice period in the case of a wrongful dismissal is also usually used as a reasonable period for a Non-Solicit.[18]

In any case, when faced with a Non-Solicit or Non-Compete, either when signing a new contract, considering leaving your current job or when seeking new employment following a termination, the decision whether to seek work with a competitor should not be made without consulting an employment lawyer. The lawyers at KPA Lawyers Professional Corporation have extensive experience evaluating various formulations of restrictive covenants in different employment circumstances.

Book a consultation today to make your next career steps wisely.

[1] Globex Foreign Exchange Corp. v. Kelcher 2011 ABCA 240 at paras 44-72, Martin v. ConCreate USL Ltd. Partnership, 2012 ONSC 1840 at para 47, Gerrard v. Century 21 Armour Real Estate Inc. [1991] O.J. No. 261, 4 O.R. (3d) 191 [ONSC] at para 35 and 37.

[2] Researchco Ltd. Partnership v. Real Estate Search Corp. 2004 CarswellOnt 4510, [2004] O.J. No. 4578, [2004] O.T.C. 968 [ONSC] at para 18.

[3] H.L. Staebler, Co. v. Allan 2008 ONCA 576 at para 33.

[4] Lyons v. Multari, 2000 CarswellOnt 3186, [2000] O.J. No. 3462 [ONCA] at para 33.

[5] Donaldson Travel Inc. v. Murphy et al, 2016 ONSC 740 at Para 22, IMS Health Canada Inc. v. Harbin 2014 ONSC 4350 at para 65.

[6] Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 at para 41.

[7] Ibid at para 38.

[8] Frost Insurance Brokers Ltd. v. McMorrow [2004] OJ No 5752 at paras 30-32.

[9] Supra note 6 at para 42.

[10] IT/NET Ottawa Inc. v. Berthiaume [2002] O.J. No. 4256, 117 A.C.W.S. (3d) 921, 29 B.L.R. (3d) 261

[11] Roy v. Assumption Mutual Life Insurance Co. 2000 CarswellNB 3, 2000 CarswellNB 4, [2000] A.N.B. No. 1 [NBCQB] at para 71.

[12] Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 at para 42.

[13] J.G. Collins Insurance Agencies Ltd. v. Elsley [1978] 2 S.C.R. 916, [1978] S.C.J. No. 47 at para 19.

[14] Lyons v. Multari, [2000] O.J. No. 3462, 136 O.A.C. 281 [ONCA] at para 25.

[15] Globex Foreign Exchange Corp. v. Kelcher, 2011 ABCA 240 at para 169.

[16] KRG Insurance Brokers (Western) Inc. v. Shafron, 2009 SCC 6 at para 43.

[17] Ibid at paras 33-42.

[18] KJA Consultants Inc. v. Soberman, [2002] O.J. No. 489, 111 A.C.W.S. (3d) 753 [ONSC] at para 3.

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