Date: February 29, 2012
Author: Daniel A. Lublin
Publication: The Globe & Mail
The question: Could you comment on Canadian case law about non-compete and non-solicitation clauses? My new employer is insisting that I sign one, and the battle to get it removed is proving unhealthy for my relations with the employer even before I start.
Are they enforceable? Do I need to spend more time fighting it, or leave it as wasted verbiage on paper? I checked with a local lawyer and he felt the non-competes are worthless in a Canadian context and not enforceable. I wondered what your experience has been with this.
The answer: Customers are seldom attracted to one company or another exclusively by virtue of the services they are offered. Rather, their loyalty often lies with the relationships that are built and the key employees who have built them. That is why employers will go to great lengths to protect their business from departing employees, often by compelling them to agree to contractual limits on post-employment competition.
While courts permit employers to protect their business through these contractual limitations, for a number of reasons, they often rule that employers have gone too far. A recent Ontario case provides a perfect example.
In 1992, when Tom Mason was hired as a salesperson by Chem-Trend Ltd., a Michigan-based company selling chemical products around the world, he was required to sign a contract providing that, for a period of one year after he left the company, he would not conduct any business with any of its clients.
What he signed was a non-compete contract: The agreement effectively forbade him from performing any work for a competitor for a defined period of time after he left Chem-Trend.
Non-solicitation contracts are different, however: They permit people to work wherever they please, but prohibit them from contacting any of their former clients for any competitive purposes.
Together, these clauses are referred to as “restrictive covenants.” Because they can easily place employees in difficult situations, courts scrutinize them carefully to ensure that only the most reasonable restrictions will survive.
During Mr. Mason’s 17-year career with Chem-Trend, the non-compete contract he signed when he started work was never discussed. There was never an occasion or need to do so. However, when he was dismissed, as part of his wrongful dismissal lawsuit, he asked the court to declare the contract invalid after a dispute about whether he could do business with some of his old customers.
The Ontario Court of Appeal recently determined that although he had voluntarily agreed to the non-compete clause, it was not enforceable for several reasons. First, the clause he signed was, in practice, a complete prohibition on competing with Chem-Trend, which was unnecessary. Mr. Mason did not deal with many of Chem-Trend’s customers, so the ban on competing with them was excessive.
Nor was he a senior employee. The court noted that for executives or key employees, non-compete clauses might be justified to protect a company, but for ordinary employees, a non-compete clause will not often be respected.
The Mason case demonstrates the customary approach courts take to deciding whether a restrictive covenant should be upheld:
First, does the contract form part of the employment relationship? This is critically important but often overlooked by employees and employers – and sometimes by inexperienced lawyers. As with an employment contract, a restrictive covenant must be agreed to by the person before he or she accepts employment.
If the clause is provided to the employee after work begins, even if on the first day, it will not be enforceable unless it is provided along with something of value in exchange for signing it, such as a bonus, raise or promotion. If an employee is required to sign the clause mid-tenure, it is sometimes wise to not even protest it, since it will never be enforced.
Second, was any form of duress involved? Was the employee forced to sign the clause or otherwise threatened with losing his or her job? If the contract was not entered into freely and voluntarily, a court will set it aside.
Third, and not least, is the contract even reasonable? Unlike other forms of employment contracts, restrictive covenants have the potential to do significant harm to individuals, so courts have the power to overrule them where the restrictions imposed are unfair. So the clause must only limit an individual’s post-employment activities to the extent that is absolutely necessary. This is often assessed by considering the length of time the restriction applies, the geographic scope of the restriction and whether it is even necessary.
In short, most non-compete clauses are excessive, and thus will be upheld only in very limited circumstances.
Non-solicitation clauses, however, are a different story. If the terms are not clearly unfair and the employee is in a position to solicit business following his or her departure, a court is much less likely to intervene.
So in determining whether to spend any time and energy fighting a restrictive covenant, the language must be assessed to determine what form of restrictive covenant it actually is, and whether the employer has any chance of seeing it enforced.
As with many issues in workplace law, the law itself can be easy to state but difficult to apply. Get good advice.