Enforceability of Non-Competition Provisions

Two insurance salesman entered into employment agreements that contained a restrictive covenant stipulating that for two years after the termination of employment, they were not to “conduct business with any clients or customers of [their employer] that were handled or serviced by you at the date of your termination”.   The agreement also contained a liquidated damages clause.

The employees left their employment, and commenced employment with a competitor of their former employer.  The former employer sues and the defendants argue that the clauses are not enforceable.  The Trial Judge disagrees and awards $2 million in damages plus punitive damages. 

The employees and their new employer appeal and asked that the Court of Appeal declare that the restrictive covenant and the liquidated damages clause to be unenforceable.

The Court agreed that the non-compete provision was unenforceable.  In reaching this conclusion, the Court set out the governing principles:

Reasonableness is the mechanism by which a court decides whether a covenant is “overly broad” or is only that which is reasonably required for the employer’s protection.  But how is a court to determine whether any given restrictive covenant is “reasonable”?  Elsley offers a framework for making such a determination.  The starting point is “an overall assessment of the clause, the agreement within which it is found, and all of the surrounding circumstances”. Thereafter, three factors must be considered.  First, did the employer have a proprietary interest entitled to protection?  Second, are the temporal or spatial features of the covenant too broad? And, third, is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer?

The Court then discusses two additional considerations:

1. A general principle flowing from Elsley and reiterated in Lyonsis that a non-solicitation clause - suitably restrained in temporal and spatial terms - is more likely to represent a reasonable balance of the competing interests than is a non-competition clause.  An appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person’s ability to work in his or her chosen field.  A non-competition clause, on the other hand, is enforceable only in exceptional circumstances; and
2. The fact that a clause might have been enforceable had it been drafted in narrower terms will not save it.  The question is not whether a valid agreement might have been made but whether the agreement that was made is valid (the Court will not "blue-pencil" the clause, at least in Ontario).

The Court found that the clause was a non-competition provision which had no geographic limitation.  Further, there was "no limit in the Restrictive Covenant on the type of work which the Employees are prohibited from conducting". The Court concluded that the clause was “overbroad” and unenforceable.

The Court went on to make the following comment:

A non-solicitation clause is sufficient in conventional employer/employee situations. The Employees were two of ten commercial insurance salespeople that worked for Staebler.  They did not play an exceptional role in the Staebler business – they were ordinary salespeople.  They were not managers, directors or key employees.  They did not stand in a fiduciary relationship with Staebler.  

Another helpful case from the Court of Appeal.  Employers should take note of it and ask some tough questions before they enter into one of these agreements with a prospective employee including "what type of clause do I really (really) need to protect some proprietary interest?"