Though it would be an overstatement to suggest that it is impossible to successfully enforce a post employment non-competition covenant found in an employment agreement, it would be fair to say that it is very difficult to do so.
The Ontario Court of Appeal judgment in Mason v. Chem-Trend Limited Partnership is the most recent in a growing line of cases striking down a non-competition provision as unenforceable.
The employee was terminated after 17 years and filed suit which was ongoing. To assist in determining the extent to which the employee could compete with the company post-termination, he brought a separate application asking the court to declare the restrictive covenant in his employment contract unenforceable. He was unsuccessful with his application and appealed to the Court of Appeal.
When he was hired he signed an agreement that included the following provision:
"I agree that if my employment is terminated for any reason by me or by the Company, I will not, for a period of one year following the termination, directly or indirectly, for my own account or as an employee or agent of any business entity, engage in any business or activity in competition with the Company by providing services or products to, or soliciting business from, any business entity which was a customer of the Company during the period in which I was an employee of the Company, or take any action that will cause the termination of the business relationship between the Company and any customer, or solicit for employment any person employed by the Company". [Emphasis added by the Court of Appeal].
The issue before the Court was whether "the restrictive covenant in the employment contract between the appellant and the respondent enforceable or unenforceable at law".
The Court held that the application judge erred in not striking down the clause and in doing so provided a thorough review of the applicable legal principles when considering the enforceability of these covenants.
According to the Court, among the principles to be considered are the following:
- While covenants in restraint of trade are contrary to the public policy in favour of trade, certain of such covenants will be upheld if they are found to be reasonable in the circumstances. (Shafron v. KRG Insurance Brokers (Western) Inc.)
- Restrictive covenants in employment contracts will be scrutinized more rigorously than restrictive covenants in a sale of a business because there is "often an imbalance in power between employees and employers and because a sale of a business often involves a payment for goodwill whereas no similar payment is made to an employee leaving his or her employment". (Shafron)
- The first question is whether there is ambiguity in the interpretation of the meaning of the restrictive covenant clause. According to Rothstein, J. in Shafron, "[a]n ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity" and further, "The onus is on the party seeking to enforce the restrictive covenant to show that it is reasonable and a party seeking to enforce an ambiguous covenant will be unable to demonstrate reasonableness."
- To be enforceable, the covenant must be “reasonable between the parties and with reference to the public interest.” (the leading case of Elsley v. J.G. Collins Ins. Agencies)
- “The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment of the clause, the agreement within which it is found and all of the surrounding circumstances.” (Elsley)
- The three factors to be considered are, (1) did the employer have a proprietary interest entitled to protection? (2) are the temporal or spatial limits too broad? and (3) is the covenant overly broad in the activity it proscribes because it prohibits competition generally and not just solicitation of the employer’s customers?
The Court of Appeal considered these principles and disagreed with the applications judge about the reasonableness of the covenant.
Specifically, the Court considered the Agreement as a whole and found that there were "other clauses that protect the respondent" and that these clauses "significant protection for the company" and that the restriction on competition in the manner set out in the Agreement and in all of the circumstances of the case, was unreasonable and unenforceable. The Court stated:
After conducting the balancing process between the rights of the respondent to protect its trade secrets and customer information, and the public interest in free and open competition, in the context of the agreement as a whole and the role of the appellant in the company as a salesman, I conclude that the complete prohibition on competition for one year is overly broad as well as unworkable in practice and makes the restrictive covenant unreasonable and unenforceable.
The Court concluded that the clause was unreasonable and therefore unenforceable and awarded $25,000 in costs of the appeal to the employee.
While there are many reasons for wanting to limit an employees ability to compete post-termination, the trend in the case law makes such blanket prohibitions on competition difficult to enforce.
Putting a broad restriction on an employee's post-employment activities simply because you can, won't make it enforceable. Similarly, defending the enforceability of the covenant on the basis that "this is our standard form, everyone signs it" is a hollow argument and, ultimately, will be rejected in favour of the principled analysis described above and in the cases.
Further careful drafting of the agreement will not necessarily "win the day", but overly broad and reaching provisions that simply go too far will sink the case given the judicial trend.
Asking "what are you trying to achieve?" and "what interest are you trying to protect?" through these covenants and what is the absolute minimum protection necessary to achieve that interest are good questions to ask as a starting point. Clearly, where the employer over-extends the protection beyond the absolute minimum required, the Court will step in a rectify the matter by striking down the clause as unenforceable.
And there's more bad news.... Employers can no longer rely on the Court fixing an unreasonable restrictive covenant by "blue penciling" or writing it down. As the Court noted in Shafron:
I am also of the view that notional severance has no place in the construction of restrictive covenants in employment contracts. .....
It invites the employer to impose an unreasonable restrictive covenant on the employee with the only sanction being that if the covenant is found to be unreasonable, the court will still enforce it to the extent of what might validly have been agreed to.
So the key is to get it right from the outset and defend the enforceability of the covenant on the legal principles found in a growing line of cases.