Legal Blog

Non-Comp Revisited

Since we are in an “I told you so mood”, we will also report on the ultimate effect of a non-competition covenant in an employment agreement. The covenant was dealt with in H.L. Staebler Co. v. Allen [2008] O.J. No. 3048 (C.A.).

First, however, we take you back to our newsletter of October 2005, in which we stated,

“Finally, a contractual duty may be set out in an employment agreement. It can impose a very high duty. However, if the duty is so high as to be unreasonable, the duty is in restraint of trade and is unenforceable. Examples of unreasonableness are:

1.   The agreement contains a non-competition covenant rather than a non-solicitation covenant (e.g. for a dentist – do not compete; rather than do not solicit my clientele).

2.   The geographical area for non-competition is too wide (e.g. for a video store – do not compete anywhere in the country; rather than within two blocks of the employer’s store).

3.   The time for non-competition is too long (e.g. in the computer industry – do not compete for 5 years; rather than for 6 months to a year).”

Facts

An insurance broker had a restrictive covenant in its employment agreement with two defendant employees. It said that if their employment was terminated, they would not conduct business for two years with any clients of the brokerage that they serviced at the date of termination. During the course of their employment, the employees serviced clients they had obtained on their own and clients that the brokerage gave to them.

The employees left the brokerage and went to work at another brokerage. They immediately solicited their old clients and, within 14 days of their leaving, about 64% of their old clients moved their business to the new brokerage. The old brokerage then obtained an injunction and the bleeding stopped.

The issue at trial was whether the restrictive covenant was so wide as to be unenforceable. The trial judge said that it was not.

Principles

The Court noted that a non-competition covenant restrains a departing employee from conducting business with former clients whereas a non-solicitation covenant merely prohibits a departing employee from soliciting business. It held that the Staebler  covenant was a non-competition covenant.

The Court referred to prior Court of Appeal decisions, which held that a non-competition covenant is warranted only in exceptional circumstances and that a non-solicitation covenant should normally be sufficient. In essence, a non-solicitation covenant “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.”

The Court also noted that it would not save an overbroad clause, even though the Court would have enforced a suitably narrow clause had it been properly drafted (i.e. if an employer is greedy in the drafting, it gets nothing).

Result

The Court held that the non-competition covenant was too wide: the employees were merely salespersons who had no fiduciary duty to the brokerage and there was an imbalance of bargaining power when the contracts were negotiated. Further, there was no geographical limitation in the covenant. The Court refused to enforce the covenant and dismissed the brokerage’s action.

Comment

This result is not a surprise, at least to us. However, that does not make the result palatable. It assumes that an employer can easily determine whether an employee is soliciting clients; in many cases, it cannot. Clients who switch to departing employees are not likely to be forthcoming to an employer’s queries.

In addition, the aspect of a geographical limitation, in the context of a non-solicitation clause, makes no sense to us. The whole idea is that the employer services clients, wherever they are, and departing employees are not supposed to solicit their business. What difference does it make where the employees or the clients are located?