What are Non-Competition and Non-Solicitation Clauses?
Together, non-competition and non-solicitation clauses are known as “restrictive covenants.” Restrictive covenants are contractual clauses, typically in an employment agreement, that attempt to limit a former employee’s ability to solicit the employer’s clients and/or to compete for those same clients in the same area.
In general, courts will be reluctant to enforce clauses that will restrict an individuals’ ability to earn a living or pursue a job of their choice. As such, the starting point for restrictive covenants is that they are unenforceable, unless the employer can demonstrate why the covenant should be enforced. For a restrictive covenant to be deemed enforceable, the courts usually require that it be as minimally restrictive as necessary. As such, non-competition clauses are hard to enforce as a non-solicitation clause will often be considered sufficient. Courts will also not “fix” a restrictive covenant. If it is too broad, unreasonable, or otherwise flawed, it will be found unenforceable – the Courts will not “fix” the clause to make it enforceable.
RELEVANT CASE LAW
Non-solicitation clauses will typically allow a former employee to “compete,” but will restrict them from soliciting the clients, and sometimes the employees, of the former employer. The non-solicitation clause must have reasonable limitations in regards to the duration the non-solicitation clause will last; the geographic location in which the non-solicitation clause is enforceable; and the activities that are prohibited by the clause. For example, if the non-solicitation clause fails to set out the time period for which the clause applies, or tries to set out an unreasonable time period (e.g., a 10 year restriction on solicitation for an employee of 3 years), then the non-solicitation clause will be found to be unreasonable and therefore unenforceable. Similarly, a clause that purports to cover the entirety of Canada, when the former employee only worked and interacted with clients located in Toronto or Ontario, will be found to be too broad geographically and will be unenforceable. Further, a non-solicitation clause may actually be a “non-competition clause in disguise” if it attempts to limit activities that are not “solicitation.” For example, if the clause attempts to prevent a former employee from doing work for a competitor, or for doing work for a client of the former employer when that client had approached the former employee of their own free will, then the clause is actually attempting to prevent the former employee from competing rather than simply trying to prevent them from soliciting.
Non-solicitation agreements aim to prevent departing employees from poaching their former customers, clients, suppliers or coworkers. Without a proper non-solicitation clause or agreement, it would be much easier for employees to poach former clients, suppliers or fellow employees once their employment with a company has been terminated. Just like non-competition agreements, the courts will consider several factors in determining whether a non-solicitation agreement is reasonable. These factors include the length of the restriction, the geographic scope, whether the covenant is clear, certain and not vague, and the general reasonableness with respect to the public interest. This test for restrictive covenants from Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. in 1894 was addressed by the Supreme Court of Canada in Elsley v. J.G. Collins Insurance Agencies Ltd., (1978), 83 D.L.R. (3d) 1 (S.C.C.) Employers should be aware that a great deal of skill is required in drafting an enforceable post-employment restrictive covenant. Employees should carefully review an employment agreement, non-competition agreement or non-solicitation agreement and seek legal advice before signing such a document. Please note that the above information does not constitute legal advice. It is general information about the law. If you require legal advice and assistance with regards to drafting or understanding a restrictive covenant or an employment agreement, please contact the experts at Ball Professional Corporation.
Employers often want employees to sign these agreements as part of their employment contract. These covenants attempt to impose additional obligations on the employee both during and after employment has ended. If an employer wants to enforce a restrictive covenant which is a restraint of trade, they will need to demonstrate that it is justified and reasonable. Please see the article titled “Restraint of Trade Clauses” for more information and examples of relevant case law. Non-competition agreements aim to prevent employees from working with a competitor of the employer’s for a specific period of time, during and after employment has ended. This can make it very difficult for an employee to find new work, especially if they work in a specialized field and there are limited job opportunities available to them. If challenged, the employer must show that the restriction is reasonable in the circumstances. If the courts are required to rule on the enforceability of a non-competition agreement, they must first determine that the employer has a proprietary interest to protect. Courts will then consider several factors in determining whether a non-competition agreement is reasonable. These factors include the length of the restriction, the geographic scope, whether the covenant is clear, certain and not vague, and the general reasonableness with respect to the public interest.
Restraint of Trade: The Enforceability of Non-Solicitation and Non-Competition Clauses
Employment contracts, especially contracts for senior and executive employees will often include restraint of trade clauses. The purpose of restraint of trade clauses is to protect the interests of the employer once an employee leaves for a new company. This article will discuss two main types of restraint of trade clauses. It should be noted that in general, courts are more willing to uphold restraint of trade clauses in contracts where there is a sale of business given the primacy of the protection of goodwill. In employment contracts, employers should ensure that their restraint of trade clauses are reasonable and are not so broad so as to unnecessarily limit a departing employee’s autonomy. Furthermore, employers should ensure that a legitimate business interest is being protected.
The test the courts consider in assessing the legal enforceability of a non-solicitation clause is whether the language of the clause is reasonable. To be reasonable, non-solicitation clauses must be clear and narrowly drafted in relation to the activity it seeks to restrain. The Supreme Court of Canada in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, has stated that if a non solicitation clause is not clear “in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable”. Other decisions such as HL Staebler and Co v Allan, 2008 ONCA 576 have held the same.
In the recent Court of Appeal Decision of MD Physician Services Inc v. Wisniewski, 2018 ONCA 440, two employees who had signed non-solicitation agreements, left MD to join a competitor (RBC). The agreement stated:
“The Employee agrees that the Employee shall not solicit during the Employee’s employment with the Employer for the period ending two (2) years’ after the termination of his/her employment, regardless of how that termination should occur, within the geographical area within which s/he provided services for the Employer.”
“Solicit” was defined as “to solicit, or attempt to solicit, the business of any client, or prospective client, of the Employer who was serviced or solicited by the Employee during his/her employment with the Employer”.
On the first day of their new employment, the Defendants began to solicit clients of the Plaintiff. The Plaintiff sued for breach of the non-solicitation agreement. The trial judge found the employees had breached the non-solicitation agreement when they contacted MD’s clients from memory and found RBC vicariously liable for the employees.
On appeal it was argued that the agreement was ambiguous as to the term “solicit”, the duration of the restraint was too long and the applicability of the clause to prospective clients was unduly restrictive. The ONCA upheld the lower courts decision and stated that the language in the clause was reasonable as it protected the employer’s proprietary interest without unduly limiting the employees right to earn a living.
Ultimately, a non-solicitation clause is properly limited if it applies to a certain geographical area and indicates a reasonable time period, which in the case of Wisniewski, it did just that.
Non-competition clauses attempt to limit a former employee’s ability to compete with their previous employer – whether through opening a competing business or through employment with an already existing competitor. Non-competition clauses will only be enforced when a non-solicitation clause would not sufficiently protect the proprietary interests of the former employer. Factors such as the vulnerability of the employer; the confidential information the former employee had access to; the influence and relationship the former employee had with clients; and the nature of the business, will be considered when determining whether a non-competition agreement is necessary. Similar to the non-solicitation clauses, there must be reasonable limitations to the restrictive covenant in regards to duration, location, type of activities limited, etc. Non-competition clauses prevent a departing employee from competing with their former employer by either starting their own business or working for a competitor business. For non-competition clauses to be enforceable, each party much gain something of value. If no incentive was given to you after you signed a non-compete agreement, it is unlikely that the courts will find it enforceable. Non-competes that are limited in duration and in geographic scope are more likely to be enforced as opposed to a very broad and clause that lasts for many years. It should be noted that non-competes are less likely to be upheld where a non-solicitation can achieve the objective of protecting employer proprietary interests (such as customer lists). To be enforced, employers must prove harm occurred or is likely to occur if the clause is not enforced.
Stacey Reginald Ball is an experienced employment lawyer with Ball Professional Corporation. Our office is located in Toronto, Ontario, and handles various employment law matters, including wrongful dismissal. If you have questions regarding non-competition and non-solicitation agreements, please consult a lawyer for advice. An experienced Toronto employment lawyer can help you if you require help with drafting a non- solicitation clause, or need help with challenging its enforceability. Contact our office at 416-921-7997 extension 222.
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