Less is More – “Loyalty Incentives” Upheld

Canada’s big five banks and the financial planning industry will benefit by paying close attention to the difference between a “loyalty incentive” and a restraint of trade, as canvassed thoroughly by the Ontario Superior Court in Levinsky v. The Toronto-Dominion Bank, 2013 ONSC 5657.

Levinsky, a managing director with TD Securities Inc., resigned his employment and then challenged the enforceability of the forfeiture provisions in the bank’s Long Term Compensation Plan. Under the plan, Levinsky received Restricted Share Units as part of his compensation, which cliff-vested after three years, i.e. they did not mature until three years after grant, as opposed to other plans under which RSUs vest on a three-year rolling basis. The plan also provided for immediate forfeiture of unvested RSU’s upon resignation.

Levinsky contended that the forfeiture provisions amounted to a restraint of trade, as their intent was to discourage employees from working for a competitor.

The court rejected that argument, finding based on the terms of the plan and other evidence that the plan was designed to incent employee loyalty. As forfeiture was not tied to working for a competitor, the clause at issue did not operate as a restraint of trade.

The decision contains an enlightening and thorough review of authorities from Canada, the UK, Ireland, Singapore, Australia and the U.S. After reviewing these decisions, the court summarized the law as follows:

I conclude that in examining a clause in an employment contract which operates to forfeit deferred compensation upon or following the cessation of the contract, a court must assess whether the clause, on its face or in its practical operation, ties the forfeiture of compensation to the event of termination or whether it ties it to the employee’s conduct following the end of his employment. If the forfeiture results simply from the cessation of the employee’s service, without more, the clause does not operate in restraint of trade because it does not fetter the employee’s ability to choose where he or she wants to work next. Of course, a court must inquire into the circumstances under which the clause came into force to ensure that it was not the product of unfair dealing or bargaining.

Even if the forfeiture results simply from the cessation of employment, the court must examine the terms of the deferred compensation plan to ascertain whether or not the employee possessed any vested rights in the deferred compensation. The forfeiture of vested compensation would necessitate an inquiry into whether the forfeiture constituted a penalty, an analysis similar to that undertaken by Rivard J. in the Nortel Networks v. Jervis case.

(at paras. 81-82)

Applying this law, the court characterized the clause as a form of “loyalty incentive, not a restraint of trade.”

The court also considered whether Levinsky had any vested rights to deferred compensation, noting the forfeiture of vested compensation (even if not a restraint of trade) is still subject to review as to whether the forfeiture constituted a penalty. On this point, the court held that the terms of the plan clearly spelled out that the right to have the value of the RSUs paid out did not vest until three years after the date of grant.

The lesson from this case? Less may be more. While employers may be tempted to combine non-compete clauses with forfeited compensation, doing so will subject such clauses to the traditional reasonableness analysis, whereas forfeiture provisions on their own may be seen as simply “loyalty incentives.”

Failure to Meet Irreparable Harm Test Sinks Both a Non-Solicit and Non-Compete Clause

As predicted earlier in this space, the British Columbia Court of Appeal’s decision in Edward Jones v. Voldeng, 2012 BCCA 295, is making it very difficult to enforce a non-solicit agreement in B.C. on an interim basis pending trial.

In Hub International v. Redcliffe, 2012 BCSC 1280, one of the first decisions to apply Edward Jones, the B.C. Supreme Court refused to enforce a restrictive covenant prior to trial, even though it found there was a strong prima facie case that the provision was enforceable and that the defendant was in breach of it.

The court relied on the decision in Edward Jones to hold that damages should be ascertainable at trial and hence there was no need to enforce the restrictive covenant on an interim basis.

Interestingly, the court characterized the restrictive covenant at issue as a non-solicitation clause and relied on the finding in Edward Jones that damages are more readily ascertainable for breach of non-solicitation clauses than for non-competition clauses.

But from the court’s description of the clause, it appears it was actually both a non-solicitation and non-compete covenant. While the court did not actually quote from the clause, it stated that it:

“…provided a prohibition against soliciting or doing insurance-related business with clients or prospective clients of Hub and Redcliffe Investments. For the former, the period of restriction was 12 months following termination of employment and for the latter 24 months.” 

(at para. 4, emphasis added)

The portion of the covenant preventing the defendant from “doing insurance-related business” with his former employer’s clients is surely a non-compete clause, not a non-solicit provision. A former client could approach the defendant without him soliciting it, yet the defendant would be prevented from doing business with the client. That is a form of a non-compete provision.

The distinction is important, because in Edward Jones the Court of Appeal held that irreparable harm may more readily be found in the case of apparent breach of a non-compete agreement than in the case of a breach of a non-solicit. (I’ve previously written that this distinction is questionable, but nonetheless this is now the law in B.C.) Yet the court in Hub International appears not to have made this distinction and held that the entire clause was unenforceable because the plaintiff could not show irreparable harm.