THE CANADIAN EMPLOYEE COMPETITION BLOG

Mandeville Holdings Inc. v. Santucci, 2021 ONSC 4321

An investment advisor’s negotiated sale of the good will in his book of business to a firm causes the Ontario Superior Court to construe his non-solicitation covenant as part of the sale of a business, not within an employment context. The court issues an interim injunction prohibiting solicitation of clients for two years.

Canadian courts routinely distinguish between restrictive covenants executed as part of a sale of a business as opposed to those arising in a pure employment context, with the latter interpreted much more strictly than the former. In most cases, the line between the two is easy to draw – where an owner sells their business and agrees to a covenant so as to protect the buyer’s investment, the covenant is held as being part of the sale of a business.

An Ontario court recently offered an interesting take on this divide when assessing restrictive covenants given by an investment advisor who had moved himself and his clients to a firm in 2014 and six years later left for another. The rather unique nature of the 2014 transaction, the court said, rendered the sale of business lens more appropriate than the employment lens. From there, the court granted an injunction to uphold a two-year non-solicitation obligation that it likely would not have enforced had it applied an employment lens.

Jerry Santucci, an investment advisor, moved to Mandeville Private Client Inc. in 2014. He negotiated a deal that included significant equity in Mandeville’s parent company, an interest free loan and, notably, payment to him of $390,000 for purchase of assets, which consisted mainly of the goodwill in the 240 clients in his book of business. The court found that these arrangements, particularly the purchase of the goodwill in the clients, was by no means Mandeville’s “standard method of doing business” and that “This was a negotiated arrangement.”

Notably, neither Santucci nor Mandeville took the position he was an employee. Rather, he performed services via an agency agreement under which he maintained his own staff, paid many of his own expenses and received allowances for others.

Noting the contrasting approach taken by the courts when dealing with a sale of a business or an employment contract, Justice Dunphy found that “To the degree this case has unique traits it lies in the fact that Mr. Santucci’s agreements have aspects of both an employment-like arrangement and a traditional sale of business or goodwill.” Ultimately, the court favored the sale of business lens as more appropriate. The sale of goodwill in the clients and purchase of shares – not a standard feature in the industry – was more akin to a negotiated business transaction rather than standard employment terms.

Having decided to apply the sale of business lens to the covenants, the court upheld a two-year restriction on solicitation. In doing so, it dismissed several arguments as to problems with ambiguity and reasonableness in the clause at issue, problems which likely would have been fatal to the covenant had an employment analysis been applied.

Finally, while the court preferred the sale of business analysis, it noted the matter is not “an all-or-nothing proposition”:

At the end of the day, the test of reasonableness applies to restrictive covenants arising both from the sale of a business and from the employment context. The difference between them largely comes down to the degree of strictness applied to the analysis of them. That degree of strictness is not a binary “on or off” decision but may be considered to be more in the nature of a continuum.”
(at para. 42)

The concept of some sort of hybrid test, it should be noted, was expressly rejected by the B.C. Court of Appeal in IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301. Other decisions, however, seem to have left open the possibility of a continuum. See generally the discussion in The Canadian Employee Competition Blog, Chapter on Restrictive Covenants, Part 1, at section B.5.