Employee Competition Articles

Is Consideration Still Necessary to Enforce Restrictive Covenants? A Consideration of the British Columbia Court of Appeal’s Decision in Rosas v. Toca

Courts Will be Wary of Enforcing Restrictive Covenants Without Fresh Consideration in Light of Judicial Presumptions Regarding Inequality of Bargaining Power and Public Policy Favouring Employee Mobility

Court Rejects Plea for Disgorgement of Profits, Despite Finding Departing Physicians Breached Fiduciary Duty and Duty of Confidence

Breaches of fiduciary duty and confidence not sufficient to warrant disgorgement remedy, as such an award would be out of proportion to Defendants’ wrongdoing.

Former Telus Executive Escapes Non-Compete due to “Overzealous Drafting”, but Rebuked for Pursuing Termination Payment while Negotiating New Employment with Competitor

Restriction on competing with the business of “Telus” too broad, given its business went beyond telecommunications business, and also found to be ambiguous. Executive found to have breached fiduciary duty, however, by trying to obtain severance package while negotiating with future employer.

Employee’s Non-Competition Covenant Attached to Share Purchase Attracts Rigorous Interpretation

Even where evidence did not support an imbalance of bargaining power, more rigorous approach applied to non-competition clause contained within a share purchase agreement executed by employee.

Valuable Employee? Yes. Fiduciary Employee? Not so Much.

Business owner who abandoned sales side of the company to an employee failed to establish the employee as a fiduciary, even though he had become the “face” of the business to the customers.

The Perils in Drafting Restrictive Covenants and the Importance of Context

Ceredian Dayforce’s non-compete clause attempting to restrain former employee from working for competitor struck down on eight different bases. By contrast, court faced with similar arguments on enforceability of non-compete and non-solicit clauses negotiated as part of sale of a business finds ways to uphold them.

Less is More – “Loyalty Incentives” Upheld

Forfeiture of restricted share units under TD Bank’s long-term compensation plan when employee resigned upheld. Not a restraint of trade.

Arguing Ambiguities in Restrictive Covenants – The Pendulum Swings Back to Enforceability

Difference of opinion on meaning of a non-compete involving a veterinary practice does not amount to ambiguity.

Economic Disincentives to Compete Found to be Restraints of Trade

Requirements to pay sums of money or forfeit benefits when working for a competitor are restraints of trade, subject to usual analysis, even if competition per se not prohibited.

Is Forfeiture of a Bonus for Resigning a Restraint of Trade?

Forfeiture of restricted share units under TD Bank’s long term compensation plan.

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

Interim injunction to enforce Hub International’s restrictive covenant denied.

BC Court of Appeal Raises Bar on Injunctions to Enforce Non-Solicit Clauses

Edward Jones’ attempt to enforce six-month non-solicitation clause via interim injunction denied.

SCC Will Not Have Opportunity to Resolve Questions Raised by Globex Decision

Alberta Court of Appeal’s decision not appealed.  Globex Foreign Exchange lost right to enforce non-compete and non-solicit clauses when it wrongfully dismissed plaintiffs. Fresh consideration required to enforce restrictive covenants introduced mid-employment.

Is Consideration Still Necessary to Enforce Restrictive Covenants? A Consideration of the British Columbia Court of Appeal’s Decision in Rosas v. Toca

(Published September 28, 2019)

The British Columbia Court of Appeal radically altered the law of consideration last year in Rosas v. Toca. The Court held that, absent duress, unconscionability or other public policy concerns, a mid-contract variation will be enforceable as long as the parties agree to the variation. Against Rosas stand judicial presumptions of an inequality of bargaining power between employers and employees and public policy favouring employee mobility. It is argued here that these presumptions are so pervasive in the approach of Canadian courts to employment cases and restrictive covenants that the courts should not extend Rosas to enforcement of restrictive covenants entered into without fresh consideration.

Courts routinely have required fresh consideration to enforce restrictive covenants agreed to by employees after work has commenced. However, the British Columbia Court of Appeal’s radical alteration of the law of consideration may open the door to enforcement of such covenants in Canada and elsewhere, even in the absence of fresh consideration.

In Rosas v. Toca, 2018 BCCA 191, the Court, after reviewing developments in the law of consideration in Canada, the UK, the US and elsewhere, articulated the test for enforceability of mid-contract variations as follows:

When parties to a contract agree to vary its terms, the variation should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns, which would render an otherwise valid term unenforceable. A variation supported by valid consideration may continue to be enforceable for that reason, but a lack of fresh consideration will no longer be determinative.
(at para. 183)

While the subject matter in Rosas was not a restrictive covenant, notably the Court relied in part on a dissenting judgement from the Alberta Court of Appeal, wherein the minority would have enforced non-solicitation covenants executed after two employees had commenced work and absent fresh consideration. The dissenting Justice in that decision, Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, opined that the “primary purpose” of consideration:

…is to draw a line between gratuitous or morally based promises, and legally enforceable obligations. It was never intended to provide an easy escape mechanism for parties who have second thoughts about the covenants they agreed to, and that they intended to bind them.
(at para. 134)

The dissenting Justice continued:

In this case none of the employees were “caught by surprise”. They knew exactly what terms their employer was proposing for them, they agreed to them, and both the employer and the employees thereafter conducted their affairs as if the “going-transaction adjustment”, in the form of the non-solicitation clause, was binding. Invoking the law of consideration after the fact is the invocation of a legal fiction in aid of a particular result.
(at para. 136)

Against these pronouncements in Rosas and Globex stand judicial presumptions about inequality of bargaining power in employer-employee relationships and public policy favouring mobility of employment. It is argued here that these judicial presumptions are so pervasive in the approach of Canadian courts to employment cases and restrictive covenants that the courts should not extend Rosas to enforcement of restrictive covenants, but for now the matter is an open question.

Background

The headnote from the B.C. Court of Appeal provides a concise summary of the factual background to Rosas and the trial court decision that was under appeal:

The appellant won the lottery and loaned $600,000 interest-free to her friend. Approximately one year after the loan was formed, the appellant’s friend told her “I will pay you next year”, and the appellant agreed to the extension on payment and declined to bring suit. This request was repeated for several years, but the loan was never repaid. Eventually, the appellant brought a claim against her friend. At trial, the judge found that the original term of the loan was for one year, and, based on the original repayment date, the limitation period had expired. The judge held that the subsequent promises from the friend to repay a year later were unenforceable for lack of consideration as the friend was already under an obligation to pay. The appellant’s claim was therefore dismissed as statute-barred.

The Decision

The Chief Justice indicated the Court’s intention to overturn the decision in the introductory paragraph, writing:

It has been famously said that “hard cases make bad law”; sometimes, however, hard cases make new law. Or, at least, they very much encourage the court to do so lest we give credence to Mr. Bumble’s lament in Oliver Twist: “If the law supposes that…the law is a ass”.
(at para. 1)

From here, the Court traced the evolution of the law of consideration in Canada, the UK, US and elsewhere in arriving at its reformulation of the law regarding mid-contract variations.

The Globex decision, which pre-dates Rosas, is the most recent significant Canadian decision to address enforceability of restrictive covenants obtained without consideration after commencement of work. No Canadian courts have returned to this question as of yet to consider Rosas. In the writer’s view, there is ample reason to expect the courts may not enforce such covenants, given the exceptions noted in Rosas for duress, unconscionability and “other public policy concerns.”

Canadian courts have repeatedly recognized an imbalance of bargaining power between employers and employees. This recognition has led the judiciary to insist on consideration as a pre-requisite to enforcement of important modifications to employment contracts. As stated by the Ontario Court of Appeal:

The requirement of consideration to support an amended agreement is especially important in the employment context where, generally, there is inequality in bargaining power between employees and employers. Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment, but once they have been hired and are dependent on the remuneration of the new job, they become more vulnerable.

Hobbs v. TDI Canada Ltd., 2004 CanLII 44783 (ONCA), at para. 42

The same Court later relied on this statement of the law in another decision, refusing to enforce a severance clause introduced by the employer nine months after the commencement of employment and without fresh consideration.1

While the presumption of an inequality of bargaining power does not rise to the same level of concern underlying duress and unconscionability, the presumption is so widely accepted in Canadian law that, in the writer’s view, the courts will be wary of enforcing restrictive covenants entered into without consideration. Given Hobbs and other decisions, it would not be a leap for the courts to postulate that an employee who has already been hired will be vulnerable and feel little choice but to agree to a restrictive covenant provided by the employer after the commencement of work.

A further public policy concern which will influence the debate is the express promotion by the courts of employee mobility. Under Canadian common law, restraints of trade are contrary to public policy, being an interference with individual liberty and employee mobility. The Supreme Court of Canada2 has endorsed the following statement of Lord Macnaghten in the seminal decision of the House of Lords in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., [1894] A.C. 535:

The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule.
(at p. 565)

However, recognizing the freedom to contract, restraints of trade found to be reasonable will be enforced.

The confluence of these concerns about unequal bargaining power and the protection of employee mobility was at the forefront of a Supreme Court of Canada decision refusing the application of notional severance to employee restrictive covenants. In Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, the Court refused to apply notional severance to a covenant prohibiting competition in the “Metropolitan City of Vancouver.” At the time, no such legal entity existed and the employer argued for the substitution of several individual municipalities for that term.

The Court refused the invitation, noting that the application of notional severance to restrictive covenants would provide no incentive to employers to draft such clauses in a reasonable manner:

Not only would the use of notional severance change the terms of the covenant from the parties’ initial agreement to what the court thinks they should have agreed to, it would also change the risks assumed by the parties. The restrictive covenant is sought by the employer. The obligation is on the employee. Having regard to the generally accepted imbalance of power between employers and employees, to introduce the doctrine of notional severance to read down an unreasonable restrictive covenant to what is reasonable provides no inducement to an employer to ensure the reasonableness of the covenant and inappropriately increases the risk that the employee will be forced to abide by an unreasonable covenant.

For these reasons, the doctrine of notional severance does not apply in respect of restrictive covenants in employment contracts.
(at paras. 41-42)

Here, we see the Court recognizing the leverage employers have when negotiating restrictive covenants and also acting to preserve employee mobility by incenting employers to draft reasonable restrictive covenants at the outset of employment.
It is unlikely the courts will want to provide motives to employers to hold off on presenting restrictive covenants until after employment has commenced. An application of Rosas to uphold such covenants in the absence of consideration would encourage some employers to delay bringing forward such clauses, anticipating they will have more leverage once employment has commenced than during the contract negotiation stage.

Conclusion

Inevitably, the courts will be faced with the question of enforceability of a restrictive covenant entered into by the parties without fresh consideration. The presumption of unequal bargaining power, while not raising the spectre of illegitimate pressure as do duress or unconscionability (doctrines specifically mentioned in Rosas), nonetheless has a significant influence on the courts when interpreting and ruling on employment contracts. That influence will be magnified, it is suggested, when coupled with the public policy of protecting employee mobility.

In the writer’s view, these concerns put the application of Rosas to restrictive covenants in doubt. However, we are at the early stages of this development in the law, which likely will play out over time not only in Canada but elsewhere. The evolution of the law in this area promises to be interesting, given the interplay of the various policies at stake and the wealth of jurisprudence and academic commentary on reform of the doctrine of consideration.

In the interim, those tasked with drafting such covenants are best to continue to include consideration in exchange for the agreement to be bound. At the same time, counsel tasked with persuading a court to uphold a covenant agreed to without fresh consideration have a new weapon in their arsenal in light of Rosas.

Court Rejects Plea for Disgorgement of Profits, Despite Finding Departing Physicians Breached Fiduciary Duty and Duty of Confidence

(Published April 28, 2019)

Genesis Fertility Centre Inc. v. Yuzpe, 2019 BCSC 233

A decision of the British Columbia Supreme Court rejects a claim for disgorgement of profits, even though the Defendants committed breaches of fiduciary duty and confidence. The decision is a reminder that, in employee competition cases, the courts will be mindful of whether departing employees’ profits arise from their own skill and effort as opposed to any breaches of duty. Further, the courts will not allow equitable doctrines to be used to award remedies out of proportion to wrongdoing.

A departed employee’s success in attracting former clientele to a new place of business frequently gives rise to disgorgement claims by the aggrieved former employer. Asserting a breach of fiduciary duty or breach of confidence, the plaintiff seeks an accounting (or “disgorgement”) of the defendant’s profits, in addition to the claim for damages, reserving the right to claim the more favourable remedy at trial.

The prospect of the court ordering disgorgement, which may far exceed the plaintiff’s damages, provides the plaintiff a ready incentive to allege causes of actions for which that remedy is available.  A recent decision from the British Columbia Supreme Court, however, underscores the limits of the disgorgement remedy in employee competition cases. Even if the asserted breach is established, the courts may not be inclined to strip away all of a defendant’s profits, given the departed employee’s right to compete.[1]

In Genesis Fertility Centre Inc. v. Yuzpe, 2019 BCSC 233, the Court addressed the conduct of several specialist physicians who had sold their shares in a fertility clinic to one physician who remained. The departing physicians worked out a 60-day notice period, during which time they took preparatory steps to establish a competing clinic, Olive, which would open immediately upon the expiry of the notice period.

At trial, the departing physicians were found to have committed several breaches of fiduciary duty and breach of confidence, including:

  • Entering into employment agreements with several Genesis employees while the physicians continued to be directors of Genesis;
  • Utilizing confidential information of Genesis to prepare their business plan and hire Genesis employees; and
  • Failing to keep Genesis updated, while still shareholders, as to their activities in preparing to establish a competing fertility clinic.

The primary remedy sought by the Plaintiffs was payment by the departing physicians of the $4.275 million paid by the remaining physician for their shares, on the ground that, immediately upon the remaining physician being obliged to pay this sum, the Defendants set about to “destroy that very business that they had just sold…”.

The Court rejected this characterization, finding their object instead was to continue to practice medicine together in their area of practice. The Court also found there had been no breach of the shareholders’ agreement, which had set out the procedure for the sale of shares.

The Plaintiffs sought the alternative remedy of disgorgement of the Defendants’ profits for a two-year period, on the basis that the shareholders’ agreement contained a confidentiality covenant of that duration.

The Court found the Plaintiffs’ argument ignored the contractual right of the departing physicians to compete with Genesis. Importantly, the Court also distinguished between several cases cited by the Plaintiffs, where the “central act” involved an objective that itself was a breach of fiduciary duty, and the object of the departing physicians, which was to continue to practice medicine together in their area of practice:

[285]     Determining an appropriate remedy in this case presents challenges that were not present in many of the cases relied upon by the plaintiffs. Most of those cases involved a central act that was a breach of fiduciary duty. In such cases less serious breaches of duty can be viewed as being done pursuant to an object that was itself a breach.

[286]     In Canadian Aero Service, the pursuit of the contract was held to be wrongful. In Strother, the wrong was pursuing a business opportunity that put Mr. Strother in a conflict of interest position with his client. In Cadbury Schweppes Inc., the wrong proven was utilizing the plaintiff’s confidential formula to manufacture a competing product. In Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377the wrong was failing to disclose a conflict of interest. In each of these cases, the defendants would not have obtained a benefit but for their breach of duty.

[287]     In this case, however, I have found that the Departing Physicians had the right to set up a competing clinic within which to practise and that the benefit they obtained came from that lawful activity. I must be careful not to deprive them of that benefit in any remedy I grant.

Accordingly, the Defendant physicians might only be required to disgorge any benefits received from their breach of duty. They were not required to disgorge profits arising from lawful activity on their part. Relying on a decision from the Australian High Court, Warman International v. Dwyer, the Court further stated:

[315]     The law is clear that a fiduciary who has breached a duty must account only for what it acquired in consequence of the breach. The overarching consideration is summarized in Warman International Ltd. v. Dwyer, (1995) 128 A.L.R. 201 (H.C.A.) at 214:

In determining the proper basis for an account of profits, it is of first importance in this, as in other cases, to ascertain precisely what it was that was acquired in consequence of the fiduciary’s breach of duty. And, in some situation, it may also be relevant to ascertain what was lost by the plaintiff….

The Court noted this passage was cited with approval by the Supreme Court of Canada in Strother v. 3464920 Canada Inc.2007 SCC 24 (CanLII). Justice Binnie in that decision held there must be a causal connection between a breach of fiduciary duty and the benefits obtained by the wrongdoer before an accounting can be ordered. Paraphrasing Strother, the Court in Genesis stated that  “equitable doctrines should not be used to impose awards out of proportion to the fiduciary’s behaviour…”.

In rejecting the Plaintiffs’ claim for disgorgement, the Court in Genesis concluded:

[331]     …I find that substantially all of the benefits the Departing Shareholders earned from Olive were acquired from their skill, effort and professional standing in the medical profession.

[332]     The Departing Physicians had well established practices and reputations before they formed Olive. I am satisfied that it was their professional standing and the excess of demand for the services they were able to provide over the supply of such services in the community that accounted for the incomes they earned through Olive.

[335]     The remedy sought by Genesis would deprive the Departing Physicians of all of their earnings for a two-year period. In my view, such an award would be out of proportion to any benefits obtained by the defendants from their breaches of fiduciary duty and breaches of confidentiality. The stringent rule requiring a fiduciary to account for profits should not be carried to extremes and should not be transformed into a vehicle for the unjust enrichment of the plaintiff.

Having dismissed the Plaintiffs’ claim for disgorgement of two-years of earnings, the Court instead assessed the Plaintiffs’ damages at $187,000.

***

The need to establish a causal link between a breach of fiduciary duty or breach of confidence and a departed employee’s profit must be kept front and centre when considering whether a substantial disgorgement remedy is realistic. As was the case in Genesis, the courts are sensitive to the right of departing employees to compete and that their own skills, reputation and effort may be the cause of customers following them, not any unlawful activity.

There will be cases where the courts will look beyond causation and strip away substantial profits even when doing so amounts to a windfall to the plaintiff. That was the case in Strother, where the Supreme Court of Canada noted that disgorgement can be directed to either a prophylactic or a restitutionary purpose. Citing the prophylactic purpose of deterring the faithless fiduciary, the Court stripped away 15 months’ of profits realized by a lawyer arising from breach of fiduciary duty to his client, without applying any reduction to recognize the lawyer’s own skill and effort in generating those profits.

In many other cases – and Genesis appears to be one of them – the underlying breach does not engage the same policy considerations. In such cases, the courts will determine the appropriateness of the disgorgement remedy keeping in mind the right of departing employees to compete and whether their own skill and effort generated a profit rather than the breach.

***

[1] Of course, the right to compete may be circumscribed in limited circumstances by an enforceable non-competition covenant, but the remedy for breach of such a covenant consists of the plaintiff’s damages, not the defendant’s profits.

Former Telus Executive Escapes Non-Compete due to “Overzealous Drafting”, but Rebuked for Pursuing Termination Payment while Negotiating New Employment with Competitor

(Published January 26, 2019)

Telus Communications Inc. v. Golberg, 2018 BCSC 1825

A battle between corporate titans Telus Communications and Rogers Media highlights the danger of “overzealous drafting” of restrictive covenants, which enabled a former Telus executive to compete against his former employer. At the same time, the Supreme Court of British Columbia rebukes the defendant, finding he breached his fiduciary duty to Telus by “actively pursuing a termination payment while negotiating the terms of his new employment at Rogers Media.”

In Telus Communications Inc. v. Golberg, 2018 BCSC 1825, Telus applied for an interlocutory injunction restraining the defendant, Daniel Golberg (Rogers Media was not named as a party), from commencing or continuing his employment with Rogers on the basis of a non-compete clause in his employment agreement. The decision is notable as an example of the “less is more” maxim when it comes to drafting restrictive covenants. The court held that the covenant was ambiguous and overly broad due to the insertion of language which, in hindsight, was not necessary to protect the legitimate interests of Telus.

Golberg commenced employment with Telus as a Vice President in 2005 and remained at the VP level until his departure in August of 2018. His 2005 employment agreement contained a non-compete clause which prohibited him from competing with Telus for a period of time following termination of employment. The covenant contained the following terms:

…the vice president will not, without the prior written consent of Telus, directly or indirectly either individually or in partnership or jointly or in conjunction with or on behalf of any person or persons, firm, association, syndicate, corporation or other enterprise, as principal, agent, employee, director, officer, shareholder or contractor or in any other manner whatsoever:
1) carry on or be engaged in executive, management, supervisory or strategic work or participate in, make decision ins respect of, direct, assist with, contribute to, advise on, provide consulting or other services in respect of any strategic management, supervisory or executive matters for any person or persons, firm, association, syndicate, corporation or other business enterprise engaged in or concerned with or interested in any business which is competitive with the business of Telus within the provinces of British Columbia, Alberta, Ontario and Quebec.

In June 2018, Golberg commenced discussions of potential employment with Rogers, a Telus competitor. He did not disclose these discussions to Telus and continued to participate in meetings to develop Telus’s business strategies, including discussions to compete with Rogers.

During this time, Golberg also expressed his concerns to Telus about his career advancement and requested a severance package if he were to leave the company. When Telus did offer him a package as part of an extended 24-month non-competition covenant, he declined the offer and subsequently informed Telus he was resigning to commence employment with Rogers.

Telus applied for an interlocutory injunction to enforce the restrictive covenant. The first issue addressed by the court was the level of scrutiny to be applied to the non-compete clause. The court relied on prior case law which presumes an inequality of bargaining power in an employee/employer relationship and applied a high level of scrutiny to the covenant, despite noting that Golberg was a “well educated, accomplished business person.” The court declined to follow an earlier 2018 decision from a different Justice, Quick Pass Master Tutorial School Ltd. v. Zhao, 2018 BCSC 683. In the latter decision, the court held that because the inequality of bargaining power between the parties was less than that usually presumed in an employment relationship, the restrictive covenants were not subject to a high level of scrutiny.

The court in Telus noted that Quick Pass was the only authority cited in which it was held that the court can apply a lesser standard of scrutiny in an employee/employer relationship if it is satisfied that there was not an inequality of bargaining power. It further noted that the particular passage relied on by Telus, arguably, was obiter dicta.

Having decided to apply the usual high level of scrutiny to restrictive covenants connected to an employment relationship, the court had little apparent hesitation in finding that the non-competition clause in Golberg’s agreement was overly broad and ambiguous and hence unenforceable.

The court first noted that the definition of “Telus” in the restrictive covenant included any and all present or future affiliates of Telus. The difficulty was that Golberg’s activities while at Telus were restricted to the telecommunications industry. As the court noted, however, the clause “purports to preclude Mr. Golberg from taking a senior management position in any company that competes with any activity that Telus or its affiliates now or in the future may engage in.”

The court went on:

[35] I find this problematic because the interest of Telus that is identified as requiring protection is its telecommunications business. The restrictive covenant is, however, not limited to such businesses. Telus is a multibillion dollar company. The restrictive covenant extends to any company or other form of organization that Telus may in the future acquire regardless of the business activities of that company.

[36] As I already stated the onus is on Telus to establish that such restrictions are reasonably necessary to protect its interests and do not unduly restrict the ability of Mr. Golberg to make use of his talents and skill. I find that Telus has not met that onus.

[37] In my view, the restrictive covenant is the product of overzealous drafting by Telus’s solicitors. The entire focus of the covenant appears to be directed to making the covenant as broad as possible without giving adequate consideration to the important interests that Telus seeks to protect in the covenant or the interests of Mr. Golberg as an employee.

The court concluded that the broad prohibition on working for any competitor of Telus or its affiliates, regardless of whether the new position was connected to Golberg’s role at Telus, made the clause overly broad. In essence, the drafter of the clause went too far and should have narrowed the restricted activity to the telecommunications industry and the role held by Golberg.

The court also found that the covenant was ambiguous and hence unenforceable. Again, the drafter of the clause went too far when describing the types of roles with a competitor that would be prohibited. The clause stated that Golberg would be restricted from working as “principal, agent, employee, director, officer, shareholder or contractor”, but concluded with the words “or in any other manner whatsoever”. The court found that the initial specificity of the types of restricted roles was lost by the addition of these words.

Having concluded that Telus had not met the test for an interlocutory injunction, the court nonetheless found that Golberg breached his fiduciary duty by inviting and negotiating a termination package from Telus (which he ultimately did not accept) at the same time that he was negotiating employment with Rogers. The court held that “when Mr. Golberg was seeking a termination package, he owed a fiduciary duty to provide Telus with frank and full disclosure about his employment situation.”

Notwithstanding these findings, the court found that Golberg was still entitled to compete, as long as he did so fairly, such as by maintaining his duty of confidentiality. The court stated it was prepared to entertain an application from Telus restraining Golberg from disclosing confidential information or engaging in unfair competition. While these were obligations that he had in any event, given Goldberg’s conduct with respect to negotiating the severance package, the court noted that “such an injunction may well be in order. While it falls short of the relief Telus seeks, it would provide additional incentive for Mr. Golberg to comply with his ongoing fiduciary obligations.” Telus subsequently stated in a Globe & Mail article that it would be taking up the court’s invitation.

Employee’s Non-Competition Covenant Attached to Share Purchase Attracts Rigorous Interpretation.

(Published October 3, 2018)

961945 Alberta Ltd (Servicemaster of Edmonton Disaster Restoration) v Meyer, 2018 ABQB 564, 2018 ABQB 564

The Alberta Court of Queen’s Bench holds that even where the evidence did not support an imbalance of bargaining power, the more rigorous approach to interpreting restrictive covenants was warranted in respect of a non-competition clause contained within a share purchase agreement.

The characterization of a restrictive covenant as arising from either an employment relationship or a sale of a business is often critical to a court’s assessment of its enforceability. The power imbalance that typically exists between workers and their employers has long been cited as the basis for applying more rigorous scrutiny to covenants arising from employment relationships.

The distinction has been confirmed twice in the last decade by the Supreme Court of Canada, in Shafron v. KRG Insurance Brokers (Western) Inc. [2009] 1 SCR 157, 2009 SCC 6 (CanLII) and Payette v. Guay.  [2013] 3 SCR 95, 2013 SCC 45 (CanLII). In Payette, the Court summarized both the common and civil law position as follows:

[36] The application of different rules in the context of a contract of employment is a response to the imbalance of power that generally characterizes the employer-employee relationship when an individual contract of employment is negotiated, and its purpose is to protect the employee.

[37] These rules have no equivalent in the commercial context, since an imbalance of power is not presumed to exist in a vendor‑purchaser relationship.  The inclusion of non‑competition and non‑solicitation clauses in a contract for the sale of a business is usually intended to protect the purchaser’s investment. …

[39] Thus, the common law rules for restrictive covenants relating to employment do not apply with the same rigour or intensity where the obligations are assumed in the context of a commercial contract.  This is especially true where the evidence shows that the parties negotiated on equal terms and were advised by competent professionals, and that the contract does not create an imbalance between them.

[40] Although Shafron, like Elsley and Doerner, was decided under the common law, the same principles apply in Quebec civil law. …

But what about non-competition or non-solicitation clauses that do not fall neatly into the employment or sale of a business dichotomy? In the past, Canadian courts have focused on whether the power imbalance typically present in the employer-employee relationship was present at the time the covenant was executed.

For example, where an employee was offered an opportunity to buy into a business on the basis of executing a shareholders agreement that contained a non-competition clause, the court was not persuaded the clause should be subjected “to the more rigorous standards traditionally applied to employment agreements.” The court noted that the power imbalances between employer and employee were largely absent in the case. (Audience Communication Inc. v. Sguassero, 2008 CanLII 17306 (ONSC), at para. 34, aff’d Audience Communication Inc. v. Sguassero, 2010 ONCA 510 (CanLII). See also Reservoir Group Partnership v. 1304613 Ontario Ltd., 2007 CanLII 921 (ON SC), at para. 56, where the circumstances of a covenant connected to a partnership agreement were held to more closely resemble those involved in the sale of a business.)

By contrast, where a new partner in a large national accounting practice agreed to a one-year non-competition clause in the partnership agreement, the court found the parties did not have equal bargaining power.  The new party had no ability to influence the provisions of the partnership agreement and had to accept them in order to become a partner.Ernst v. Stuart, 1993 CanLII 2069 (BCSC) at pp. 14-15, aff’d 1994 CanLII 2426 (BCCA).

A recent decision from the Alberta Court of Queen’s Bench, however, departs sharply from this approach. Even though the covenant was not connected to an employment contract and the evidence did not strongly support an inequality of bargaining power, the Court held that the mere fact of employment itself meant the covenant at issue must be subjected to more rigorous scrutiny.

In 961945 Alberta Ltd (Servicemaster of Edmonton Disaster Restoration) v Meyer, 2018 ABQB 564, the former employer, Servicemaster, sought an interlocutory injunction against Meyer for breach of a non-competition covenant. Meyer conceded he was competing, but argued on several grounds that the covenant was not enforceable.

After Meyer had commenced employment, Servicemaster offered him and several other employees the opportunity to purchase shares in Servicemaster’s parent company. He and two other employees did purchase shares, while two other employees did not.

The evidence did not strongly support an imbalance of bargaining power at the time of the share purchase, as the Court noted:

[18] While Meyer did not retain his own legal counsel, he paid for and had access to advice provided by lawyers for other prospective shareholders. There is no evidence that he was pressured into signing by the Applicants. Meyer had the opportunity to review a draft of the ESPA several months before it was signed. He and the other prospective shareholders responded in a memorandum and a meeting, and a number of changes were made to the draft ESPA, including a reduction of the restrictive covenant from three years to two years.

[19] The evidence does not strongly support an imbalance of bargaining power between Meyer and ServiceMaster Edmonton. Meyer was a key employee, who earned a substantial income, and he and the other employees who were offered the opportunity to purchase shares negotiated the terms of the ESPA. …

From here, one would have expected the Court to find that the covenant should be subjected to the less rigorous scrutiny applied to commercial arrangements. The covenant was not part of the initial employment agreement and the employees negotiated, with the assistance of legal counsel, the terms of the covenant. Rather than focus on this specific fact pattern however, the Court instead relied on the power imbalance that generally exists in all employment relationships in deciding to apply more rigorous scrutiny:

[19]…But this, in my view, does not mean that the rules applicable to employment contracts do not apply. Those rules do not depend on a demonstration of duress or unequal bargaining power on a case-specific basis; they apply because of the “imbalance of power that generally characterizes an employer-employee relationship” and in order “to protect employees”: Payette v. Guay inc at para 3, emphasis added. While Meyer may have had a relatively strong bargaining position, he is nonetheless entitled to protection as an employee. He attests that his decision to enter into the ESPA was affected by a concern for his employment. This is not surprising; it is noteworthy that the two employees who did not enter into the ESPA both resigned their employment with ServiceMaster Edmonton soon thereafter. Further, Meyer requires protection upon the termination of his employment. While he may be bound by a reasonable non-competition covenant, his interest in using his acquired skills for the purpose of gainful employment is entitled to due consideration.

The decision may be defensible on the basis of the Court accepting Meyer’s evidence that his decision to executive the shareholder’s agreement was motivated by a concern for his employment. However, to the extent the Court decision suggests that all covenants signed by employees who purchase equity in their employer should attract the more rigorous approach, it is questionable.

Payette, does not invite the courts to treat all such arrangements as covenants related to employment status.  That decision and earlier decisions of the Supreme Court, including Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 916, 1978 CanLII 7, explicitly focused on the power imbalance that is presumed to exist.  Where the facts demonstrate an absence of a power imbalance, such as in a decision to purchase shares in an employer, the Courts should not assume the imbalance exists.

The decision in ServiceMaster also creates the prospect of the courts applying two different standards for interpretation of a restrictive covenant arising from the same shareholder agreement: a rigorous approach if the shareholder is an employee and a lenient approach for non-employee shareholders. (For example, a non-compete clause may be used to prevent a departing non-employee shareholder, who nonetheless has detailed knowledge of client relationships, from competing.) Why should that be the case if neither the employee or the non-employee faced an inequality of bargaining power?

Counsel faced with the task of persuading a court to apply a more lenient approach to the enforcement of restrictive covenants have decisions other than ServiceMaster on which to rely (see discussion in competingemployee.com, Restrictive Covenants, Part 1). However, the ServiceMaster decision is a caution that even covenants attached to shareholder agreements must be drafted with great care and precision, given that a rigorous approach to interpretation may apply if the purchaser of shares is an employee.

Valuable Employee? Yes. Fiduciary Employee? Not So Much.

(Published June 19, 2018)

Jetco Heavy Duty Lighting v. Fonteyne, 2018 ABQB 345

The Alberta Court of Queen’s Bench cautions against conflating a valuable employee with a fiduciary employee, given the onerous obligations placed on fiduciaries. The decision underscores the importance of securing a reasonable restrictive covenant if an employer wishes to protect its clientele from departing employees, given the difficulties often encountered in affixing fiduciary status to even the most valuable employees.

In Jetco Heavy Duty Lighting v. Fonteyne, 2018 ABQB 345, a business owner who had abandoned the sales side of the company to an employee failed to establish the employee as a fiduciary, even though he had become “the face” of the business to the customers.

The decision offers an important reminder that the courts often will not deem a departed employee to be a fiduciary of the former employer, even where the employee was quite valuable to the enterprise. Attempts to protect clientele from the departed employee often will prove elusive if the employer has not taken the time to secure a non-competition or non-solicitation agreement from the employee.

Jetco, the plaintiff company, sued its former sales employee, Vincent Fonteyne, for breach of fiduciary duty. Jetco was an importer and distributer of heavy duty vehicle and industrial lighting. Fonteyne was the Vice-President of Sales and Marketing.

Fonteyne joined the company in 2000 as its primary sales and marketing representative. The Court found that the owner of the company “relinquished all customers and customer relationships to him”. At trial, the owner said he reposed significant confidence in Fonteyne and regarded him “like a son”.

Fonteyne had joined the company based on a handshake agreement and did not have a written employment contract. The owner’s son proposed a more formal employment agreement in 2007, but Fonteyne declined the contract and at trial stated it was because he felt the “non-compete” clause would prevent him from earning a living if he were to ever leave the company.

Fonteyne resigned once in 2008, but Jetco persuaded him to return. He resigned for good in 2009. At the time of his resignation, he had already started to set up a competing business and embarked on that business after he left Jetco.

Jetco commenced proceedings against Fonteyne as well as several other parties. Amongst other things, it alleged that Fonteyne stood as a fiduciary to Jetco and breached that duty by soliciting its clients.

The Decision – Importance of not conflating a Valuable Employee with a Fiduciary

The Court began by setting out the analytical framework for determining whether a fiduciary relationship exists. The test is described in Frame v. Smith, 1987 CanLII 74 (SCC), at para 136, was modified by Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24, at para 36, and consists of the following:

1. A fiduciary has scope for the exercise of discretion or power;

2. The fiduciary can unilaterally exercise that discretion or power so as to affect the beneficiary’s legal or practical interests;

3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power; and

4. The fiduciary has given an undertaking to act in the best interests of the beneficiary.

The Court noted there is a long line of cases which have held that fiduciary relationships may arise in the employment context:

The key concept in these cases is that the employer’s vulnerability is created by the employee’s ability to exercise unilateral power or discretion so as to affect the employer’s legal or practical interests. The critical question is whether the employee has “actual authority or control over the employer’s operation” (RBC at para 50) or “is imbued with discretion or control” (Firemaster at para 42).

(at para. 58)

In what should be a cautionary note to employers, the Court stated it is important “not to conflate a valuable employee with a fiduciary employee.” Given the onerous obligations held by a fiduciary, it is necessary to actually find that the employee is a “key employee” as opposed to merely being a good or valuable employee. (at para. 59)

The Court relied on a decision of Justice S.L. Martin (then of the Alberta Queen’s Bench and most recently appointed to the Supreme Court of Canada) in Flagworks Inc. v. Signcraft Digital (1978) Inc., 2007 ABQB 434. In that decision, Justice Martin said of the former production manager of the plaintiff:

That Ms. Holt was an exceptionally good employee and even essential to the efficient operation of Ms. Flock’s business does not however, make her into top or senior management. Her responsibilities would have some impact on the practical and legal status of the company but any vulnerability which existed was attributable to her diligence, not her discretion to affect Flagwork’s relevant financial or legal interests. That Flagworks needed Ms. Holt, or relied upon her to be the backbone of one of their profit center does not make her into a “key employee” for the purpose of affixing fiduciary duties.

(at para. 51 of Flagworks, emphasis added)

In respect of sales employees, the Court in Jetco noted it is important not to make findings of fiduciary status based entirely on relationships with clients. The assessment of fiduciary status involves a consideration of whether the employee has sufficient control and authority over the employer’s business. Client relationships are only one part of that context.

Turning to the specific circumstances of Fonteyne, the Court observed there was no question that he was the “face of Jetco” and that the owner had long abandoned the sales side of the business to him. Nonetheless, it held that he was not a fiduciary, finding amongst other things:

• He had no signing authority other than when it came to placing orders;
• He had no access to the corporate financial statements;
• He had no financial stake in the company’s performance; and
• There was no evidence that he was responsible for the strategic direction of the company.

The Court further noted that Fonteyne executed the strategies and relationships that were already in place at the company, while the owner maintained control over all aspects of the business and made all the important decisions.

Employment Likely Suitable for a Restrictive Covenant

The Court’s finding that Fonteyne was the “face of Jetco” to the customers and that the owner had essentially abandoned the sales side of the business to him likely would have justified a reasonable non-competition or non-solicitation covenant. It has been held that “when an employer introduces an employee to customers and facilitates a relationship between its customers and the employee, there is a proprietary interest entitled to protection.”

It also has been held that where the nature of the employment likely will cause customers to perceive “an individual as the personification of the company or employer, the employer has a proprietary interest in the preservation of those customers which merits protection against competition from that individual employee after his termination…”

In this case, the evidence was that Jetco had tried and failed to introduce a non-competition clause into the employment relationship in 2007. In light of the restraint exercised by the courts in affixing fiduciary status, employers that introduce their employees to existing customers are wise to make restrictive covenants a required element of the employment agreement from the outset.

The Perils in Drafting Restrictive Covenants and the Importance of Context

(Published April 18, 2018)

Ceridian Dayforce Corporation v. Daniel Wright (2017 ONSC 6763),
853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd. (2016 BCSC 2233)

A recent decision of the Ontario Superior Court of Justice refusing to enforce a non-competition clause highlights the many ways in which the drafter of a restrictive covenant can go too far in attempting to protect the interests of a business from its departing employees.

In Ceridian Dayforce Corporation v. Daniel Wright (2017 ONSC 6763), the court declared a non-competition clause unenforceable, finding no less than eight faults with it. Given that the clause likely would have fallen even if the court had found only one fault, the decision is a stark reminder that the drafting of a restrictive covenant to withstand judicial scrutiny can be a perilous exercise.

The decision also stands as an interesting counterpoint to a 2016 decision of the BC Supreme Court. Faced with similar objections to the restrictive covenants at issue in that case, the court in 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd. (2016 BCSC 2233) (“Source Office Furniture”) enforced the covenants. Context was critical in the two decisions, however, as the court in Ceridian was faced with a non-compete clause given by an employee, whereas in Source the restrictive covenants were tied to the sale of a business.

Ceridian Dayforce

The individual defendant in this case was a software developer, formerly employed by the plaintiff corporation in designing, building and testing components of its software. At the outset of his employment, he executed an agreement containing a non-compete clause. He resigned five years later and soon thereafter took up employment with a competitor.

The plaintiff corporation invoked the non-compete clause, attempting to justify it on the basis that the knowledge held by the employee was unique such that a non-solicitation or confidentiality provision was insufficient to protect its trade secrets relating to its software. It argued that the information to be protected was in the employee’s “head”. The plaintiff corporation brought a partial summary judgment motion to enforce the clause.

The key provisions of the non-compete provisions were:

(1)               The non-competition period, defined as the “Restricted Period” means the period up to 12 months from the date the employee ceases to be employed by the Company as determined by the Company in its sole unfettered discretion, provided that the Company informs the Employee of the length of the period within 5 business days of the Employee ceasing to be employed by the Company.

(2)               The Employee shall not, “directly or indirectly provide services, in any capacity, whether as an employee, consultant, independent contractor, owner, or otherwise, to any person or entity that provides products or services or is otherwise engaged in any business competitive with the business carried on by the Company or any of its subsidiaries or affiliates at the time of his termination (a “Competitive Business”) within North America”;

(3)               The Employee shall not “be concerned with or interested in or lend money to, guarantee the debts or obligations of or permit his name to be used by any person or persons, firm, association, syndicate, company or corporation engaged in or concerned with or interested in any Competitive Business within North America,

(4)               Nothing restricts the Employee from holding less than 1% of the issued and outstanding shares of any publicly traded corporation.

(5)               During the Restricted Period, the Company is to pay the Employee his or her base salary, less applicable deductions

(emphasis added)

The defendant employee successfully challenged the enforceability of the non-compete clause on several grounds. The decision illuminates the many ways in which a restrictive covenant can be successfully attacked if care is not taken when drafting it, particularly where it is provided in the context of a normal employment relationship.

Definition of Competitive Business Overly Broad in Application to Affiliates

The reference in the clause to the business of any of the company’s “subsidiaries or affiliates” meant the employee was prohibited from working in the field of providing gas cards and gift cards, which was the line of business of an affiliated company. The court held it was unreasonable to purport to prevent the employee from working in areas completely unrelated to his work for the plaintiff.

Prohibition on Working for Competitors Outside of Scope of Expertise Overly Broad

Similarly, the corporate plaintiff itself, aside from its affiliates, had lines of business unrelated to the employee’s particular work. Prohibiting him for working in all of these lines of business also went too far.

No Evidence of Harm from Holding Shares of Competitors

The clause prohibited holding 1% or more of a publically traded corporation of a competitive business. Many non-compete clauses in Canada use such boilerplate language without any apparent thought as to its enforceability. Here, the court noted there was no evidence demonstrating why this prohibition was reasonable or how ownership of 1% or more of the shares of a competitor would undermine its proprietary interests.

Length of Clause Ambiguous

The non-compete clause gave the employer the right to determine, within five days of the termination of employment, the length of the prohibition on competitive employment, up to a maximum of 12 months. This, the court found, was impermissible since, at the time the agreement was executed, its length was ambiguous.

12 Months Arbitrary

The employer invoked the non-complete clause for the maximum 12 months. Many restrictive covenants in Canada adopt a length of 12 months, without any apparent thought given to whether, if challenged, the employer could justify the length. Here, the court noted that the evidence “did not establish the duration of the software development lifecycle, or tie this to the duration of the proprietary interest” and hence 12 months was arbitrary.

Geographic Scope Overbroad

The non-compete applied to “North America”, which, the court noted, generally includes Mexico and the Caribbean. The employer’s failure to establish that restrictions on working for a competitor in those two countries were necessary also was fatal to its enforceability.

Ambiguous Reference to Employer’s Business

The definition of competitive business included any business carried on by the employer or any of its subsidiaries or affiliates at the time of the employee’s termination of employment. Given that reasonableness is measured at the time of execution, it was impossible for the employee to know, at the time he was hired, the “unlimited” number and kinds of other business his employer might carry on during his employment.

Use of the Words “In Any Capacity” Overbroad

Most colourfully, the court held that the prohibition on providing services to a competitor “in any capacity” overreached in that the employer did not establish how its legitimate proprietary interests would be threatened if the employee were to:

  • Work as a janitor for the competitor;
  • Provide hardware (as opposed to software) support for the competitor, either as an employee or via his own business;
  • Develop his own software unrelated to the software at issue in the litigation, sell it to the competitor and provide support to the competitor in its use of it; or
  • “Start a band in Mexico and be engaged as an independent contractor by (the competitor) to play at a staff retreat in Cancun.”

On this point alone, the court had no difficulty concluding that the covenant was a “blanket prohibition which unreasonably restricts (the employee’s) economic interests and goes beyond that reasonably necessary to protect (the employer’s) claimed proprietary interest”.

Source Office Furniture

The BC Supreme Court’s decision to uphold non-compete and non-solicit clauses in Source Office Furniture is an interesting contrast and reminder that, sometimes, context is everything.

In Ceridian Dayforce, the prohibition on working for a competitor “in any capacity” conjured up examples of activities which, the court held, were improperly prohibited by the non-compete clause (starting a band in Mexico and playing at a staff retreat there).

In Source Office Furniture, the defendant also attempted to invalidate the restrictive covenant by raising many hypothetical activities arising from similar wording. There, the restrictive covenants prohibited servicing or providing advice to customers “for any purpose.” The BC court found that reference to hypothetical examples outside of the office furniture and equipment business of the plaintiff would result in an “absurdity”.

The courts have available to them various tools to address allegations that restrictive covenants are defective. In Source Office Furniture the court was prepared to apply those approaches to preserve the covenants.

The court first recalled the decision of Dickson J. in Elsley v. J.G. Collins Ins. Agencies ([1978] 2 SCR 916, 1978 CanLII 7 (SCC)), who wrote:

It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. 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. (at pp. 923 – 924)

Importantly, in Source Office Furniture, the surrounding circumstances included the fact that the restrictive covenants were provided by a departing shareholder that sold its portion of the business to the plaintiff corporation. As a general principle, it has long been held that the courts will apply a greater degree of scrutiny to covenants attached to employment relationships as opposed to those provided in the context of the sale of a business.

The court also drew on a decision from the BC Court of Appeal which rejected the proposition that “any provision which falls short of being “definitive” in all imaginable circumstances is ambiguous”. The Court of Appeal stated in the same decision that consideration must be given to the agreement as the whole and the factual matrix, or surrounding circumstances, in which the agreement was reached. (See Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 at paras.72 – 83).

Applying these concepts, the court in Source Office Furniture:

  • Found that the words “service or provide advice” to customers was not ambiguous;
  • Did not overreach in respect of the customers to which the covenants applied; and
  • Held it would be an “absurdity” to construe the prohibition on providing services or advice “for any purpose” as applying to various hypothetical examples.

***

The temptation to focus on a particular element of a covenant, e.g. an arguably ambiguous word or a seeming overreach in the nature of activities restricted, may lead to a quick conclusion that the covenant is unenforceable.  Yet if all the surrounding circumstances of the covenant are considered, a different conclusion may be reached. That is particularly the case with covenants attached to the sale of a business.

Less is More – “Loyalty Incentives” Upheld

(Published May 29, 2015)

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.”

Arguing Ambiguities in Restrictive Covenants – The Pendulum Swings Back to Enforceability

(Published May 28, 2015)

One of the most-used strategies to argue that a non-compete or non-solicit provision is unenforceable is to point to any possible ambiguity in the wording used.

In the leading Canadian decision, the Supreme Court of Canada held in J.G. Collins Insurance Agencies Ltd. v. Elsley Estate, 1978 CanLII 7 (SCC), that in order to be enforceable, the terms of the restraint must be clear, certain and not vague. In Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), the Court characterized the demand for clarity as high, finding a clause that prohibited competition in the “Metropolitan City of Vancouver” to be unenforceable, given there was no such legal entity in existence at the time.

Countless restrictive covenants have failed because of the ability of the employee to point to ambiguities in their wording.

In Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97, the British Columbia Court of Appeal has perhaps swung the pendulum back toward enforceability, holding that a difference of opinion over the meaning of a clause does not necessarily render it ambiguous and hence unenforceable.

As summarized in my earlier article about this decision, the clause at issue in Rhebergen set out economic consequences for a veterinarian if, upon the termination of her contract with a clinic, she were to set up a veterinary practice within three years and within a 25-mile radius in British Columbia.

Specifically, the clause stated:

 NON-COMPETITION

  1. The Associate acknowledges and agrees that she will gain knowledge of and a close working relationship with the CVC’s [Creston Veterinary Clinic Ltd.’s] patients and clients which would injure CVC if made available to a competitor or used for competitive purposes.
  2. The Associate covenants and agrees that in consideration of the investment in her training and the transfer of goodwill by CVC, if at the termination of this contract with CVC she sets up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of CVC’s place of business in Creston, BC, she will pay CVC the following amounts:

If her practice is set up within one (1) year termination of this contract – $150,000.00;

If her practice is set up within two (2) years termination of this contract – $120,000.00;

If her practice is set up within three (3) years termination of this contract – $90,000.00.

Relying on Elsley and Shafron, the trial judge (2013 BCSC 115 (CanLII)) held the clause to be unenforceable on several grounds, including ambiguity. He considered the words “sets up a veterinary practice” to have a variety of meanings:

In my view, the plaintiff’s concerns are well-founded. “[S]ets up a veterinary practice” can mean a variety of things. Does it prevent the plaintiff from practising veterinary medicine within that radius if her practice is based elsewhere? For example, if her office were outside the 25-mile radius, could she provide services inside the 25-mile radius? Conversely, does the covenant prohibit her from having an office within the 25-mile radius, but only doing veterinary work outside the 25-mile radius? What if she established an office with other veterinarians inside the 25-mile radius but did not personally conduct work within that radius? What if, as the plaintiff has suggested she may do, she seeks to set up a mobile veterinary practice with no specific physical location, but does some work within that radius? What if she joined another practice that started within that radius but did not herself participate in establishing it or “setting it up”?

(at. para. 24)

On appeal, Madam Justice D. Smith for the majority found there was no ambiguity in the clause, noting that differences of opinion on interpretation do not automatically lead to ambiguities. In a portion of the judgment that surely will be cited by many counsel for employers seeking to enforce restrictive covenants in the future, she held:

[74]       A clause is not ambiguous simply because of a difference of opinion as to whether the hypothetical activity triggers the compensable provision. If the clause can be construed by an application of the plain and ordinary meaning of its words and the ordinary rules of grammar, then the clause is not ambiguous. In deciding on the applicability of the contra proferentem doctrine, which is also premised on a finding of ambiguity, Ritchie J., in his concurring reasons in Survey Aircraft Ltd. v. Stevenson, 1962 CanLII 42 (SCC), [1962] S.C.R. 555 at 563, said the following:

In my view the principle was correctly stated by Lord Sumner in London and Lancashire Fire Insurance Company v. Bolands, Limited [[1924] A.C. 836 at 848], and the following language in my opinion has direct application to the present case:

It is suggested further that there is some ambiguity about the proviso, and that, under the various well-known authorities, upon the principle of reading words contra proferentes, we ought to construe this proviso, which is in favour of the insurance company, adversely to them. That, however, is a principle which depends upon there being some ambiguity–that is to say, some choice of an expression–by those who are responsible for putting forward the clause, which leaves one unable to decide which of two meanings is the right one. In the present case it is a question only of construction. There may be some difficulty, there may be even some difference of opinion, about the construction, but it is a question quite capable of being solved by the ordinary rules of grammar, and it appears to me that there is no ground for saying that there is such an ambiguity as would warrant us in reading the clause otherwise than in accordance with its express terms. (The italics are [Ritchie J.’s].)

The Court cited the factual matrix in which the agreement was reached, noting there were no other established veterinary clinics within a 60-mile radius generally or within a 100-mile radius in Canada. Further, the principal source of business for the clinic were the eight dairy herds in the Creston Valley, all of which were situated within the 25-mile radius described in the clause.

The Court concluded by rejecting the hypothetical questions of the trial judge over the meaning of the clause:

In my opinion, the hypothetical scenarios posited by the chambers judge have no basis in the reality of a dairy practice in the Creston Valley.  It matters not, in my view, where on the spectrum Dr. Rhebergen proposes to provide veterinary services within the 25-mile radius of Creston.  If her intention is to provide those services on a regular or continuous basis they will, in my view, trigger the non-competition clause.  That is the only reasonable interpretation that, in my view, could be made on a fair reading of the clause.

(at para. 85)

Economic Disincentives to Compete Found to be Restraints of Trade

(Published May 24, 2015)

The B.C. Court of Appeal’ decision last year in Rhebergen v. Creston Veterinary Clinic, 2014 BCCA 97, is both a win and a loss for employers seeking to restrain employees from competing with them post-employment. In both instances, the decision will have long-reaching effects over employer’s strategies to implement effective restraints and the courts’ decisions on enforceability.

In this, the first of two articles, I will review the Rhebergen’s implications for the use of economic disincentives to compete (as opposed to outright prohibitions). Next week, I will review the Court’s approach to addressing whether a restrictive covenant is ambiguous and therefore unenforceable.

The Facts

The Respondents operated a veterinary clinic in the Creston Valley. The primary business consisted of servicing eight dairy farms in the immediate vicinity. There were no other such clinics within B.C. within a 100-mile radius.

The Appellant graduated from veterinary college and obtained her license. In order to gain practical experience, she applied for work at the clinic and entered in to a three-year “Associate Agreement” under which she was paid $65,000 per year.

The agreement set out particular financial consequences should the Appellant set up a competing practice within three years of the termination of the Agreement. The relevant provisions stated:

  1. NON-COMPETITION
  2. The Associate acknowledges and agrees that she will gain knowledge of and a close working relationship with the CVC’s [Creston Veterinary Clinic Ltd.’s] patients and clients which would injure CVC if made available to a competitor or used for competitive purposes.
  3. The Associate covenants and agrees that in consideration of the investment in her training and the transfer of goodwill by CVC, if at the termination of this contract with CVC she sets up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of CVC’s place of business in Creston, BC, she will pay CVC the following amounts:

If her practice is set up within one (1) year termination of this contract – $150,000.00;

If her practice is set up within two (2) years termination of this contract – $120,000.00;

If her practice is set up within three (3) years termination of this contract – $90,000.00.

* * *

  1. TERMINATION
  2. CVC agrees not to terminate this agreement during the term hereof except for just cause as hereinafter defined.
  3. The Associate cannot terminate this agreement prior to the expiry of the term, except for death, permanent disability preventing the Associate from continuing to practice veterinary medicine, or default of this agreement by the CVC….

The two principals of the clinic calculated the amount to be paid if the Appellant were to set up a practice within 25 miles of Creston based primarily on their experience in hiring a former associate. They took into account the recoverable and unrecoverable investment made in mentoring, training and equipment and the impact on the clinic’s good will and business if she were to compete for its clientele.

Differences arose between the parties and after 14 months Rhebergen advised she was terminating the agreement and would no longer work for it, whereupon the clinic told her she had no right to terminate the agreement and then proceeded to terminate her employment for cause. Five months later, Rhebergen gave notice that she intended to set up a mobile dairy practice and commenced proceedings seeking to have the section requiring a payment to the clinic declared unenforceable.

Economic Disincentives Considered to be a Restraint of Trade

The trial judge, relying on  Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), held the clause to be in restraint of trade and unenforceable on several grounds.

At the Court of Appeal, the panel first deal with the issue of whether section 11, not being an outright prohibition on competition, was nonetheless a restraint of trade and therefore unenforceable if unreasonable. The Court noted there are two strands of authority as to whether a clause that creates financial consequences arising from competition, but does not outright prohibit competition, is a restraint:

…there appears to be essentially two strands of authority in the employment context: first, what one may call a ‘functional’ approach, which asks whether the clause at issue attempts to, or effectively does, restrain trade, in which case it will be captured by the doctrine and subjected to reasonableness scrutiny; and second, a more ‘formalist’ approach, in which the clause must be structured as a prohibition against competition to constitute a ‘restraint’.  On the latter approach, mere disincentives to post-employment competition are not sufficient to trigger the doctrine, even if those disincentives operate as effectively at dissuading competitive conduct and participation in the marketplace as a prohibition.

(at para. 28)

Lowry, J.A.,  after reviewing case law in the U.K.,  B.C. and Ontario, held:

 the functionalist approach established in English law is to be preferred as the legal basis for determining whether clauses that burden employees with financial consequences, whether by payment or forfeiture, they would not otherwise have for engaging in post-employment completion constitute a restraint of trade….it is a matter of the effect of the clause in practice over its form.

(at para. 42)

The Court’s decision to adopt the functionalist approach aligns British Columbia with the reasoning of the Ontario Superior Court in Levinsky v. The Toronto-Dominion Bank, 2013 ONSC 5657. Clauses that impose financial consequences for competing post-resignation, such as the “claw-back” of exercised stock options, will only be enforceable if they can be said to be reasonable.

By contrast, in an earlier decision of the Ontario Superior Court, Nortel Networks Corp. v Jervis, 2002 CanLII 49617, the departing employee was sued under a “claw-back clause” which required re-payment of market gains from exercised stock options if he went to work for a competitor within 12 months of exercising the options. The Ontario court held that as Jervis “was not precluded from going elsewhere or from doing whatever he chose to do”, the clause was not a restraint of trade.

Going back to Rhebergen, if “permissive” clauses that allow competition but demand a price constitute restraints of trade, how will they be assessed for reasonableness? Lowry J.A., on behalf of the Court, suggests the amount to be paid, or the amount forfeited “may have to be considered as an element of the fairness of a non-competition clause of that kind.”

Should that be the case, employers will need to carefully weigh the amount of money being forfeited or required to be repaid when insisting on financial consequences if a key employee competes after resigning. While the law of penalties has no application to payments upon the occurrence of an event, i.e. competition, extravagant or unconscionable requirements may cause a court to consider such clauses to be nonetheless unfair and hence unenforceable.

Is Forfeiture of a Bonus for Resigning a Restraint of Trade?

(Published January 26, 2013)

Does the forfeiture of a bonus for leaving an employer constitute a restraint of trade?

This question was recently put to the Ontario Supreme Court of Justice in Levinsky v. TD Bank, 2012 ONSC 5110. The Court’s ultimate response may encourage more employers to require forfeiture or repayment of bonuses to incent employee loyalty as opposed to the use of non-compete clauses.

Enforcement of non-compete clauses in Canada is notoriously difficult. The courts begin from the proposition that the public has an important interest in every person carrying out his or her trade freely, as does the individual. All restrictive covenants are deemed to be restraints of trade, and, without more, are void. An employer, therefore, has the onus of establishing that a non-compete clause is necessary to protect is legitimate proprietary interest.

But what constitutes a restraint of trade? In Levinsky, the applicant contended that a term within a restricted share unit plan that caused him to forfeit $1.75 million in bonuses when he resigned constitutes a restraint of trade and should not be enforced. The plan provides that RSUs do not “fully vest” until three years after they have been allocated and that an employee forfeits his unvested RSUs if he resigns before this date.

(While not stated in the decision, according to the website of Mr. Levinsky’s current firm, he was previously employed by the bank in investment management and, after resigning, co-founded his own investment management firm. I should also note that the opening paragraph of the decision states that the amount at issue is only $174,708, which appears to be a typographical error, as the decision later refers to $1,750,000 being at issue.)

TD Bank argued that the purpose of the plan is to provide “additional” compensation to create “incentives” for employee retention.

Mr. Levinsky proceeded by way of an application instead of by trial. The Court found that he had not provided the appropriate evidence for the court to determine whether or not the provision in dispute is in restraint of trade and, if so, is justifiable, and therefore remitted the matter to the trial list.

While much will obviously depend on the evidence put before the court at trial, prior decisions suggest the court will adopt a more relaxed approach toward enforcement of the forfeiture clause than it would to a non-compete clause.

Indeed, there is considerable question whether the forfeiture clause will be determined to be a restraint of trade at all. In Nortel Networks Corp. v. Jervis, 2002 CanLII 49617 (ON SC), an Ontario Court ordered the defendant, a former Nortel employee, to pay the company more than $625,000 in stock option profits after he joined a competitor.

The terms of the stock option plan stipulated that if, within 12 months (later extended to 24 months) of exercising a stock option, the employee left to join a competitor, Nortel reserved the right to require repayment of the gain.

Jervis exercised options, realized a profit of more than $625,000 and within 12 months left to join a competitor. Nortel sought repayment of the gain.

The court held that this form of clawback provision was not a restraint of trade. Relying on a 1941 decision of the Ontario Court of Appeal in Inglis v. Great West Life Assurance Co., [1941] O.R. 305 (C.A.), the court held that “Where a former employee is required to forego a benefit if he or she chooses to compete, that is not a restraint of trade.” (at para. 29)

Since its release in 2002, Nortel has not received much judicial consideration. Its underlying premise, however, that the foregoing of a benefit if someone chooses to compete is not a restraint of trade, makes good sense. In Levinsky, the particular clause in question in the RSU plan does not even appear to tie the loss of the bonus to competition – the forfeiture takes place merely upon resignation. TD Bank’s argument that the provision is meant to create incentives to promotion employee retention (and not a restraint of trade) is persuasive.

Should Levinksy be decided by the trial court, the decision may provide further support for the use of forfeiture or clawback provisions as an alternative to the use of non-compete clauses.

(Some of the analysis for this argument is taken from an article I wrote, “Protecting Employers from Departing Employees: Alternatives to the Use of Restrictive Covenants”, published in The Advocate, vol. 64, part 1, January 2006, p. 79.)

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

(Published September 8, 2012)

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.

BC Court of Appeal Raises Bar on Injunctions to Enforce Non-Solicit Clauses

(Published August 17, 2012)

The British Columbia Court of Appeal has raised the bar considerably for employers hoping to obtain an injunction to enforce a non-solicit clause pending trial.

In Edward Jones v. Voldeng, 2012 BCCA 295, released July 3, 2012, the court held that Edward Jones, a securities firm that sought to enforce a six-month non-solicit clause against Voldeng, had not established it would suffer irreparable harm if the interim injunction was not granted.

The decision is one of few Canadian appellate court decisions addressing whether interim injunctions should be granted to restrain alleged breaches of non-solicit and non-compete clauses and hence will be very influential in future cases, particularly in B.C.

Voldeng was subject to a six-month non-solicit provision in his employment contract. He left employment with Edward Jones and took up employment with RBC Dominion Securities. He immediately sent out a communication to his clients announcing his move and indicating he would personally call his clients in coming days to answer any questions they may have.

The B.C. Supreme Court granted an interim injunction, finding, amongst other things, that if the injunction were not granted, Edward Jones could suffer irreparable harm. It also found there was an arguable case that his communication to clients breached the non-solicit clause.

Voldeng sought leave to appeal, obtained it and, remarkably, was able to have his application heard by the Court of Appeal a mere six weeks after the initial order was granted by the Supreme Court.

The Court of Appeal overturned the decision to grant the interim injunction on the basis that Edward Jones had not established it would suffer irreparable harm if the injunction was not granted. In doing so, the Court distinguished a decision by Mr. Justice Groberman, as he then was, in MD Management Limited v. Dhut, 2004 BCSC 513.

In Dhut, Mr. Justice Groberman (who now sits on the Court of Appeal), held that damages would not be an adequate remedy for a breach of a non-solicitation clause by a financial consultant, stating:

I have some sympathy for (the) argument that the arrangements at issue in this case are purely concerned with financial services and that the only losses that might accrue to the plaintiff are financial.  I am, however, not persuaded that damages will prove an adequate remedy.  If the plaintiff succeeds at trial, it will be virtually impossible to unscramble the egg and determine how much the plaintiff lost as a result of violations of the agreement.  Mr. Dhut will argue, as he did before me, that many clients will follow him to ScotiaMcLeod not because of any solicitation but because they value his services.

(at para. 42)

In Voldeng, Mr. Justice Chiasson, on behalf of the Court of Appeal, distinguished Dhut on the basis that in Dhut the client list was provided to the defendant financial advisor by his employer, that the employer was a specialized venture that dealt only with members of the medical profession and that there may have been issues of lost reputation at stake.

The Court did not directly address, however, the passage quoted above addressing the irreparable harm component. Perhaps out of deference to Mr. Justice Groberman, who now sits as a colleague on the Court of Appeal (but was not on this panel), the Court declined to simply say that it disagreed with his decision in Dhut. In my respectful view, it would have been preferable for the Court to do so rather than attempt to distinguish the case on grounds unrelated to the issues raised by Mr. Justice Groberman in the cited passage.

The Court also attempted to distinguish between irreparable harm in the context of a non-solicit agreement and irreparable harm flowing from a non-competition agreement. With respect, the attempted distinction is not persuasive. Here is what the court said about non-solicit agreements:

The respondent asserts that it may not be possible to link a defendant’s breach to damages sustained by a plaintiff.  In my view, in this case, at best, that argument raises an issue of causation; of liability, rather than the difficulty of calculating damages.  The authorities repeatedly have held that difficulty in calculation is not a bar to awarding damages.  Even where irreparable harm is in issue, a plaintiff must establish a link between the conduct of the defendant and potential damages.

(at para. 40)

And here is what the court said about non-competition clauses:

Non-competition covenants restrict a departing employee from seeking business generally.  It usually will not be possible to tell whether business is lost to the employee’s new employer as a result of prohibited competition as opposed to legitimate competition.  Such damages, not being calculable, generally do constitute irreparable harm.

(at para. 37)

With due respect to the Court, it is difficult to see how the difficulty of proving damages is solely an issue of causation when it comes to non-solicit clauses, but amounts to irreparable harm when it comes to non-competition agreements.

In both cases, there are elements of legally permissible and legally impermissible activity which may each attract clients from the employee’s former employer, making it difficult, in Mr. Justice Groberman’s words from Dhut, to  “unscramble the egg and determine how much the plaintiff lost as a result of violations of the agreement.”

In the case of breach of a non-competition agreement, the new employer’s own business activity (legally permissible) may be the cause of some of the shift in business. In the case of breach of a non-solicit clause, the mere fact of the departing employee leaving to set up business (legally permissible) may in itself, without solicitation, cause a shift in business. Both cases cause difficulty in determining damages but to say that in one case the issue is causation and in the other it amounts to irreparable harm is difficult to accept.

Finally, one wonders if the Court was asked to consider whether it is sending a signal to employers and their legal counsel to use non-compete clauses as opposed to non-solicit clauses. For that likely will be an unintended consequence of this decision.

There is a long line of cases in Canada holding that restrictive covenants should go no further than necessary to restrict an employer’s legitimate proprietary interests. Applying this rule, courts have held that non-compete clauses, being more intrusive on an individual’s right to earn a livelihood, should not be enforced where a non-solicit clause would be sufficient.

Voldeng, it is submitted, may well have the effect of employers inserting non-competition clauses in their employment agreements as opposed to non-solicitation clauses. Given the apparent greater likelihood of the Courts finding irreparable harm for breach of a non-compete agreement as opposed to a non-solicit clause, employers will need to consider including non-compete clauses in their agreements where previously they may have been content with a non-solicit clause.

SCC Will Not Have Opportunity to Resolve Questions Raised by Globex Decision

(Published August 1, 2012)

Word out of Alberta that the plaintiff company in Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, will not be appealing the Alberta Court of Appeal decision to the Supreme Court of Canada. That’s too bad for those of us who had hoped for some clarification from the nation’s top court on some fundamental employment law issues raised by Globex.

In addition to deciding the issue of whether a restrictive covenant continues to apply to a wrongfully dismissed employee – the issue which has attracted the most attention in legal press – the Court of Appeal also grappled with the question of what, if any, form of consideration is required for introducing a non-compete or non-solicit clause once an employee has commenced employment. Other parts of the decision are good reminders about the importance of careful drafting when it comes to restrictive covenants.

The Background

The case concerned three employees who either, at the commencement of or during the course of their employment with Globex Foreign Exchange Corporation, accepted post-employment restrictions on competing with their former employer or soliciting its clients.

MacLean accepted the restrictions as a term of his initial employment and was wrongfully dismissed. Kelcher and Oliverio agreed to the restrictions during employment but did not receive any new benefits, i.e. “consideration”, for the restrictions. Kelcher and Oliverio left their employment when Globex aske them to accept more onerous restrictions.

The three employees entered into competition against Globex, a foreign currency exchange company. At the Court of Appeal, all three judges agreed that the non-competition clauses were overly broad and hence unenforceable.

The Court sharply differed, however, on the enforceability of the non-solictiation clauses and in doing so raised a number of issues fundamental to the law concerning lawful competition by former employees.

General Billposting Applied – Wrongfully Dismissed Employees Not Subject to Restrictive Covenants

Hunt J.A., writing on behalf of the majority, himself and Martin J.A., applied the English House of Lords decision in General Billposting Co ltd. v. Atkinson, [1909] AC 118, to the effect that a wrongful termination renders restrictive covenants in employment agreements unenforceable. Accordingly, MacLean, who had been wrongfully dismissed, was not bound by his non-solicitation clause.

The majority would also have found that the clause was both ambiguous and overly broad and would have refused to enforce the clause on those grounds alone.

The majority reviewed prior Alberta decisions and held that General Billposting is still good law in Alberta. The judges also noted that other Canadian appellate courts, including the B.C. Court of Appeal in Poole v. Tomenson Saunders Whitehead Ltd (1987), 16 BCLR (2d) 349 have also followed General Billposting.

The majority declined to deviate from  the General Billposting principle. Amongst other reasons, doing so, it wrote, would reward employers for mistreating employees. For example, an employer could hire a potential competitor, thereafter impose a restrictive coventant, then wrongfully dismiss the employee a short time later but enforce the restrictive covenant.

The court was also concerned that upholding a non-compete or non-solicit clause in respect of a wrongfully dismissed employee would severely constrain that employee’s duty to mitigate his or her damages.

Slatter J.A. in dissent would not have applied the General Billposting principle. First, he noted that a breach of contract does not automatically terminate the contract. If one party to the contract commits a breach serious enough to evince an intention “not to be bound by the contract”, the other party can accept the repudiation of the contract and terminate it. Such terminatation ends the obligation of either party to perform the substantive or primary covenants, but it does not bring to an end all collateral covenants, e.g. a non-compete clause.

“The argument that a party in breach cannot enforce any other covenant of the agreement is an over extension of the general principle that “the innocent party can accept the repudiation and terminate the contract”. That is true as it relates to the obligation for future performance. But it should not be extended so as to suggest that all the collateral covenants in the agreement have disappeared.”

(at para. 149)

Slatter J.A. also noted that, unlike General Billposting, in Globex the restrictive covenant stipulated that it was to apply for 12 months from the date of termination of employment “for whatever reason” and  hence a dismissal without notice should not affect the enforceability of the clause. 

Finally, Slatter J.A. noted the consequences of a strict application of the General Billposting principle. Suppose an employer misculates the appropriate length of notice by one month and is found at trial to owe one month’s severance. Strictly speaking, a wrongful dismissal has taken place, yet under General Billposting any breach of a restrictive covenant after the dismissal would be excused by virtue of the minor miscalculation.

This aspect of Slatter’s decision has considerable merit to it  – an employer that genuinely attempts to provide reasonable working notice but is slightly off the mark should not lose the benefit of an otherwise valid non-compete or non-solicit clause.

Perhaps the answer lies in the approach followed by the courts in British Columbia when determining whether an employee provided inadequate notice of dismissal is obligated to continue in the position to mitigate damages. The B.C. approach is to determine whether the notice provided was so far off the range of reasonable notice as to signal an intention to no longer be bound by the contract. If the notice provided is far out of the range, a court is more inclined to hold that the employee can repudiate the contract, terminate it and no longer work, without any affect on the duty to mitigate. See, for instance, Giza v. Sechelt School Bus Service Ltd., 2012 BCCA 18.

Adopting the approach of the B.C. courts, an employer that was slightly off the mark in the amount of working notice would not be signalling an intention to no longer by bound by the contract and hence the non-compete or non-solicit clause would still be effective.

Dissenting Judge Questions Requirement of Consideration for Changes to Employment Contracts 

The court also split on whether fresh consideration was required for the enforcement of non-solicit clause introduced during the course of employment. Hunt J.A., for the majority, applied longstanding jurisprudence in Canada that forebearance to dismiss is insufficient consideration. Rather, there must also be a mutual understanding when the restrictive convenant is entered that there will be such forebearance.

Given that Kelcher and Oliviero were already employed and received nothing in return when they accepted the non-solicitation clause, the majority held the clauses were not enforceable. Globex had not made any promise or implied that their employment would continue as a result of their signing.

The concept that some sort of fresh consideration is required to enforce the introduction of a restrictive covenant raises a number of questions. Why are restrictive convenants and some other forms of new employment terms – notably, notice periods – singled out for this treatment while other forms of contract changes are not?

Employers routinely change employment terms throughout the employment relationship, introducing new policies, e.g. restrictions on the use of social media at work, or changing benefit plans or compensation. In the case of some changes, i.e. a change in compensation or a benefit plan, if the employee says nothing and works on under the new circumstances, she is said to condone the change and it becomes part of the employment agreement.

In the case of a non-compete or non-solicit introduced mid-employment, however, an employee may sign the new agreement and work for several years, yet the concept of condonation or agreement to the change is not applied years later when the employer attempts to enforce the clause.

In a sharp dissent, Slatter J.A. focussed squarely on these issues, stating  “invoking the law of consideration after the fact is the invocation of a legal fiction in aid of a particular result.” (at p. 35)

Slatter J.A. reviewed the Supreme Court of Canada decision in Maguire v. Northland Drug Co., [1935] S.C.R. 412, a decision about the enforceability of a non-compete clause that the employee was asked to sign 11 months after the commencement of employment. The court in Maguire was of the view that the covenant was unenforceable because it was too wide, but otherwise would have held there was adquate consideration given that the “employer tacitly promised that if the bond were signed, the employment would not soon be terminated.” (from Maguire, pp. 415-6, 419)

For Slatter, “Maguire stands, at least, for the proposition that a “tacit promise” that the employment would “not soon be terminated”, followed by an “indefinite refraining” from exercising the right to terminate the employment agreement is sufficient consideration for the covenant.” (at para. 119) “Further, since many of the key terms of employment agreements are implied by law, it is not unreasonable for the law also to imply the “tacit agreement” metioned in Maguire.” (at para. 129)

The majority, by contrast, would require at least a “mutual understanding” that there will be forebearance rather than simply a one-sided “tacit promise.”

Slatter J.A. continued:

“There is nothing unreasonable about either side seeking variations to the terms of an employment agreement from time to time. The employee may seek a raise in pay, or promotion, or transfer, or a different work schedule, or other changes. The employer may feel the need to change the arrangement to respond to competitive pressures or changing business conditions. It is unrealistic to establish a rule of law that prevents the parties to a long-term employment relationship from restating and reducing to writing, from time to time, the terms of employment. Both parties rely on the enforceability of the terms of employment, and should not have their expectations disappointed by an artifical rule of law which makes their covenants unenforceable after they have been relied on for years.”

(at para. 129)

Slatter J.A. also criticized the Ontario Court of Appeal decision in  Braiden v. La‑Z‑Boy Canada Ltd., 2008 ONCA 464 (CanLII), where the court refused to enforce the notice provision on the basis that it was introduced without consideration, whereas it did enforce a myriad of other changes that hade been made to the employment agreement over its 22-year lifespan. Given this lengthy period, it was not surprising that there were many variations in the employment agreement. However, “of all the changes that were made, the court appears to have found that one (relating to the notice provision) was not enforceable, while many or all of the others (such as those relating to the employee’s duties, his method of pay, the rights to his commissions, and so forth) were implicityly found to be enforceabile. How could there be consideration for some of these changes,m but not others.” (at para. 132)

In my view, the dissent’s reference to promotions, increases in pay or changes in work schedules does not really advance the argument. Where the change is to the benefit of the employee (e.g. a pay raise), that in itself is consideration. Where the change affects the employee immediately (e.g. a change in work schedule) and the employee continues to work, she has condoned the change. And with respect to promotions, an employee very rarely refuses the promotion and hence the change to the contract is not unilateral.

But there may also be instances where changes have been made that are to the detriment of the employee, with no consideration, yet the changes are enforced. A pay cut or a demotion come to mind. Unless the employee, within a reasonable period of time, accepts the repudiation of contract and resigns, he is taken to have condoned the changes. Yet the courts do not apply this same concept to the introduction, mid-employment, of restrictive covenants or defined notice/severance clauses if there has not been consideraton. Why?

I believe the the proper justification for the difference lies in the application of the doctrine of condonation, albeit in a more nuanced manner than is it is traditionally applied. In particular, the focus should be on the ability of the employee to effectively condone a change.

For instance, an employee feels the affect of a unilateral demotion immediately and if the employee continues in the changed position for a resonable period of time, he is taken to have condoned the change. Other unilateral changes that the employee feels immediately would include the loss of a car allowance, a pay cut or a geographic relocation. In all instances, if the employee continues in the position for a reasonable period of time, he has condoned the change.

That is not the case in the instance of the introduction of a restrictive covenant or a defined notice or severance clause. In these instances, the employee does not “feel” the affect of these change until the employment is terminated – perhaps several years later. Hence, it cannot really be said the employee has condoned the change because the change has had no impact on him at the time.

Thus, I would propose a two-part test to determine whether a unilateral change to the employment agreement should be enforced. First, has their been consideration? Second, if not, has the employee effectively condoned the change, i.e. felt the affect of the change soon after its implementation and nonetheless continued to work?

Application of this approach may well lead to other changes to the employment contract being held to be unenforceable years later. For instance, an employer unilaterally cancels its long-term disability program and an affected employee continues to work. Years later, the employee becomes disabled but is not covered by a plan. Under the test I propose, the employee would have a claim against the employer for the lost disability plan, given she did not effectively condone its elimination, since she did not immediately feel the affect of it.

Careful Drafting of Covenants Continues to be of Critical Importance

Other aspects of the Globex decision serve as a stark reminder of the importance of precise, careful drafting when it comes to restrictive covenants. Kelcher’s non-solicitation clause stated:

2. That for a period of twelve (12) months from the date of termination of the Employee’s employment with Globex, for whatever reason, he/she will not, for any reason directly of indirectly as principal, agent, owner, partner, employee, consultant, advisor, shareholder, director or officer or otherwise howsoever, own, operate, be engaged in or connected with or interested in, the operation of or in any way guarantee the debts or obligations of, or have any financial interest in or advance, lend money to, or permit his/her name or any part thereof to be used, or employed in any operation whether a proprietorship, partnership, joint venture, corporation, or other entity, or otherwise carry on, engage in, solicit customers in any manner whosoever, in any business or activity for any client of Globex with which he/she had dealings on behalf of Globex at any time within the twelve (12) months preceding the date upon which the Employee left the employment of Globex.

(para. 14, with emphasis)

The majority held that the clause was ambiguous and refused to enforce it on this ground. In particular, it found that the term “dealings” was ambiguous both in its meaning and practical application. For instance, if a trader was away from his desk and one of his regular clients called and spoke for a brief period of time to a different trader, would this constitute a “dealing”? And how would the trader who briefly spoke to that client know he had had “dealings” with that client if he didn’t write down the client’s name or make a particular record – something he might not have any motiviation to do if the client was not a regular client of his?

As the majority stated (para. 19), ” If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable.”

Slatter, J.A., in dissent, did not have the same difficulty with the wording as did the majority:

Just because the word “dealings” might mean different things to different people does not justify the conclusion that it is too vague to mean anything. On that test, no restrictive covenant would ever be enforceable, because any word used will engage conduct at the fringes of its meaning.

(at para. 168)

The majority also found the clause to be over broad because it would prohibit the employee from soliciting in the clients of Globex in any business or activity, even those in which Globex is not involved.

  1. Holland v. Hostopia Inc., 2015 ONCA 762, at paras. 47-55.
  2. See, for instance, Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, at para. 16