Post-Resignation Restrictive Covenant Upheld as a Commercial, not Employment Agreement

Author: Dean Crawford, KC

WJ Packaging Solutions Corp. v Park2021 BCSC 316

The BC Supreme Court holds that a five-year agreement prohibiting competition by a departed employee is enforceable, with less scrutiny applied as being a commercial agreement. The decision raises interesting considerations for employers contemplating negotiating non-compete or non-solicit covenants with former employees as part of their departure package or as a settlement of actual or threatened litigation.

In assessing the enforceability of a restrictive covenant, an important threshold question is whether the covenant arises in an employment vs. commercial context. The courts will apply a less rigorous approach, for example, to covenants attached to the sale of a business than those given in a pure employment context, on the assumption that in the former case there is more freedom to contract than in the latter.

In many, if not most instances, the nature of the covenant – employment or commercial – is readily apparent. An interesting question, however, is where to draw the line in cases of restrictive covenants negotiated not as part of an employment agreement, nor as part of a sale of a business, but as part of the terms of an employee’s departure or to settle actual to threatened litigation.

This issue was recently before the British Columbia Supreme Court in WJ Packaging Solutions Corp. v. Park, where the Court assessed the enforceability of five-year covenants between the plaintiff and its former employee. In this case, the parties had reached an agreement prohibiting solicitation and competition after the defendant employee had submitted her resignation.

Ms. Park was employed by the plaintiff company, WJ Packaging, a broker connecting Canadian companies with Korean manufacturers of packaging solutions. She was the liaison between WJ Packaging’s main Canadian customer, Champion, and the Korean manufacturer, Dongwon.

Ms. Park gave one month’s notice of resignation when it became apparent that she was training the owner’s son to become her successor. The owner, concerned about Ms. Park working for competitors, offered Ms. Park a large sum for a five-year agreement restricting her from competing or soliciting customers. Reluctant at first, Ms. Park ultimately entered into the agreement after obtaining legal advice and was paid $610,000.

Nearly a year after Ms. Park’s departure, Champion ceased using WJ Packaging as a broker and began dealing with Dongwon directly. Champion approached her about becoming a consultant. Realizing that she could not harm WJ Packaging given it had lost Champion as a client, she accepted. Ms. Park’s role was very similar to the one she held at WJ Packaging – for all practical purposes she was the liaison between Champion and Dongwon.

Upon learning of Ms. Park’s new role with Champion, WJ Packaging commenced proceedings for both an injunction and damages, though did not pursue the injunction.

At trial, the parties differed on whether the non-competition covenant was commercial in nature or arose from an employment contract. Not surprisingly, Ms. Park argued the covenant amounted to an employment agreement. She then advanced several arguments that the covenant should not be enforced, due to over breadth and ambiguity, amongst other things. Had the Court accepted the characterization of the covenant as an employment agreement, she almost certainly would have persuaded the Court to declare the covenant unenforceable, given multiple defects in the drafting.

However, the Court found that both the timing of the agreement, post-resignation, and its generous terms took it “out of the usual employment context.” Given Ms. Park had already submitted her resignation when presented with the agreement, she was under no obligation or coercion to sign it. While acknowledging the five-year term was long, the Court noted that the compensation covered five years’ salary. The Court held the agreement to be enforceable.

Unfortunately for the plaintiff, the Court awarded only nominal damages of $500, given it already had lost Champion’s business at the time of the breach.

Nonetheless, the decision is helpful in addressing enforceability of restrictive covenants reached by parties on an employee’s departure (where a sale of business is not involved). While most such arrangements are entered into at the commencement of or during the employment relationship, employers and their departing employees also may negotiate non-competition or non-solicitation covenants on the employees’ departure.

In some cases, such discussions are in the context of negotiations over the employee’s severance package on a dismissal without cause. An employer may be prepared to provide a greater payment on dismissal if assured the employee will not compete or solicit its customers.

How might a court address enforceability of a restrictive covenant negotiated as part of severance package, in light of the decision in WJ Packaging? Would the court assess it as an employment agreement, subject to rigorous scrutiny, or a commercial agreement?

The presence of additional significant compensation for the agreement not to compete may influence the Court to interpret the contract as a commercial one. Further, an employee who negotiates such an agreement with the assistance of counsel may not be seen as subject to a power imbalance.

At the same time, many departing employees will not have the ability to negotiate their severance package on an even playing field and may feel compelled to accede to a restrictive covenant in order to obtain a fair severance package.

Another type of covenant given post-departure may be in the form of an undertaking or consent order provided by the ex-employee in order to avoid threatened or actual litigation. In Westpac Solutions Ltd. v. Morgan, 2018 BCSC 976, for instance, the defendant employee agreed to a consent order restraining solicitation for 12 months, leaving the parties to litigate the enforceability of a non-compete covenant. If a defendant were subsequently to resile from such an order or from an undertaking on the basis of it being unreasonable, what level of scrutiny would the Court apply in assessing its enforceability?

The authors of the UK text, Employee Competition, argue persuasively, “The fact that an employee has given an undertaking to comply with restrictive covenants once the employment has terminated engages a powerful public policy, namely that such agreements to compromise actual or threatened litigation are to be encouraged by the court and thus, unless for good reason, supported also.” [1] There is every reason to expect Canadian courts also to be influenced by such considerations. The decision in WJ Packaging opens the door somewhat to the ability of employers to enter into enforceable restrictive covenants with employees at the time of, or shortly after, their departure. Employers may have some comfort that, in appropriate circumstances, the courts will treat such agreements as commercial agreements subject to a lesser degree of scrutiny and will hold employees to their bargains.

[1] Paul Goulding, ed, Employee Competition: Covenants, Confidentiality, and Garden Leave, 3rd ed, Oxford, Oxford University Press, 2016, ch 6 at 6:15.