Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

1. Legitimate Proprietary Interest

The courts have held that trade secrets, confidential information and customer lists are legitimate proprietary interests.1

Such information may include contact information, the clients’ needs or preferences and the rates the clients are willing to pay.2

Further, the courts have confirmed that while employers have a legitimate proprietary interest in their “trade connections” and their “goodwill”, i.e. in the loyalty of their customers, in the absence of special circumstances they do not have a proprietary interest that entitles them to protection from the competition of former employees per se. In Maguire v. Northland Drug Co. Ltd., the Supreme Court of Canada stated that “competition, as such, is something which will not be restrained.”3

In Winnipeg Livestock Sales Ltd. v. Plewman, the Manitoba Court of Appeal held that the failure of the plaintiff, a livestock auction market, to lead evidence to indicate there was any significant degree of customer loyalty in the business was fatal to the enforceability of a clause that combined non-competition and non-solicitation covenants.4

In a case involving an employee working in the engine parts division, the British Columbia Supreme Court recognized that the employee had an opportunity to establish long-term relationships with and develop knowledge of the employer’s customers.5

An oral surgeon had some proprietary interest in some regular referring dentists, but had no proprietary interest in dentists in the city who had never referred patients to him in the past or who stopped referring patients to him before the defendant’s employment. Accordingly, a non-competition clause was not enforced.6

In the case of a long-standing contract with a large public health body, a court held that the employer had a proprietary interest in its relationship with that body, which “it had built and established over the last 15 years.”7

A covenant extending beyond a business’s own customers to include those either initially brought to the business by the individual or subsequently attracted by the individual while employed may be unenforceable on the basis that, while an employer has a proprietary interest in its own clients, that interest may not extend to clients that are not its own. In a case involving a massage therapy clinic, the court found that an independent contractor who rented space at the clinic had developed her own clientele through word of mouth and her own promotional efforts. The court held that as an independent contractor, the defendant was not bound by fiduciary or employment obligations. The clients she generated were her own and hence the non-competition clause would prevent her from practicing her profession in relation to her own clients. The court concluded that the clinic’s proprietary interests could have been protected by a non-solicitation clause and that the non-competition clause “was little more than an attempt to protect (the clinic) from competition generally.”8

Such concerns about the application of non-competition covenants to clients brought to a business or attracted to a business by a worker have not been limited to independent contractors. Where a legal headhunter was hired by a company that had not previously engaged in the legal recruitment business in Calgary and was dismissed two year later, the court held there was a serious issued to be tried as to whether the company had an exclusively proprietary interest in the clients worthy of protection under restrictive covenants. Most, if not all, of the clients the employee continued to deal with after her termination were ones she had brought to the company at the outset of her employment. The court therefore declined to issue an interlocutory injunction.9

Generally, however, 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.”10 Where investment advisors came to the employer with few clients and were essentially handed a book of business and did not subsequently attract on their own a significant number of new clients, the employer had a legitimate proprietary interest in the list of clients.11 Similarly, where a dentist contracted with a management company to obtain the benefits of a “turnkey” dental practice built by others, which included a list of clients, premises and equipment, the management company’s goodwill in its “location, facility and Premises” constituted a legitimate proprietary interest.12

Where a salesperson was solely responsible for maintaining his employer’s customer relations with a major client and, in the space of only four months, had developed a close business relationship with his counterpart at the client, the employer had a legitimate proprietary interest to protect. A trade attachment of this nature is a form of goodwill and business asset vulnerable to competition.13 A courier driver who, because of his seniority, was able to choose his customers, had developed “a special, close relationship” to the 15 or 16 customers he serviced on a regular basis and hence a non-solicitation covenant was reasonable.14 In another case, where the plaintiff paid the defendant insurance adjuster a fixed salary in order to subsidize his income while the business became profitable, it “acquired a proprietary interest in the business as it developed.”15

A court was prepared to accept that an optometry clinic may have “a reasonable economic interest” in its patients that had regular eye exams and new prescription products, but found there was insufficient evidence to establish it had a similar interest in protecting its ability to sell non-prescription reading glasses or sunglasses to the same patients. While the court struck down the covenant on the basis of the scope of activities restricted, an additional basis was the lack of a legitimate proprietary interest, it would seem.16

In drafting a non-competition or non-solicitation clause, counsel must be careful to focus precisely on the legitimate proprietary interest of the employer and not overreach. The danger of drafting a broad covenant without regard to what is actually protectable was well illustrated by a court’s treatment of a covenant that purported to prohibit a software developer from providing service “in any capacity” 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.” The words “in any capacity” were fatal. The court held that the clause overreached in that the employer did not establish how its legitimate proprietary interests would be threatened if the former 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.”

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”.17

The clause suffered from other overbreadth issues. The reference 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 an affiliated company’s line of business. Here, too, there was no evidence as to how the plaintiff’s legitimate proprietary interest would be threatened. Nor was there evidence as to why a prohibition in the same covenant on holding more than 1% of a publicly traded corporation protected a legitimate proprietary interest.18

A clause also may overreach if the nature of the activities prohibited extends beyond the business of the former employer. That was the case where a clause prohibited doing “business” with the employees’ former clients in the insurance business. The court held the clause was unreasonable because it would purport to prohibit the employees from dealing with their former clients even if they began anew in a different business.19

This reasoning may also be applied within the context of similar, but not same businesses. In one case, a non-solicitation clause which prohibited the employee from soliciting any clients relating “to the business of general insurance and financial services” was too broad, as the employee had only sold group benefits products and the covenant would have prohibited him from soliciting those customers to sell general insurance or financial products.20 To a similar effect was a court’s decision that a clause prohibiting the sale of any competitive product of the employer was unreasonable when the employee was only involved in the sale of engines and engine parts, a subset of the employer’s larger business.21

A covenant that prohibited a departed employee from operating a competing business that provided fire services to his former customers was not enforced, on the bass that it also prohibited him from offering security products and services, an area in which he had not been involved with his former employer.22

In another case, a prohibition on competing against an optometry clinic was too broad when it purported to restrict competition via any entity that dealt with prescription or non-prescription eye glasses or sun glasses. The court held that the prohibition would prevent the defendant from working in a food market, drug store or similar outlet that sold sunglasses or non-prescription reading glasses.23

Not surprisingly, where a non-solicitation agreement purported to prohibit solicitation of the former employer’s customers “in any business or activity”, the court held that the clause was too broad in that the employer had a legitimate proprietary interest in preventing solicitation of its customers in its own line of business, but not from solicitation for other types of businesses.24

And where the covenant purported to prohibit soliciting or accepting business from “an individual or entity with which (the defendant) personally had direct or indirect contact, or access to conduct confidential information about, during the last two years of (his employment)” the court noted that the prohibition would apply even to those with whom the defendant had not contact in connection with his employment duties. In refusing to enforce the covenant, the court noted “As drafted, his drycleaner would qualify.”25

An interesting approach to resisting enforcement of a non-competition clause was illuminated in a BC decision where the defendants, at the outset of an application for an interlocutory injunction, entered into a consent order prohibiting solicitation of clients, the breach or use of confidential information and requiring the destruction of confidential information in the hands of the defendants. The defendants had also entered into an agreement between themselves prohibiting solicitation of the plaintiff’s clients by the employee and regarding confidential information. The court held that the consent order  and agreement protected the legitimate proprietary interests of the applicant and hence it was not necessary to restrain the defendant employee from working for the defendant employer.26

  1. Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at para. 27 and cases cited therein. See, however, the discussion below in section 2 under “Nature of Activities Prohibited” as to whether a legitimate proprietary interest in confidential information will be sufficient to justify a non-competition covenant.
  2. Stress-Crete Limited v. Harriman, 2019 ONSC 2773, at para 51. However, an employer may not have a proprietary interest in simple contact lists that contain nothing beyond what is available on the internet: 2909731 Canada Inc. (Pewter Graphics) v. Toews, 2016 BCSC 852, at para. 81.
  3. Maguire v. Northland Drug Co. Ltd., [1935] SCR 412, 1935 CanLII 35 (SCC) at p. 416.
  4. Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at paras. 27-29 and cases cited therein.
  5. ADP Distributors Inc. v. Davidson, 2019 BCSC 219, at para 43.
  6. Lyons v. Multari, 2000 CanLII 16851 (ONCA).
  7. IBM Canada Ltd v. Almond, 2015 ABQB 336 (CanLII),at paras. 60-61, though the application for an interlocutory injunction was denied on other grounds.
  8. Boxall v. Fonkalsrud, 2014 SKQB 134 (CanLII), at paras. 52-56.
  9. Human Resource Capital Group Inc. v. Reis, 2009 ABQB 159 (CanLII), at paras. 11-13.
  10. Specialized Property Evaluation Control Services Ltd v Les Evaluations Marc Bourret Appraisals Inc, 2016 ABQB 85 (CanLII), at para. 41.
  11. MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at paras. 75-80, affirmed, 2018 ONCA 440 (CanLII).
  12. Smilecorp Inc. v. Pesin, 2012 ONCA 853 (CanLII) at paras. 24, 30.
  13. Atlantic Business Interiors Limited v. Hipson et al, 2004 NSSC 32 (CanLII), at para. 46, aff’d 2005 NSCA 16 (CanLII). However, the restrictive covenant was not upheld as the non-competition clause went further than what was necessary to protect the interest of the employer. A non-solicitation clause would have been sufficient.
  14. Dynamex Canada Inc. v. Miller, 1998 CanLII 18094 (NLCA), affirming 1997 CanLII 15963 (NLSCTD).
  15. S.J. Kernaghan Adjusters Limited v. Kemshaw, 1978 CanLII 260 (BCSC), at para. 5, affirmed, 1978 B.C.J. No 573 (CA).
  16. IRIS The Visual Group Western Canada Inc. v. Park, 2016 B.C.S.C. 2059 (CanLII), at para. 29, aff’d 2017 B.C.C.A. 301 (CanLII).
  17. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 43-44.
  18. Ceridian Dayforce Corporation v. Daniel Wright, 2017 ONSC 6763 (CanLII), at paras. 46-47.
  19. HL Staebler Co. v. Allen, 2008 ONCA. 576 (CanLII), at para. 50.
  20. Valley First Financial v. Trach, 2004 BCCA. 312 (CanLII), at para. 48.
  21. ADP Distributors Inc. v. Davidson, 2019 BCSC 219, at para 61.
  22.   0777792 B.C. Ltd. v. Da Costa, 2019 BCSC 1839, at para. 22.
  23. IRIS The Visual Group Western Canada v. Park, 2016 B.C.S.C. 2059 (CanLII) at para. 28, aff’d 2017 B.C.C.A. 301 (CanLII).
  24. Globex Foreign Exchange Corporation v. Kelcher, 2011 A.B.C.A. 240 (CanLII), at para. 21.
  25. Labrador Recycling Inc. v. Folino, 2021 ONSC 2195, at para. 24.
  26. Westpac Solutions Ltd. v Morgan, 2018 BCSC 976 (CanLII), at paras.  12, 15-17 and 51.

(a) Confidential Information as a Legitimate Proprietary Interest in Non-Compete or Non-Solicit Clauses

The development of Canadian case law has not addressed whether the need to protect the use or disclosure of trade secrets or confidential information, in and of itself, will justify the imposition of a non-competition or non-solicitation covenant. It is clear that protection of such information is a legitimate propriety interest1 which would justify a confidentiality covenant.2 However, Canadian common law, despite common roots with English law, has not developed in the same manner to address whether this proprietary interest justifies a more onerous non-compete or non-solicit covenant.

In Elsley v. J.G. Collins Ins. Agencies,3 the Supreme Court of Canada adopted the following passage from the House of Lords in Herbert Morris Limited v. Saxelby concerning the circumstances in which non-competition or non-solicitation covenants will be enforceable:

Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.4

(emphasis added)

The emphasized passages from the Herbert Morris decision clearly contemplated a situation where an employee might become so familiar with the employer’s trade secrets that a non-competition or non-solicitation covenant could be justified to restrict the employee’s use of that confidential information with another employer. Indeed, later in the same decision, the author of this oft-quoted passage, Lord Parker of Waddington, later described the rationale for upholding a non-competition covenant as follows:

In fact, the reason, and the only reason, for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, or the protection of which such a restraint is – having regard to the duties of the employee – reasonably necessary.5

In separate, concurring reasons, Lord Atkinson also stated that a non-competition covenant, in the right circumstances, may be justified by the need to protect trade secrets:

In all cases such as this, one has to ask oneself what are the interest of the employer that are to be protected, and against what is he entitled to have them protected.

He is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use.6

Despite the Supreme Court of Canada’s approval of the Herbert Morris decision in Elsley, subsequent case law in Canada has focused on the need to protect the former employer from the employee’s knowledge of and personal influence over the employer’s clients. To the extent that the employee’s familiarity with confidential information has been considered a legitimate proprietary interest justifying a non-competition or non-solicitation covenant, it most often has been in conjunction with a consideration of the employee’s personal influence over clients, rather than as a stand-alone ground.7

For instance, the court in Woodward v. Stelco found the employer to have a proprietary interest in its marketing strategy, pricing policies and customer base requiring protection and noted that the defendant, after leaving Stelco, maintained knowledge of its pricing policies and practices. At the same time, the court emphasized that the defendant had been “a senior executive with overall responsibility for sales and marketing, and was well acquainted with Stelco’s customers” and that prior to his retirement, he was “in control of Stelco’s trade connection” within the meaning of Elsley”. Thus, while Stelco’s confidential information was a proprietary interest deserving of protection, the court also relied on the defendant’s influence over Stelco’s trade connection.8

In Sunsweet Fundraisers v. Foldenhauer and Theissing,9 the defendant sales representative had executed a covenant prohibiting him from soliciting or performing work for the plaintiff’s customers within his territory for a period of two years from termination of his employment. The defendant sought an interim injunction to enforce the covenant after his resignation.

The court held the plaintiff had a legitimate proprietary interest to protect, given the defendant  had been was “privy to confidential information such as customer pricing lists, its policies, selling strategy and promotional material.” At the same time, the court emphasized that the plaintiff had provided the defendant with the benefit and control of its previous trade connection and had put him in control of moving forward. Again, protection of confidential information was coupled with protection of a trade connection in justifying the covenant.10

By contrast, in the United Kingdom, the courts will protect trade secrets or confidential information by upholding a non-competition covenant, provided it goes no further than necessary to achieve that aim. In Littlewoods Organisation v. Harris, Lord Denning, after citing the Herbert Morris decision, summarized the law as follows:

It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period.11

Given the express adoption of the Herbert Morris decision by the Supreme Court of Canada in Elsley, it is submitted that in the right circumstances, Canadian courts should also uphold a non-competition covenant on the basis of the need to protect trade secrets or confidential information.

  1. Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at para. 27 and cases cited therein.
  2. American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA), at p. 532.
  3. Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 926, 1978 CanLII 7.
  4. Herbert Morris Limited v. Saxelby, [1916] 1 A.C. 688 at p. 709, cited in Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 926, 1978 CanLII 7, at p. 927.
  5. Herbert Morris Limited v. Saxelby, [1916] 1 A.C. 688 at p. 710.
  6. Herbert Morris Limited v. Saxelby, [1916] 1 A.C. 688 at pp. 701-702.
  7. Though in an older decision, the BC Court of Appeal considered whether the appellant company had a legitimate proprietary interest in protecting particular information it had characterized as trade secrets which would justify a non-competition covenant. The court held that the manner in which the appellant carried on its business was not a trade secret and that what it sought to do was to protect its “competitive positon rather than any proprietary rights.” American Building Maintenance Company Ltd. v. Shandley, 1966 CanLII 428 (BCCA) at pp. 529-531. See also Westpac Solutions Ltd. v Morgan, 2018 BCSC 976 (CanLII), where the court agreed that the plaintiff employer had a legitimate proprietary interest in its information relating to its business, including client lists, employee directories, costing information, equipment list and pricing information, but was not prepared to enforce a non-competition covenant given a consent order and agreement concerning solicitation of clients and confidentiality of documents sufficiently protected those interests.
  8. Woodward v. Stelco Inc., 1996 CanLII 8180 (ONSC), at para. 44, aff’d 1998 CanLII 17686 (ONCA).
  9. Sunsweet Fundraisers Inc. v. Moldenhauer and Theissing, 1991 CanLII 7672 (SKQB).
  10. Sunsweet Fundraisers Inc. v. Moldenhauer and Theissing, 1991 CanLII 7672 (SKQB), at para. 22.
  11. Littlewoods Organisation v. Harris, [1977] 1 W.L.R. 1472 (C.A.) at p. 1479.