Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

(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.