Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(h) Restraints of Trade that do Not Prohibit Competitive Activity
Some earlier decisions suggested that clauses which do not prohibit competition, but impose financial consequences for competing post-resignation, such as a “claw-back” of exercised stock options or forfeiture of bonuses, are not restraints of trade 1(and this continues to be the view in Ontario – see the discussion below under “Is the Clause in Restraint of Trade?”). More recently, however, the BC Court of Appeal adopted the “functionalist” approach established under English law. Under this approach, clauses that impose financial consequences on employees through payment or forfeiture if they engage in post-employment competition amount to a restraint of trade.2
Given such clauses do not actually restrict competitive activity, the amount to be paid or forfeited may be a significant factor in assessing the overall fairness of such a clause. In Rhebergen, the BC Court of Appeal considered the fairness of a clause that required a veterinarian to pay $150,000 if she were to set up a competing practice within a year of her employment agreement being terminated, $120,000 if within two years and $90,000 within three years. The court held that these amounts, which were calculated based on unrecoverable mentoring, training and equipment costs to the veterinarian clinic as well as the impact of competition on the its goodwill and volume of business, were not extravagant or unconscionable and hence reasonable.3