Restrictive covenants in an employment context seek to limit a former employee’s ability to compete for and/or solicit clients in the industry once the employment relationship is terminated. Think non-competition and non-solicitation clauses, and confidentiality agreements.
Despite commonly appearing in employment contracts, there is a lot of mixed messaging with respect to when a restrictive covenant (including non-solicitation and non-competition agreements) will be found to be enforceable. This topic is important in a range of circumstances, including where employees are fired for cause and/or in circumstances of wrongful dismissal.
How Restrictive is “Too Restrictive”?
Courts prefer whenever possible to promote competition and freedom of commerce to former employees. The reason for this is easy to understand, as the court system supports maintaining a robust labour and market economy.
For this reason, courts generally start by assuming that restrictive covenants are void and unenforceable and that therefore the onus lies on the employer to demonstrate that the clause is reasonable between the parties and in the public interest.
Courts in Ontario also subject restrictive covenants to a high degree of scrutiny because of the power imbalance that exists between the employer and the employee. Employees have very little bargaining power upon entering the employment relationship, and it would be unjust to restrict their ability to earn a living once the employment relationship is terminated.
For a restrictive covenant to be reasonable, and therefore enforceable, it cannot be overly broad or ambiguous. In determining whether a restrictive covenant is reasonable, the courts consider the following:
- Is there a proprietary interest entitled to protection?
- Are the temporal or spatial features of the clause too broad?
- Is the covenant unenforceable as being against competition generally and not limited to prescribing solicitation of clients of the former employer?
A recent motion heard by the Ontario Superior Court of Justice in Camino Modular Systems Inc. v Kranidis, highlights the difficulty in enforcing and crafting these employment agreement clauses.
The Case for the restrictive covenants
Following the resignation of their former employee, Mr. Antonio Kranidis, the Plaintiffs brought a motion before the court for an injunction to enforce the restrictive convents in the employment agreement between the parties. Mr. Kranidis resigned to pursue employment with a direct competitor of the Plaintiffs, and therefore, the Plaintiffs required the non-competition, non-solicitation, and confidential information clauses to be upheld and enforced to protect their legitimate business interests now that the employment relationship had been terminated.
The Three-Part Test
To determine whether granting an injunction to enforce the restrictive covenants is justified, the judge applied the three-part test outlined in RJR-MacDonald Inc. v Canada (Attorney General).
The first part of the test was modified and required the Plaintiffs to demonstrate a strong prima facie case that the restrictive covenants were enforceable; meaning that at first glance, the clauses appeared to reasonably protect the proprietary interests of the Plaintiffs. The second part of the test required the Plaintiffs to demonstrate that they would suffer irreparable harm if the injunction was not granted. The third and final part of the test required the Plaintiffs to show that the balance of convenience weighed in their favour.
Restrictive Covenants are not Easy to Enforce
The court found that the Plaintiffs did not meet the high threshold of demonstrating a strong prima facie case that there was a proprietary interest entitled to protection. The concerns with Mr. Kranidis’ knowledge of clients, pricing, and other project-specific information did not constitute proprietary information because of the nature of the industry.
Firstly, customer information was not exclusive to the Plaintiffs because the large projects undertaken in their industry are secured through a request for proposal (RFP) process, which involves a bidding system. Therefore, customers are not recurring or exclusive to any one company.
Secondly, projects are large and long-term, and therefore a twelve-month restriction did not make sense in the context of the industry. The Plaintiffs did not identify any specific upcoming or ongoing projects that Mr. Kranidis has specific knowledge of that could be detrimental to them.
Furthermore, the court also considered the ambiguity of the restrictive covenants. A restrictive covenant that is ambiguous regarding time, activity, or geography is prima facie unreasonable and unenforceable.
The non-competition and non-solicitation clauses
The non-competition and non-solicitation clauses, as well as the confidentiality clause, were ambiguous and overly broad. Specifically, the non-competition clause was overly broad in the activities it covers as it would have restricted Mr. Kranidis from taking any position at a competing business, including a position in which he was not actually competing.
The non-solicitation clause in agreement was exceedingly broad as it covered all customers, suppliers, licensees, subcontractors, and other business relations for a period of two years following termination.
The confidential information clause was also extremely broad as it covered all information used or obtained by Mr. Kranidis during the course of his employment with the Plaintiffs. Enforcing any of the restrictive covenants contained in the employment agreement between the parties would have resulted in a restraint on Mr. Kranidis’ ability to compete generally or to obtain employment in the industry.
Given that the first prong of the test was deemed to not be satisfied, it follows that the second and third prongs also failed. The judge, therefore, did not feel that the Plaintiffs would suffer irreparable harm if the injunction were not granted. There was accordingly not a strong prima facie case that Mr. Kranidis possessed confidential and proprietary information, nor that he had shared confidential and proprietary information with his new employer. Therefore, the injunction was not granted.
Employers Should Seek Advice Regarding Restrictive Covenants
While a properly drafted restrictive covenant can be a powerful tool for an employer to protect its interests, it will be carefully scrutinized by a court before it will be determined to be enforceable. Specifically, and for restrictive covenants to be enforceable, employers must satisfy a court that they are sufficiently well drafted and ‘reasonable’. This means that a clause must not be overly broad or ambiguous, and that it is appropriately narrow in scope, duration, and geography.
If you have any questions about employment agreements and restrictive covenants whether it relates to termination of employment, unjust dismissal, or otherwise, please contact Toronto employment lawyers Sultan Lawyers at 416-214-5111 or here.
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