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Restrictive Covenants

Restrictive Covenants, also known as restraints against trade, are restrictions imposed on the way that the employee will do business in the future.  Non-Competition / Non-Solicitation clauses or agreements are examples of these restrictive covenants.

Non-Solicitation restriction attempts to prohibit an employee from approaching the former employer’s clients and inviting them to do business.  While a Non-Solicitation restriction does not allow an employee to actively seek out or invite the former employer’s clients or employees, simply contacting the client and informing them that the employee is no longer with the company generally does not constitute solicitation.  Similarly, if the employee posts an advertisement for his or her new business, or updates his or her LinkedIn profile, this would not be considered as solicitation.

Non-Competition restriction, on the other hand, is a broader constraint; it attempts to restrain the former employee from engaging in stipulated forms of commercial activity.  Canadian courts have been hesitant to enforce Non-Competition restrictions because they can aid in creating a monopoly in the market and discourage a healthy competition.  Therefore, as a general rule, a Non-Competition restriction will be unenforceable if a Non-Solicitation restriction will serve to protect the employer’s interests.

Overall, restrictive covenants found in agreements are presumptively unenforceable.  In other words, the company seeking to enforce such restriction must demonstrate that such restriction is reasonable in the circumstances.  The reasonableness of the restriction is examined based on: a) the geographic coverage, b) the duration, and c) the extent of activity sought to be restrained. The language used in the restrictive covenants must also be unambiguous and ascertainable.  If the employer cannot establish that the restraint is reasonable, and that it is not injurious to the public, then it will not be enforced.

The Supreme Court of Canada in Shafron v KRG Insurance Brokers (Western) Inc., 2009 SCC 6, ruled that a restrictive covenant that does not meet the above requirements would be void and unenforceable.  Further, the Court made it clear that the courts would not read down such clauses as it may unjustly allow the employers to write an overly wide, unreasonable provision and let their employees litigate the matter.  This would not be fair to employees who generally have limited resources in comparison to their employers.

However, if you hold a position of a fiduciary employee, you may be subject to certain restrictions without any written agreements prepared by the parties.  For example, in Anderson, Smyth & Kelly Customs Brokers Ltd v World Wide Customs Brokers Ltd., 1996 ABCA 169, the Alberta Court of Appeal cited the Manitoba Court of Appeal in WJ Christie & Co v Greer (1981), 1981 CanLII 2733 (MBCA) and recognized an obligation owed by a fiduciary employee:

 There is nothing to prevent an ordinary employee from terminating his employment, and normally that employee is free to compete with his former employer.  The right to compete freely may be constrained by contract. … But it is different for a director/officer/key management person who occupies a fiduciary position. Upon his resignation and departure, that person is entitled to accept business from former client, but direct solicitation of that business is not permissible.

In summary, unless contractually restricted from so-doing, all employees (even fiduciary employees) are permitted to fairly compete with their former employer immediately upon their departure.  Further, the restrictive covenant must be reasonable, unambiguous and ascertainable so that employees can fully understand the restrictions that have been laid upon them.

However, even in the absence of a written restriction, fiduciary employees are restricted from soliciting their former employer’s clients for a period of time.  The length of the restriction is based on the time it is estimated the former employee will need to solidify its relationships with clients; typically, the higher the fiduciary employee’s position is, the longer the length of the restriction would be. Another way of determining the length of restriction is to reference the length of notice an employee would have received if the employer had terminated them.  An employee who breaches his or her fiduciary obligations may be obligated to pay damages, which can be either the loss of profits suffered by the former employer, or the profits earned by the fiduciary.

Please contact Osuji & Smith for any questions you may have arising from your employment contracts as regards restrictive covenants.

Written by: Claire Lee

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