Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
When are noncompetition and nonsolicitation clauses enforceable in Canada? A recent Ontario decision examined these clauses in the context of an employment agreement.
In this case, the applicants, manufacturers and suppliers of commercial and industrial light fixtures, commenced litigation against their former sales manager, seeking to prevent him from breaching the restrictive covenants included in his employment agreement.
In 2011, the applicants hired the respondent as a regional sales manager. After he was promoted to sales manager, he signed an employment agreement including noncompetition, nonsolicitation and confidentiality obligations.
After more than seven years of employment, the sales manager resigned. He took a job as a sales representative with a direct competitor, even though the applicants clearly explained to him that such employment would adversely affect them and their employees.
The Ontario Superior Court of Justice reviewed recent law on restrictive covenants in employment contracts and explained that restrictive covenants in employment contracts are generally unenforceable unless they are reasonable and in the public interest.
In this case, the former sales manager's noncompetition clause prohibited him from working with another lighting business within a 750-mile radius of any of the applicants' production facilities, while the nonsolicitation clause prohibited him from contacting or soliciting those who were the applicants' customers during his employment. Both restrictions prohibited these activities for two years from the date he left his job.
The court refused to enforce the noncompetition clause because its geographic scope was overly broad, ambiguous and unreasonable. On the other hand, the court found that the nonsolicitation and confidentiality obligations were clear and reasonable and did not constrain the former sales manager's ability to work in sales or in a similar occupation.
Further, the evidence revealed that the former sales manager had detailed knowledge of how the applicants priced jobs and marketed their products, and that this knowledge could be used to undermine the applicants' business. As a result, the court ruled in the applicants' favor, concluding that they would suffer losses that could not be compensated by damages.
Finally, in balancing the interests of the parties, the court held that the applicants would suffer the greater harm if the former manager was permitted to solicit the applicants' current clients and to use their confidential sales information.
As a result, the court granted injunctive relief in part and issued an order enforcing the respondent's nonsolicitation and confidentiality obligations.
Stress-Crete Limited and King Luminaire Company Inc. v. Harriman, 2019 ONSC 2773 (Ont. Sup. Ct.).
Professional Pointers: Employers should use plain and unambiguous language in their restrictive covenants. Businesses cannot demonstrate that a clause is reasonable if the provision is ambiguous. In addition, employers should consider omitting noncompetition clauses when nonsolicitation obligations would adequately protect their proprietary interests. The courts have been clear that restrictive covenants should go no further than necessary to protect the employer's proprietary interests.
And finally, nonsolicitation clauses should identify which customers the employee cannot solicit. Even if the restriction is for a long period, it may be reasonable if the restriction aligns with industry norms and the employer's proprietary interests.
Republished with permission of SHRM. © 2019 SHRM. All rights reserved.