Non-Competition Agreements

ENFORCING NON-COMPETITION AND NON-SOLICITATION AGREEMENTS: WHAT EMPLOYERS NEED TO KNOW

The Supreme Court of Canada and the Ontario Court of Appeal have made it clear that they are only going to enforce non-competition agreements in the rarest of cases.  When trying to decide whether to enforce these agreements, the courts struggle with two competing interests.  On the one hand, there is the public interest in discouraging restrictions on trade, and maintaining free and open competition which benefits both society and the affected employees. On the other hand, however, the courts have been reluctant to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power.

In H.L. Staebler Co. v. Allan, [2008] O.J. No. 3048, the Ontario Court of Appeal made it clear that non-solicitation agreements will nearly always be preferable to non-competition agreements when it comes to protecting former employers.  In this case, two employees became unhappy with management and immediately began working for a competitor.  Their employment contracts prohibited them from conducting business with Staebler clients they had served for at least two years after leaving their employment.

The restriction was not sufficiently limited geographically, nor with respect to the nature of the business that the employees were prohibited from conducting.  This rendered the restrictive covenant overbroad and unenforceable. The clause unreasonably restricted the employee’s economic interests and went beyond what was necessary to protect Staebler.  The Court of appeal found the covenant to be a non-competition clause as it did not purport to merely restrain the Employees from soliciting the clients and customers they had served when they worked at Staebler, but rather, it prohibited the Employees from conducting business with any such clients.  In Staebler a non-solicitation clause would have been sufficient given the fact the employees were not key employees.

The Court confirmed the well established principal from Elsley Estate v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, that non-competition clauses should only be enforced in exceptional circumstances.  A non-solicitation clause, suitably restrained in temporal and spatial terms is more likely to represent a reasonable balance of the competing interests than is a non-competition clause. An appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person’s ability to work in his or her chosen field.

What does the recent case law including Staebler mean for employers?  You should be careful to strictly define the characteristics of the competitive business, and to strictly define the geographic area of the restrictive covenants.  The Agreement should also be specific for the individual employee and not a one size fits all.  Finally, it would be wise to draft non-solicitation and non-competition clauses separately, so if the non-competition clause is found to be unenforceable, and can be severed, and the non-solicitation clause can still be relied upon.