A Bite With No Teeth–Demystifying Non-Compete Clauses
- by D'Arcy Lussier
*DISCLAIMER: I am not a lawyer and this post in no way should be considered legal advice. I’m also in Canada, so references made are to Canadian court cases. I received a signed letter the other day, a reminder from my previous employer about some clauses associated with my employment and entry into an employee stock purchase program. So since this is in effect for the next 12 months, I guess I’m not starting that new job tomorrow. I’m kidding of course. How outrageous, how presumptuous, pompous, and arrogant that a company – any company – would actually place these conditions upon an employee. And yet, this is not uncommon. Especially in the IT industry, we see time and again similar wording in our employment agreements. But…are these legal? Is there any teeth behind the threat of the bite? Luckily, the answer seems to be ‘No’. I want to highlight two cases that support this. The first is Lyons v. Multari. In a nutshell, Dentist hires younger Dentist to be an associate. In their short, handwritten agreement, a non-compete clause was written stating “Protective Covenant. 3 yrs. – 5mi” (meaning you can’t set up shop within 5 miles for 3 years). Well, the young dentist left and did start an oral surgery office within 5 miles and within 3 years. Off to court they go! The initial judge sided with the older dentist, but on appeal it was overturned. Feel free to read the transcript of the decision here, but let me highlight one portion from section [19]: The general rule in most common law jurisdictions is that non-competition clauses in employment contracts are void. The sections following [19] explain further, and discuss Elsley v. J.G. Collins Insurance Agency Ltd. and its impact on Canadian law in this regard. The second case is Winnipeg Livestock Sales Ltd. v. Plewman. Desmond Plewman is an auctioneer, and worked at Winnipeg Livestock Sales. Part of his employment agreement was that he could not work for a competitor for 18 months if he left the company. Well, he left, and took up an important role in a competing company. The case went to court and as with Lyons v. Multari, the initial judge found in favour of the plaintiffs. Also as in the first case, that was overturned on appeal. Again, read through the transcript of the decision, but consider section [28]: In other words, even though Plewman has a great deal of skill as an auctioneer, Winnipeg Livestock has no proprietary interest in his professional skill and experience, even if they were acquired during his time working for Winnipeg Livestock. Thus, Winnipeg Livestock has the burden of establishing that it has a legitimate proprietary interest requiring protection. On this key question there is little evidence before the Court. The record discloses that part of Plewman’s job was to “mingle with the … crowd” and to telephone customers and prospective customers about future prospects for the sale of livestock. It may seem reasonable to assume that Winnipeg Livestock has a legitimate proprietary interest in its customer connections; but there is no evidence to indicate that there is any significant degree of “customer loyalty” in the business, as opposed to customers making choices based on other considerations such as cost, availability and the like. So are there any incidents where a non-compete can actually be valid? Yes, and these are considered “exceptional” cases, meaning that the situation meets certain circumstances. Michael Carabash has a great blog series discussing the above mentioned cases as well as the difference between a non-compete and non-solicit agreement. He talks about the exceptional criteria: In summary, the authorities reveal that the following circumstances will generally be relevant in determining whether a case is an “exceptional” one so that a general non-competition clause will be found to be reasonable: - The length of service with the employer. - The amount of personal service to clients. - Whether the employee dealt with clients exclusively, or on a sustained or recurring basis. - Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies. - Whether the nature of the employee’s work meant that the employee had influence over clients in the sense that the clients relied upon the employee’s advice, or trusted the employee. - If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation. - The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required. - The nature of the business with respect to the strength of customer loyalty, how clients are “won” and kept, and whether the clientele is a recurring one. - The community involved and whether there were clientele yet to be exploited by anyone. I close this blog post with a final quote, one from Zvulony & Co’s blog post on this subject. Again, all of this is not official legal advice, but I think we can see what all these sources are pointing towards. To answer my earlier question, there’s no teeth behind the threat of the bite. In light of this list, and the decisions in Lyons and Orlan, it is reasonably certain that in most employment situations a non-competition clause will be ineffective in protecting an employer from a departing employee who wishes to compete in the same business. The Courts have been relatively consistent in their position that if a non-solicitation clause can protect an employer’s interests, then a non-competition clause is probably unreasonable. Employers (or their solicitors) should avoid the inclination to draft restrictive covenants in broad, catch-all language. Or in other words, when drafting a restrictive covenant – take only what you need! D
