Are non-competes, non-solicitations and confidentiality agreements enforceable in Canada? Aside from termination provisions, restrictive covenants are probably the clauses that give us employment lawyers the most to think about. A restrictive covenant is a contractual clause, typically in an employment agreement, that seeks to limit a former employee’s ability to solicit the employer’s clients and/or to compete for those same clients in the same area.
In Canada, courts have generally been reluctant to uphold agreements that have the effect of restricting an individual’s ability to earn a living or pursue the job of their choice. Indeed, courts take the initial position that restrictive covenants in employment agreements are unenforceable, unless the employer can demonstrate otherwise. A restrictive covenant must jump through several hoops to be deemed enforceable.
Firstly, the employer must demonstrate that they have a proprietary interest in need of protection. Once a proprietary interest has been established the court will consider whether there may have been a less restrictive means to protect that interest.
Non-Competition Agreements
These clauses or agreements attempt to limit the former employee’s ability to work for a competitor, or open a competing business. These are generally only upheld in exceptional cases. The requirement that the restrictive covenant be as minimally restrictive as necessary often means that a non-solicitation clause is sufficient.
When considering whether or not a non-competition clause is truly necessary, the courts will look at the following factors:
- Vulnerability of the employer to competition or solicitation – Is there a lot of opportunity or clientele not yet serviced by anyone?
- How much confidential information the employee had access to during the course of their employment and how much confidential information they know about a key client
- How close the employee was with key clients – For example, how much service did they provide and did they provide it exclusively?
- How much damage could a competing or soliciting employee do in the same market as the employer
- How long the employee has been with that employer
- Whether the employee had influence over clients – For example, did the clients rely on the employee’s advice and trust the employee?
- The nature of the business with respect to the strength of customer loyalty
Non-Solicitation Agreements
A non-solicitation agreement will allow a former employee to work for a competitor, but prevent them from soliciting the clients (and possibly the employees) of their former employer for a specific period of time. Former employees may have close relationships with clients. Allowing them to solicit these clients may give them an unfair advantage against the former employer in the marketplace. If the employee does not solicit the client, but the client leaves to follow them anyway, there is little an employer can do.
Once it has been established that a restrictive covenant is necessary to protect the proprietary interests of the employer it must also be established that the covenant is of a reasonable scope with respect to geography, time and prohibited activities.
If a court finds a restrictive covenant clause unreasonable, for example it restricts solicitation for 12 months when 6 would have been reasonable, they will not read it down to fix it. Canadian courts require the employer to get it right the first time and a flawed clause will therefore normally be unenforceable.
Case Example – Competition in the Eyewear Industry
Last year the British Columbia Court of Appeal considered the enforceability of a non-competition clause in IRIS The Visual Group Western Canada Inc. v. Park. IRIS delivered eye care services and sold eyewear products at outlets where they also employed optometrists to assess vision and write prescriptions. The respondent, Dr. Park, was one such optometrist, who was contracted to provide services to IRIS from 2007-2016. In 2016 Dr. Park left IRIS to set up her own optometry practice, 3.5 kms away from where she had worked for IRIS.
At the outset of their relationship, Dr. Park had signed a non-compete agreement which restricted her from competing with IRIS for a period of 3 years within 5 km of their location. The trial judge held that these temporal and geographic limitations were reasonable, but that the description of the prohibited activities was too broad. Activities prohibited were “carrying on, engaged in, interested in or concerned with a business that competes with” IRIS. The Court of Appeal upheld the trial judge’s ruling, also finding that the clause was ambiguous and overbroad.
Of note, the Court felt that nature of the connection deemed by the phrases “in conjunction with” and “concerned with” a competing business was ambiguous and not easy to understand. The clause also defined a competing business as including a business that dispensed non-prescription optical appliances. This could presumably mean a business such as a sunglasses store and include business or work that had nothing to do with the practice of optometry. This aspect of the clause was broader than necessary to protect IRIS’s proprietary interests. The court declined to read down the clause and remove the reference to “non-prescription”.
Employer Take-Aways
Employers concerned about protecting their client relationships and proprietary information should employees leave are advised to have solid restrictive covenant provisions in place. While these are typically contained in the employment agreement at hiring, employers can also take steps to have existing employees enter into enforceable agreements.
See our recent blog post for an example of how a very long non-compete clause will typically require a payment in lieu.
If this is a live issue in your workplace, or if you are an executive looking for a new job and wondering if that non-compete you signed five years ago will come back to haunt you, contact us at SpringLaw. We’re here to help.
