Friday, October 05, 2007

Former Employees and New Employer Ordered to pay $1.9 million for "Client Poaching" as Ontario Court Enforces Two-Year Non-Solicitation Covenants

Canadian Underwriter reports today on an important case decided in Ontario Superior Court of Justice. The case underlines the risks employees assume when they breach employment agreements containing non-solicitation and non-competition covenants:

Tim Allan and Jeff Kienapple were commercial insurance producers with H. L. Staebler Company Ltd. as of Oct. 15, 2003, when they submitted their immediate resignations from their employment with Staebler.

Between Oct. 15, and Oct. 29, 2003, approximately 118 Staebler clients transferred their insurance business to Stevenson & Hunt, the court found.

Allan and Kienapple had both signed employment contracts with Staebler. The employment contracts contained restrictive covenants of two years duration purporting to limit the departing employees from conducting business with any customers of Staebler that were serviced by the employees at the date of their resignations.

The employment contracts also provided that the damages suffered by Staebler for breach of the employment agreements would be equal to 1-1/2 times the commission earned by the new employer from the clients who transferred their business as a result of a breach of the restrictive covenant.Staebler sued Allan, Kienapple and Stevenson & Hunt for various causes of action including breach of the employment agreements, breach of fiduciary duty, conspiracy and inducing breach of contract.

The defendants denied liability on the basis that the restrictive covenants were unenforceable, that the individual defendants were not fiduciaries and that the damage clause in the employment contracts is a penalty clause.

“I have come to the conclusion that the restrictive covenant in the Allan and Kienapple employment contracts with Staebler is enforceable,” Ontario Superior Court Justice G.E. Gaylor wrote in his decision. “I have also concluded that the liquidated damage clause in the employment contracts is enforceable. Thirdly, I find that Stevenson & Hunt are liable to Staebler for inducing Allan and Kienapple to breach their employment contracts.”

The court's willingness to enforce both the lengthy restrictive covenant and the liquidated damages provisions of the employment contract is noteworthy. The two-year restriction on solicitation is certainly at the very long end of the range of provisions courts are likely to enforce.

The employees' blatant failure to avoid prohibited client solicitation for even a brief period may certainly have been a factor predisposing the Court to provide protection to the original employer, notwithstanding the restrictive covenant's ambitious duration.

It is equally important that the subsequent employer also was held liable for inducing these two brokers to breach their employment contracts with their prior employer. Employers should be aware that they may assume significant risk when they inherit books of business via employees who migrate to their organizations.

The story above does not detail the Court's comments as to whether there was knowing complicity by the subsequent employer.

The Court's actual Judgment is not yet posted online. When it is available, we'll add a link and further comments.

It will be interesting to see Justice Gaylor's findings regarding the subsequent broker's knowledge of the non-solicitation agreements executed by the two individuals at their previous brokerage.

Clearly, this case serves as a dire warning to departing employees who blatantly disregard the terms of their non-solicitation agreements - and to subsequent employers who enjoy the fruits of ill-gotten gains arising from breaches by newly-hired employes of restrictive covenants executed in prior employment positions.

- Garry J. Wise, Toronto

UPDATE - October 10, 2007:

The full text of the decision in H. L. Staebler Company Limited v. Tim James Allan, Leah Asselstine, Ajay Gill, Jeff Kienapple, Deborah Magnus, Stevenson & Hunt Insurance Brokers (KWC) Limited and Stevenson & Hunt Insurance Brokers Limited is now online.


UPDATE - September 4, 2008

This ruling has been overturned on appeal.  See our updated post here.  

Also see the full text of the decision:   H.L. Staebler Company Limited v. Allan2008 ONCA 576 (CanLII)

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