Thursday, September 04, 2008

Ontario Court of Appeal Sets Aside $1.9 Million Award for "Client Poaching:" Restrictive Covenant Unenforceable

In an important decision that reaffirms the limited enforceability of non-competition covenants in Canadian employment agreements, the Court of Appeal for Ontario has reversed a September, 2007 trial ruling of Mr. Justice G.E. Taylor of Ontario' Superior Court of Justice.

At trial in H. L. Staebler Company Limited v. Tim James Allan, et al., two Kitchener, Ontario insurance salespersons and their new employer were ordered to pay damages of $1.9 million to the salespersons' former brokerage, H.L. Staebler Company Limited.

Staebler commenced the action after its salespersons left to join Stevenson and Hunt Insurance Brokers Limited, a competing brokerage. The employees brought their entire books of business to their new employer when they changed brokerages.

In ruling against the employees, the trial court enforced a two-year non-solicitation covenant that precluded them from "doing business" with the clients of their former brokerage for a two year period following any termination of their employment with Staebler. The court also held that Stevenson and Hunt was liable for inducing the salespersons to breach their employment agreements with Staebler.
On appeal, Madame Justice Eileen Gillese, for the Court, reviewed the law applicable to non-competition and non-solicitation agreements in Ontario. The Court unanimously ruled that the restrictive covenants in this case were unreasonable in scope, given the non-managerial roles of the salespersons involved and the "overly broad" restraints imposed by the covenants upon the salespersons' ability to freely compete in the industry:

[33] There is no dispute about the legal principles that apply when determining whether a restrictive covenant in an employment contract is enforceable, as those principles have long been settled. Several decades ago in Elsley, the seminal Canadian case on this matter, Dickson J. described the principles as “well-established”.[2] He stated the test in plain terms: such a covenant is enforceable “only if it is reasonable between the parties and with reference to the public interest”.[3]

[34] This test reflects the competing principles that must be balanced when a court is called on to decide the validity of such a covenant. On the one hand, there is the “important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants”.[4] Open competition benefits both society and the affected employees. Society benefits from having greater choice and employees benefit as they have greater employment opportunities. On the other hand, however, “the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power”.[5]

[35] While an overly broad restraint on an individual’s freedom to compete will generally be unenforceable, the courts must recognize and afford “reasonable protection to trade secrets, confidential information, and trade connections of the employer.”[6] In the present case, there is no suggestion that trade secrets or confidential information is involved. It is Staebler’s “trade connections” that warrant protection.

[36] Reasonableness is the mechanism by which a court decides whether a covenant is “overly broad” or is only that which is reasonably required for the employer’s protection. But how is a court to determine whether any given restrictive covenant is “reasonable”? Elsley offers a framework for making such a determination. The starting point is “an overall assessment of the clause, the agreement within which it is found, and all of the surrounding circumstances”.[7] Thereafter, three factors must be considered. First, did the employer have a proprietary interest entitled to protection? Second, are the temporal or spatial features of the covenant too broad? And, third, is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer?[8]

...[54] My view that Staebler has not discharged the burden of establishing that the Restrictive Covenant was reasonable[11] as between the parties is reinforced on a consideration of the third factor.

[55] A non-solicitation clause is sufficient in conventional employer/employee situations.[12] The Employees were two of ten commercial insurance salespeople that worked for Staebler. They did not play an exceptional role in the Staebler business – they were ordinary salespeople. They were not managers, directors or key employees. They did not stand in a fiduciary relationship with Staebler.

[56] Although the Employees had close personal relationships with their clients, that is the industry norm. Those relationships were not exclusive; other Staebler employees served the clients in various capacities. This is an important difference between the role that the Employees played at Staebler and that of Mr. Elsley who “was the business”.[13] Another significant difference between the present case and Elsley is that the Employees had no special knowledge of or influence over the Staebler business whereas Mr. Elsley “had control of [the employer’s] trade connections”.[14] Furthermore, and again in contradistinction to Elsley, there was an imbalance of bargaining power between the Employees and Staebler when the employment contracts were negotiated whereas Mr. Elsley bargained as an equal when selling his business and then carried on as its general manager.

[57] The 50 mile radius clause which Staebler had with five of its other commercial salespeople is significant. Under its terms, those employees could solicit their clients and customers and conduct business with Staebler clients so long as they did so outside of a 50 mile radius of the Waterloo region. No explanation was given to justify this differential treatment among Staebler’s commercial insurance salespeople which leads me to conclude that Staebler itself viewed the 50 mile radius clause as sufficient protection of its interest. Clearly, the terms of the Restrictive Covenant are far more restrictive than are those of the 50 mile radius clause.[15]

[58] Other provincial appellate courts have affirmed that suitably restricted non-solicitation clauses are likely to be found to be reasonable for “ordinary” salespeople in the insurance brokerage industry whereas non-competition clauses are not. See, for example, Valley First Financial Services Ltd. v. Trach, [2004] B.C.J. No. 1127 (C.A.).

[59] It follows from my determination that the Restrictive Covenant is not enforceable that Stevenson & Hunt are not liable for inducing a breach of contract.

For the full text of the Court of Appeal's ruling, see: H.L. Staebler Company Limited v. Allan, 2008 ONCA 576 (CanLII)

- Garry J. Wise, Toronto

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