Written on behalf of Peter McSherry

Certain employment contracts, such as those pertaining to employees who hold management positions or senior roles, may include “restrictive covenants” in the form of non-compete and/or non-solicitation clauses. Restrictive covenants are intended to protect the employer from an employee gaining access to significant trade secret information through their employment and then using such confidential information against them by working for a direct competitor. As such, non-compete clauses typically state that the employee under contract is not permitted to work for employers in the same industry, within certain geographic constraints, for a particular period of time. Non-solicitation clauses typically dictate that the employee under contract is not permitted to directly solicit any clients or potential clients of the employer post-termination of employment for a prescribed period of time.

Restrictive covenants have been interpreted by Canadian courts to constitute “restraint of trade”, meaning they restrict the way in which an ordinary person is permitted to earn income. For this reason, use of restrictive covenants is only permitted under strict conditions.

Lawsuit Ensues After Termination of Employment Contract

The case of Giacomodonato v PearTree Securities Inc. involved the plaintiff (the “employee”) who was a successful investment banker with experience in the mining sector. The employee was recruited in 2016 to work for the defendant employer (the “employer”) and served as President and co-head of banking.

In January of 2018, the employee contract was terminated by the employer without cause, which prompted the employee to file a claim of wrongful dismissal. He sought payment of between $3 and $4 million in various combined damages. The employer defended the claim and submitted that the employee was owed only between $240,000 and $627,516 (depending upon how the court decided to calculate his income) and it counterclaimed against the employee for breach of his restrictive covenants. In particular, the employer asserted that the employee had breached the non-competition clause of his employment contract when he began working for a competitor approximately 9 months after his termination.

When is a Restrictive Covenant Considered to be Reasonable?

As stated by the Court, “the general rule in Ontario is that… a provision in a contract that restrains an employee from competing with her former employer, is prima facie unenforceable. Such a provision will only be upheld if it is reasonable considered against the interests of the parties and the public, judged in light of the circumstances at the time the covenant is made”. The party that seeks to enforce the agreement, in this case the employer, bears the onus of proving that the restrictive clause in question “is protecting a legitimate or proprietary interest and is reasonable as between the parties”, while the party who claims the clause is unenforceable must prove that the “provision is unreasonable with respect to the public interest”.

In deciding whether a restrictive covenant is reasonable, the courts will consider the following criteria:

1. the extent of activity the clause seeks to prohibit;
2. the geographic coverage of the restriction; and
3. the duration of the restriction.

In order to be found reasonable, a restrictive covenant must be clear and unambiguous with respect to the activity, time and geographic area constrained by the clause. Any covenant that is ambiguous in any of these respects will be considered prima facie unreasonable and therefore unenforceable. Importantly, “a non-competition covenant in an employment agreement that restricts the post-termination activities of an employee is subject to more rigorous scrutiny than a non-competition covenant in a sales agreement that restricts the post-sale activities of the vendor”.

Non-Compete Clause was Overly Broad and Unreasonable

With respect to the non-compete clause, the Court carefully reviewed the clause in its entirety before it determined the clause to be unreasonable and unenforceable. In particular, the Court noted that the employer did not have a proprietary interest it was attempting to protect and that the provisions with respect to restricted activity were overly broad and unreasonable. It also acknowledged that the clause extended far beyond the scope of the employer’s legitimate interests and “dramatically overshot its legitimate purpose”. Moreover, the 24-month term of the non-compete clause was determined to be unreasonably long.

Non-Solicitation Clause Deemed Ambiguous; Employer’s Counterclaim Dismissed

Regarding the non-solicitation clause, the Court found that “it is a camouflaged non-competition clause designed to eliminate competition”. The Court noted that, generally speaking, an “appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person’s ability to work in their chosen field”. In this case, however, the clause “goes far beyond a typical non-solicitation clause” in that it “goes much further than necessary to protect any legitimate interest” of the employer.

The Court further found the restrictions with respect to “customers or suppliers” of the employer to be so poorly defined as to be ambiguous, in addition to which the absence of a temporal limitation (i.e., no restriction on how long the non-solicitation clause would be in effect) created unacceptable ambiguity. For all of those reasons, the Court was satisfied that the non-solicitation clause in this case was essentially a non-compete clause masquerading as a non-solicitation clause and was, therefore, unreasonable and unenforceable.

The Court went one step further and stated that, even if the non-solicitation clause had been found reasonable and enforceable, it would still have concluded that the employee had not breached the clause. Accordingly, the employer’s counterclaim against the employee was dismissed in its entirety.

Contact Guelph Employment Lawyer Peter McSherry for Advice on Restrictive Covenants

Navigating the terms of an employment contract, such as restrictive covenants, can be confusing, which is why it is important to seek legal advice to ensure you have a thorough understanding of your obligations and rights during the employment relationship. At the Law Office of Peter McSherry, our employment law team, led by Peter McSherry, regularly works with employees seeking to navigate a variety of workplace issues. From our office in Guelph, we provide clients across southern Ontario with comprehensive advice and skilled representation in wrongful termination claims, human rights matters, and workplace discrimination issues. Contact us online or by telephone at 519-821-5465 to schedule a confidential consultation and learn how we can assist you.