Two Employees Ordered to Pay Former Employer Over $1.1 Million Based on Noncompete Clauses

Written on behalf of Peter McSherry

Noncompete clauses are more likely to be used in agreements for employees who are in sales or where the employee was a manager or executive with a former employer. Such clauses are restrictive covenants with obligations to be adhered to by law, although such clauses may be ruled to be unreasonable and/or unlawful.

In a recent Alberta decision, however, the court not only determined the noncompete clauses signed by two employees to be lawful, but the court ordered the employees to pay over one million dollars to their former employer as a result of the pricing formulas set out in the clauses.

Employees Agree to Noncompete Clauses with Employer 

Two employee worked for an insurance company in Alberta. The employees had signed non-competition agreements, which included the following clause:

“For a period of 24 months after the date of termination of the Employee’s employment with [the employer], however caused, the Employee will not for any reason, directly or indirectly, either as an individual or as a partner or joint venture or as an employee, principal, consultant, agent, shareholder, officer, director or sales representative for any person, firm, association, organization, syndicate, company or corporation, or on the Employee’s own behalf, or in any other manner contact, solicit, sell, serve, direct or receive business from any person, firm or corporation in the Province of Alberta, which was a client of [the employer] at any time during the period of the Employee’s employment with [the employer], unless in respect of any such client, the Employee shall pay to [the employer] an amount equal to 250% of the total of all commissions or other income in respect of Insurance policies or related products and services of such client charged by [the employer] for premium periods commencing in the 12 month period immediately preceding the renewal date of said policies, or 250% of all such commissions or other income charged by [the employer] for the last 12 month period during which [the employer] served that client, whichever is greater.”

It should be noted that the second employee’s clause differed, with a covenant for 180% rather than 250%.

Employees Leave Employer and Take Clients with Them

The first employee was a senior account executive and the director of commercial business development. The second employee worked as the account manager for the same group of clients.

However, the two employees left the employer’s business to start a new one and took 40 of the employer’s clients with them.

The employer filed an application for summary judgment with the court against the two employees based on their non-competition agreements.

Court Explains Purpose of Specific Noncompete Clauses

At the outset, the court explained the purpose of the pricing scheme in the employee’s noncompete clause, stating:

“The effect of the clause does not restrain trade but permits it at a price. It recognizes the proprietary interest and value of a broker’s Book of Business. The effect of the clause is that if you leave your old brokerage firm and join a new one, and some of the old work comes with you (whether you solicit it or not), you have to pay for it as if you bought it. The rates of 180% and 250% are consistent with figures used in the industry. There is no countervailing evidence on this point.”

The court further noted that such clauses were not prohibitions on conducting business with former customer or clients, nor were they intended to restrain trade. Rather, the court explained that the clauses simply put a price on such trade in a manner that was consistent with the price of purchasing in the industry, noting:

“The clause simply closes the door that might have permitted a former employee to receive business from former clients in the absence of any active solicitation.”

Later, it surveyed the purpose of the clause within the specific context of the insurance industry, stating:

“The clause protects the proprietary interest that a broker has in a species of property known as the Book of Business recognized in the insurance industry …. Insurance policy sales is a highly personalized business, making the old employer especially vulnerable when an employee moves to another firm, or sets up on their own. In a manner of speaking, [the employees] were the face of business at [the employer] to the clients that came over to [the employees’ new business].”

Court Upholds Clauses and Determines Damages

The court then proceeded to review the content of the clauses to determine their enforceability.

First, the court found that the amounts claimed were consistent with figures used in the industry. As such, they were not an unenforceable penalty nor ones that were extravagant and unconscionable.

Second, the court held that the time and geographic area described in the clauses were not excessive.

Finally, the court held that there was no evidence that the clause would impair consumer choice to the point where they should be unenforceable as a matter of public policy.

Having found the noncompete clauses enforceable, the court ordered that the employees were jointly and severally liable to the employer in the amount of $1,176,330, with the caveat that the second employee’s liability was limited to $870,484 according to the formula in the noncompete clauses.

Contact Peter A. McSherry Employment Lawyers For Experienced Advice on Noncompete Clauses

Has your employer asked you to sign a nonsolicitation or noncompete agreement? Have you received a cease and desist letter from your former employer? When you move from one position to the next, you may have questions about the exact limitations on your new business based on any agreement you signed with a former employer.

At Peter A. McSherry Employment Lawyers, I can help you understand the legal agreement you have signed, advise you on ways to legally work around the clause, define exactly what you are not allowed to do, and evaluate whether the clause is valid. Since 1997, I have been working on employment law in Ontario exclusively. My Guelph law practise is geared toward catering to your needs as an employee and helping you reach your objectives.

My experience as a Cambridge lawyer advising clients on non-solicitation clauses can provide you with the knowledge, resources and effective solutions necessary to obtain your best possible resolution. Contact me today by phone at 519-821-5465 or by e-mail to schedule a consultation.