Ontario Court of Appeal confirms unenforceable non-compete clause

Written on behalf of Peter McSherry

In Donaldson Travel Inc. v. Murphy, the Ontario Court of Appeal recently upheld a lower court’s decision that a restrictive covenant in an employment contract was an unenforceable non-compete clause.

What Happened?

At issue in the original decision was an employee (Murphy) who resigned from Donaldson Travel Inc. (Donaldson Travel) in Cambridge and began working for a competing travel agency in Waterloo. At the time of her resignation, Murphy had worked at Donaldson Travel for approximately five years.

After her departure, Donaldson Travel sued Murphy, claiming $500,000 in damages for breach of the employment contract and $500,000 for “misappropriation of confidential information”. They also sought additional damages from Murphy’s new employer.

Donaldson Travel claimed, among other things, that Murphy and her new employer actively solicited their customers and that as a result, four former Donaldson Travel customers subsequently became customers of Murphy’s new employer.

In support of their position, Donaldson Travel relied on language in their employment agreement with Murphy which had stated:

[Murphy] agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [Donaldson], directly, or indirectly.

Restrictive Covenants: Non-Solicitation and Non-Compete Clauses

Many employers include non-solicitation and non-compete clauses (otherwise known as restrictive covenants) in their employment contracts to try and protect their business. In some circumstances, such clauses can restrict where departing employees can work, and can create limitations on the types of activities they can engage in after they leave. However, restrictive covenants can be difficult to enforce. Courts have to strike a balance between maintaining free and open competition in business, and interfering with an agreement between two knowledgeable parties (i.e- an employee and employer).

Non-Solicitation Clauses

Non-solicitation agreements or clauses generally state that an employee cannot approach clients of their former employer or former colleagues after that employee’s departure from their workplace. Such clauses can be enforced by courts as long as they are clearly drafted and are reasonable.

Non-Compete Clauses

“Non-competes” (more formally known as non-competition clauses) generally state that employees cannot work for a business, or start a business that is similar to the business of an employer they have left. These clauses are very difficult to enforce. An employer who wants a non-compete clause to be upheld must convince a judge that such a restriction is absolutely necessary in order to protect their interests. Additionally, the language of the non-compete must be clear and reasonable in terms of:

• It’s geographic scope
• The length of time it is valid
• The type of activities that it limits

What Did This Mean for the Employee in this Case?

The original motion judge found that the term “accept business” was essentially a restriction on conducting business, which made this clause a non-compete clause, rather than a non-solicitation clause. Further,  the language was unreasonable as it was overly broad and went beyond what was required to protect Donaldson Travel’s business. The claim against Murphy was dismissed. Donaldson Travel then appealed to the Court of Appeal.

The Court of Appeal ultimately agreed with the original motion judge that the restrictive covenant at issue was more like a restriction on competition, and therefore a non-compete, rather than a non-solicitation clause. It was more restrictive on Murphy than what would be necessary to protect Donaldson Travel’s business interests.

The Court of Appeal also agreed it that it was unenforceable for several reasons including the fact that:

• There was no geographic restriction on where Murphy could or could not work following her departure.
• There was no time limit on the restriction on her actions following her departure from Donaldson Travel.
• It extended the obligation not to solicit or accept business from all corporate accounts and customers of Donaldson Travel, rather than restricting this obligation to just those accounts and customers that Murphy had actually worked on/with, or even those accounts and customers that had been with Donaldson Travel during her five years there.
• It restricted Murphy from accepting business from any former or current Donaldson Travel clients without regard to the type of business involved, which could technically extend to business that was completely unrelated to travel.

The Court of Appeal further upheld the motion judge’s finding that Donaldson Travel’s claim that Murphy had disclosed confidential information had no merit. The motion judge had found that Murphy had only disclosed her own annual sales volumes. The Court of Appeal agreed.

If you have questions about the effect of a restrictive covenant or other language in your employment agreement contact employment lawyer Peter McSherry online or at 519-821-5465.