When is a Non-Compete Clause Breached?

Written on behalf of Peter McSherry

People who work in particularly competitive fields or hold senior positions where they are privy to their employer’s confidential information may find that their employment contracts contain a non-solicitation or non-compete clause that limits their ability to work for a competitor employer following their termination or departure. An employee’s prospective employment opportunities may also be limited through an agreement upon their termination which contains similar restrictions. However, it is important for employees and employers to understand their rights and obligations under such clauses, as a contract breach could expose them to liability, or an employee may not accept a new position they may actually be permitted to accept.

In a recent decision from the Court of Appeal for Ontario, the Court considered a situation where an employee was terminated from his job and signed a severance agreement that limited his ability to work with a competitor company for one year. Before the period was over, he had accepted a position with the company, but did not commence working in this role until the one-year period had passed. As a result, his previous employer claimed that he had breached the non-compete clause.

Employee is terminated from senior role with tour company

In the case of EF Institute for Cultural Exchange Limited v. WorldStrides Canada, Inc., the respondent employee began working with the appellant employer (“EF”) in May 2005. By October 2011, he was the president of the company that operated educational tours. In 2012, he signed an employment agreement that contained both a “Confidential Information” clause and a “Restrictive Covenant”.

On September 9, 2014, the employee was terminated by EF without cause. EF and the employee negotiated a severance package, effective September 30, 2014, which paid the employee $225,000 over two installments, with the second payment being on the one-year anniversary of the termination. The severance package also indicated that the employee could not share confidential information for one year, and if this was breached, it would result in the forfeiture of that second payment installment.

Employee meets with executives of competitor company

Following his termination, the employee updated his resume and began applying to various companies, which included a competitor company of his previous employer. This led to a conversation between the employee and the CEO of the corporate respondent, “WS.”

WS flew the employee to their United States office to meet with their executives in April 2015. However, EF became aware of these meetings and sent a letter to the employee dated May 5, 2015, reminding him of his obligations under their agreement.

Employee receives new employment offer

WS made an employment offer to the employee June 2, 2015, in which the employee would take on the role of general manager of their new office in Toronto. WS was also planning a tour of Vimy Ridge for its 100^th anniversary and felt they were behind their competitors in doing so. The employee accepted the employment offer and planned to start in his new role on October 1, 2015, which would be past the one-year agreement with his prior employer.

EF learned about the employee’s new employment on October 2, 2015, and commenced an action against both the employee and WS, claiming “$5,000,000 for breach of contract, breach of confidence, and breach of fiduciary duties and $5,000,000 against WorldStrides for knowing assistance of breach of fiduciary duties and inducing breach of contract.” EF also sought “disgorgement and accounting of profits earned because of the impugned conduct” and believed that the employee must have shared his knowledge of Vimy Ridge tours with WS.

Motion judge finds no breach of contract

The motion judge who originally heard the matter determined that WS’s knowledge of tours planned for Vimy Ridge’s 100^th anniversary did not amount to a breach of the contract. EF presented limited evidence to the Court in support their position, which included:

• an email exchange between the CEO and president of WS’ parent company;
• the employee’s notes;
• notes from the employee’s interview in April 2015;
• and an email from May 2015 talking about plans for a “massive campaign” for Vimy Ridge.

In their analysis, the motion judge found that none of the evidence provided by EF amounted to a breach of the confidentiality commitments made between the employee and EF.

EF appeal’s motion judge’s findings

On their appeal, EF argued that the motion judge was too narrow in their analysis, focusing on the sharing of confidential information rather than the broader obligation not to “assist” a competitor during the one-year period.The Court of Appeal looked at the motion judge’s decision and agreed that the communications between WS and the employee in the months leading up to the commencement of his new role were typical for job interview and negotiations. Further, the Court found that such “non-sensitive information had little if any impact on competition” between the companies.

The Court agreed with the motion judge that it was natural for an educational tour company to plan an anniversary trip to Vimy Ridge, and other competitors of EF were publicly planning similar trips at the same time. For these reasons, EF’s appeal was dismissed.

Peter A. McSherry Employment Lawyer Advises Clients on Their Obligations Under Non-Compete Clauses and Severance Package Agreements

Following a termination, employees may feel like they are at a disadvantage when negotiating a severance package with an employer. As a result, they may agree to enter into a non-solicitation or non-compete clause without being aware of what obligations and responsibilities they carry. For these reasons, it is important to consult with experienced employment lawyer Peter A. McSherry if you find yourself being asked to sign an agreement or release. Our team will provide you with the knowledge, resources and effective solutions necessary to ensure that you understand your rights and any limitations under such a clause. Contact our office today by phone at 519-821-5465 or online to schedule a confidential consultation.