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The latest Ontario defeat for non-competition covenants

Readers of this blog have read of the difficulty encountered by employers in Ontario in drafting and enforcing non-competition covenants. The obstacles to enforcing such covenants were highlighted in a decision of the Superior Court released on April 5, 2013, the employer was faced with a concerted effort by three of its employees to open a competitive business within its market. The plaintiff in this case was a recruiter of technical employees in the petroleum industry. The defendants were two technical recruiters and one account manager. They had all been working for the plaintiff for five or six years when they jointly decided to resign and open a competitive business. The plaintiff alleged that these former employees were soliciting its customers to move their business to the defendants’ new company. The employer alleged that the three employees had also made use of confidential information belonging to the plaintiff and found on its computer system in order to solicit the plaintiff’s customers.

The employer in this case had done what his lawyer presumably advised it to do – i.e., to have its senior employees sign employment contracts which contained non solicitation covenants in favour of the employer. In fact, all of the agreements contained a prohibition against solicitation or an attempted solicitation of any of the clients or prospective clients of the employer. This prohibition was specified to have a term of six months following termination of employment for any reason.

Shortly after the three employees left, the plaintiff issued its Statement of Claim. Rather than defending the claim, all three of the defendants filed motions for judgment asking the court to dismiss the claim as disclosing no genuine cause of action. In support of its position on the motions, the plaintiff filed Affidavits alleging that the defendants used confidential information and detailing alleged efforts by the defendants to solicit business which they had handled in their previous positions. However, what the plaintiff failed to provide was any direct evidence from customers that the three defendants had specifically solicited business from them. In response, all three defendants filed Affidavits denying that they had solicited business or violated their employment contracts in any way. The contacts described in the plaintiff’s Affidavits were explained by the defendants on the basis of casual contact not relating to the solicitation of business.

In granting the motions dismissing the claim, the judge at first instance reviewed in detail the Affidavit evidence produced by the plaintiff. He found that the e mails referred to by the plaintiff were not sufficient to support a conclusion that the defendants were in fact attempting to take business from the plaintiff. It is interesting to note that the judge pointed out that the plaintiff had access to its customers, candidates, and employees who could surely provide further and better evidence, if such existed, as to alleged efforts by the defendants to solicit business. The judge referred to the evidence produced by the plaintiff as nothing more than innuendo. The judge therefore concluded that the plaintiff obviously had no “meaningful evidence of solicitation” by any of the individual defendants.

Although the judge found that there was insufficient evidence to support a finding of breach of the employment contracts, he went on to consider whether or not the employment agreements were in fact enforceable. The judge relied on a long history of case law in Ontario, including the leading Court of Appeal decision in the case known as H. L. Staebler. In Staebler, the Court of Appeal set out a three part test in determining the enforceability of such clauses, by asking the following questions:

  1. Does the employer have a proprietary interest entitled to protection?
  2. Are the temporal and spatial features of the restricted covenant too broad?
  3. Is the covenant unenforceable as being against competition generally as opposed to a more limited covenant against solicitation of former clients?

Where the first question is answered affirmatively, and the last two negatively, the clause will be enforced.

In this case, the court found that the plaintiff had, in fact, been unable to provide any evidence of a proprietary interest worthy of protection. In fact, the defendants had deposed that the information which the plaintiff was alleging they were misusing was, in fact, easily available from sources such as LinkedIn and Facebook.

The court also pointed to the failure of the plaintiff to include a geographic limitation in the non competition covenant. The court reinforced the accepted principle that “…non competition clauses without a geographic limit are prima facie unreasonable.” Readers of this blog will recall that I have repeatedly recommended that employers use non solicitation covenants rather than non competition covenants, as the former are more likely to be enforced by the court.

It has long been conventional wisdom among lawyers that drafting a contract without a detailed understanding of the client’s business will often result in a poor contract. The court in this case reinforces that perception in the way in which it deals with the reference in the non solicitation covenant to use of certain databases. The non solicitation covenant in this case prohibited solicitation of “any actual or prospective candidates or contractors that are recorded on the Eagle candidate database or any Eagle data collection and retention system…” In other words, the clause sought to prohibit the use of any information contained anywhere in the employer’s computer system. The motion judge pointed out that there was no evidence that any of the individual defendants would, in fact, have knowledge of what was contained in these various databases. In addition, the three defendants swore in their supporting material that whatever information they did make use of was, in fact, publicly available. The court relied on this fact in dismissing the action as well. The result was that the employer’s claim was dismissed with costs fixed at $10,000.

The employer appealed to the Ontario Court of Appeal and in a decision released on October 15, 2013, the Court of Appeal dismissed that appeal. The plaintiff sought to argue before the Court of Appeal that the factual issues raised in the material required a trial, as there was conflicting evidence, and issues of credibility which arose from that evidence. The Court of Appeal rejected this argument. It held that the Statement of Claim contained what it called “bald allegation” and did not provide specific instances of improper use of confidential information. Where the plaintiff’s material even raised an inference of such use of information, there were few specifics on which the court could rely. The court therefore concluded that the motion judge was correct in dismissing the claim and tacked on a further $10,000 for costs payable to the defendants.

What this case tells employers is two fold:

  1. Non-competition covenants will rarely be enforced by courts in Ontario; and,
  2. Even if an employer seeks to enforce a non-solicitation covenant, it must marshal substantial and convincing evidence of the details and implications of that solicitation before it darkens the door of any courtroom in Ontario.

Earl Altman
Partner
Garfinkle, Biderman LLP

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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