Employers want to protect their proprietary interest in maintaining client relationships within reason but need to be careful not to overreach when drafting a non-solicitation clause. These clauses are particularly important for sales employees.
Labrador Recycling Inc. v. Folino
A recent case considered a non-solicitation clause that overreached. In this case, a sales employee, Mr. Folino, resigned and immediately thereafter started a competing business in the aluminum scrap industry. His former employer Labrador Recycling, Inc. (the “Employer”) brought a motion for an injunction which would basically prevent Mr. Folino from competing. The issue was whether the Employer could prove a strong prima facie case that Mr. Folino had breached his fiduciary duties and/or the non-solicitation clause in his employment contract.
The non-solicitation clause
An Ontario Superior Court of Justice judge summarized the applicable non-solicitation clause as follows: It purports to prohibit Mr. Folino from soliciting and accepting business from any of the plaintiff’s current or prospective customers. It defines a “current or prospective customer of the company” as “an individual or entity with which [Mr. Folino] personally had direct or indirect contact, or access to conduct confidential information about, during the last two years of [his employment].” Notably, the definition of customer or potential customer of the company includes no relationship between the customer or potential customer and the plaintiff. For example, it does not say that a customer or potential customer is someone with whom Mr. Folino had contact in connection with his employment duties. The only limitation on who is customer or potential customer when it comes to someone with whom Mr. Folino had contact is that the contact take place within the last two years of his employment. As drafted, his drycleaner would qualify.
Why it was not legally enforceable
The judge concluded the Employer had not proved a strong prima facie case that the non-solicitation clause was legally enforceable and refused to grant the injunction. In particular: (i) the one-year temporal limit is unreasonably long; (ii) there was no geographic limit set out in the clause; (iii) the terms of the clause were not clear and unambiguous ;and (iv) by prohibiting Mr. Folino from soliciting or accepting work from anyone with whom he personally had direct contact during the last two years of his employment, the clause purported to restrict him from accepting work from his personal contacts who may have had nothing to do with Mr. Folino at any time.
Facts that mattered
In coming to this conclusion, the judge noted: (i) Mr. Folino had worked virtually his entire life in the aluminum scrap metal industry where there are thousands of vendors and purchasers who publicly post on their websites and send mass emails stating the prices they are prepared to accept or pay. Prices are volatile; deals come together in hours, not days or months (ii) there was no evidence that any steps had been taken to build relationships with customers; there was no evidence of events with customers, or regular meetings, for example, to solidify relationships: (iii) Mr. Folino gave the Employer two months’ notice, during which time his replacement was hired, and Mr. Folino introduced him to the Employer’s customers; and (iv) Customer loyalty is not a feature of the industry. Mr. Folino’s relationships with vendors and purchasers in the aluminum scrap industry (some of which predated Mr. Folino’s employment with Labrador) did not drive the plaintiff’s ability to close deals: it was all about price. On Mr. Folino’s departure, the plaintiff retained all its contacts, and thus its ability to compete.
Lessons to be learned:
- When considering the enforceability of non-solicitation clauses judges will consider the nature of the industry (including sales cycles), the amount of investment an employer makes in the client relationship, and, how clients and potential clients are defined.
- An employer should think long and hard about seeking an injunction. They are really difficult to win. If one is sought then make sure affidavit materials are accurate. In this case, after noting that an important fact was not disclosed in an affidavit the judge wrote: The paragraph appears deliberately drafted to be technically true, while obscuring that important fact, which was adduced by Mr. Folino in his responding evidence. I have concerns about whether the plaintiff has been forthright in its evidence with respect to AIM, which in turn causes me concerns about the credibility of its evidence generally.
- Injunctions are expensive. In this case, the Employer’s partial indemnity costs were $64,169.41 and it was also ordered to pay $ $47,488.82 of Mr. Folino’s legal costs.
Original title of blog post: Ontario judge refuses to enforce non-solicitation clause