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How Broad is Too Broad? Addressing the Enforceability of Non-Competition and Non-Solicitation Clauses
The Alberta Court of Queen’s Bench recently addressed the enforceability of non-competition and non-solicitation clauses in Specialized Property Evaluation Control Services Ltd. V. Les Evaluations Marc Bourret Appraisals Inc., (2016 ABQB 85).
The case involved Specialized Property Evaluation Control Services Ltd. (SPECS) and its employee, Ross Huartt (Huartt), along with Huartt’s new employer, Les Evaluations Marc Bourret Appraisals Inc., (Bourret). In short, SPECS desired to enforce the restrictive covenants (a non-competition and a non-solicitation) found in Mr. Huartt’s employment contract. It sought to prevent Bourret from providing any services to SPECS’s clients for a six month period. SPECS was successful on the enforcement of its non-competition clause but was unsuccessful in its enforcement of the non-solicitation clause.
Mr. Huartt was hired by SPECS in March 2014. His employment contract contained the following two restrictive covenants:
6.1 During the term of this Agreement and for a period of three months following the termination of this Agreement (for whatever reason, including an unjustified termination by SPECS) the Employee shall not engage or be involved in, either directly or indirectly, any business which competes with SPECS’s business in the Territory . . .
6.2 During the term of this Agreement and for a period of six months following the termination of this Agreement (for whatever reason, including an unjustified termination by SPECS), the Employee shall not, directly or indirectly, solicit or attempt to solicit any customer or client of SPECS to commenceor increase doing business with any other organization, or to cease or decrease the business that such client or customer does with SPECS.
Through a series of forwarded e-mails, SPECS’s management found i) that Mr. Huartt had recorded hours of work done for non-SPECS projects and ii) Mr. Huartt had used SPECS’s letterhead to instruct at least one of SPECS’s clients to contact a competitor – that competitor being Bourret. Evidence at a hearing demonstrated further that Mr. Huartt had talked to a number of clients at SPECS and solicited them for work.
In examining the restrictive covenant found in clause 6.1 of Mr. Huartt’s employment agreement, the Court made clear that wrongfully dismissed employees are excused from compliance with restrictive covenants.
The court then examined whether SPECS had reason to terminate Mr. Huartt’s employment. As it was demonstrated that Mr. Huartt had been working for Bourett while employed with SPECS (contrary to the clause), the court found that Mr. Huartt’s termination was justified.
ASSESMENT OF RESTRICTIVE COVENANTS
In assessing the applicability of the restrictive covenants, the Court stated at para. 18 of its decision: “Restrictive covenants are prima facie unenforceable unless they are shown to be reasonable.Reasonableness is assessed in reference to the interests of the parties concerned and reasonable in reference to the interests of the public” (emphasis added). The Court further stated: “SPECS has the onus of establishing the reasonableness of the restrictive covenants as between the parties. The onus of proving the restrictive covenant is contrary to the public interest lies with Mr. Huartt”.
Broadly speaking, the legal test to determine reasonableness is threefold and concerns the following:
· Temporal and Geographical Restrictions
· Proprietary Interests Entitled to Protection
· Breadth of Restriction
As the temporal and geographical restrictions were agreed to by both parties, they were not at issue. The two points at issue were the proprietary interests and the breadth of restriction
Proprietary Interests Entitled to Protection
For its proprietary interests, SPECS sought to protect its goodwill and client relationships, as well as other confidential documents and records related to its business. Justice W.A. Tilleman found in favour of SPECS.
Succinctly put, at paras. 41 and 43 of the decision it was established that “when an employer introduces an employee to customers and facilitates a relationshipbetween its customers and the employee, there is a proprietary interest entitled to protection”. And that furthermore, when an employer trains an employee, specifically when that employee has little to no experience, that employer “also holds a proprietary interest in the confidential forms and documents it uses in the course of its business and that it trained Mr. Huartt to use”. (emphasis own).
Breadth of Restriction
Mr. Huartt argued that the non-solicitation clause (6.2) in his employment contract was too broad. He was successful in this argument.
“The relevant portion of the covenant reads as follows: ‘…the Employee shall not, directly or indirectly, solicit or attempt to solicit any customer or client of SPECS to commence or increase doing business with any other organization, or to cease or decrease the business that such client or customer does with SPECS’.” (at para. 48).
In assessing this paragraph, Justice W.A. Tilleman pointed out at para. 55, “while it may have been SPECS’ intention to protect its client base and interests, the language used, namely “any customer or client” and “any other organization”, encompasses too many possibilities and amounts to an unjustified restraint of trade. (emphasis own).
Restrictive covenants are only enforceable to employees who have not been wrongfully terminated. That is, if you have dismissed an employee, and seek now to enforce your restrictive covenant, you must ensure that the termination has been carried out via proper procedure. It is advisable you speak with an employment lawyer about the steps that must be taken.
Clauses that are overbroad will be deemed unenforceable. Prohibiting any and all solicitation of any kind and of any sort with any client to any organization will be found to be overly broad. It is very likely that a court will find such a clause to be an unjustified restraint on trade. It should be ensured that a clause does not prohibit solicitation of clients for a non-competing purpose.
For instance, if a furniture store prohibits a former employee from selling t-shirts to its customers, it is likely that that employer’s prohibition will not be found justifiable.
Restrictive covenants often offer employers important protections. However, they must be drafted carefully and with a good eye toward their breadth – be that temporal, geographical, proprietary or otherwise. They are frequently litigated, and their outcomes depend on the circumstances of each case and on each employment relationship.
The lawyers at Monkhouse Law are happy to assist you with any questions you have about non-solicitation clauses, non-competition clauses, and employment matters in general.
To arrange your free confidential 30 minute phone consultation make sure to contact us today.