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Non-competition clauses are designed to prevent a departing employee from competing with their former employer. Typically, they are drafted to restrict competition for a specific amount of time within a specific geographic area.
Courts take the strictest approach with non-competition clauses. This is because they can affect a former employee’s ability to earn a living in their area of expertise and put a restraint on competition. Courts will examine non-competition clauses very carefully to ensure that they are reasonable in the circumstances.
United Rentals of Canada Inc. v. Brooks, 2016 ONSC 6854
The Facts
The main legal issue in this decision was whether the “Confidentiality, Non-Competition and Non-Solicitation Agreement (“the non-compete”) was enforceable.
The employee argued that the entire employment contract, including the non-compete provision is unenforceable because he received no valuable consideration in exchange for signing it, and further that he was forced to sign the Agreement under duress.
An alternative argument advanced by the employee was that non-compete would not be enforceable because it is ambiguous and is an unreasonable restraint of trade.
The employee in this case was initially hired as a delivery driver for the employer. In August of 1999, the employee was promoted to the position of a sales representative, responsible for outside sales for the Kingston and surrounding area. The employee did not deal with all of the employer’s customers. Some of the customers continued to deal with the manager and three or four inside sales representatives.
A second outside sales representative was hired in 2002. That sales representative dealt with the employer’s customers within the City of Kingston and the surrounding area. The employee became primarily responsible for the outside sales within the City of Kingston, but not solely responsible for sales within the City of Kingston.
On August 26, 2003, the employee was presented with an employment agreement by his manager. This agreement contained, among other things, a restriction on the notice he would be provided in the event of termination, as well as a non-competition and non-solicitation clause.
The employee was told by his manager that he was required to sign the agreement if he wanted to continue his employment as a sales representative with the company. The contents of the agreement were not reviewed with him, nor was he provided with any explanation of the contents or why he was required to sign it.
On April 26, 2014, the employee resigned his position and took up employment with a competitor of the employer, who had opened an office in Kingston in 2014. At the time, the employee had been in the business for 30 years, and only had a grade 12 education.
In June of 2014, the employer commenced a claim seeking to enforce the employment agreement, namely the non-compete provision contained therein.
Analysis
1.No Consideration
The motion judge found that there was no consideration for the employment agreement and therefore, it would not be enforceable against the employee, because:
a)The agreement significantly changed the terms of the employee’s employment. It placed limitations on his ability to leave his employment and work with another company in the same business and it placed restrictions on his common-law rights to notice or payment in lieu of notice. These restrictions did not exist prior to the agreement; and
b)The employer provided the employee no benefit, for example, increased salary or promotion for or as an incentive for signing the agreement.
The judge referenced Braiden v. La-Z-Boy [2008] O.J. No. 2314 (C.A.), at paras. 48 and 49 in support of his finding:
A new notice provision in a contract is “a tremendously significant modification of the implied term of reasonable notice,” one that requires consideration flowing from the employer to support it.” “The requirement of consideration to support a change to the terms of an agreement is especially important in the employment context where, generally, there is inequality of bargaining power between employees and employers…Once they (employees) have been hired and are dependent on the remuneration of the job they become more vulnerable.
2.Duress
The motion judge did not address the issue of duress since the agreement was invalid due to lack of consideration.
3.Employee Condoned the Change in the Terms of his Employment
The employer argued that regardless of the unilateral change to the terms of the employee’s employment, he continued to work for the employer for another 11 years, and thus had agreed or acquiesced to the terms.
However, the judge found that there was no basis for this argument and that he was not barred from challenging the enforceability of the Agreement even after 11 years.
4.Non-Competition Clause
Even though the judge found the employment agreement in its entirety to be unenforceable, he still noted that if the matter were to proceed further, there was no evidence to support a 12-month restriction or to support the geographical range of 100km radius, especially since the employee’s work was primarily in the City of Kingston.
The motion judge also found that the clause would be unenforceable as being against competition generally. The clause restricted the employee with respect to all of the company’s clients, whether they were known or not to the employee, rather than a restriction only from the customers he knew of.
Therefore, the non-competition clause was found, in fact and in law, unenforceable.
5.Ambiguity
The judge decided that this was also not an issue that was necessary to address due to his other findings.
Take Away
This case highlights that there are multiple arguments to be made to invalidate a non-competition clause. If you are asked to sign, or are currently restricted by a non-competition clause that you believe is unreasonable, it is best to speak to a lawyer specializing in Employment Law when facing this situation. Contact Monkhouse Law today at 416-907-9249 for a free 30 minute consultation over the phone to discuss your options.
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