Amy KnappImplications of recent decisionMartin v. ConCreate USL Limited PartnershipRestrictivecovenants are a tricky business. Whilefundamentally important in some circumstances, they’re notoriously ineffectivein others. With the recent rulings on enforcement of restrictive covenants, it's becoming even more apparent that Canadian companies need to develop more compelling strategies to keep talent from going to the competitors.The term “restrictive covenant” may refer to either anon-competition agreement, which forbids an employee from working with acompetitor for a period of time after termination of employment, or anon-solicitation agreement, whichforbids an employee from soliciting former clients for competitive purposes.The Canadian courts have set the bar high on restrictivecovenants. They are considered primafacie unenforceable as they constitute a restraint of trade and infringe onindividual liberty. For those of you who don’t speak legalese, prima facie means the matter isconsidered to be self-evident. Guilty until proven innocent.This point was driven home by last year’s decision Mason v. Chem-Trend Limited, and again this month in Martin v. ConCreate USL Limited Partnership. The case law agrees thesecovenants are only enforceable in certain—very specific—situations.The more recent case is considered especially significant sincethe restrictive covenants in Martinwere in the context of a sale of business. In this context it is often necessaryto protect goodwill: Restrictive covenants are therefore subjected to a lessrigorous test by the courts when compared with similar covenants in standardemployment contracts.And yet Martin won his appeal. While the judge agreedrestrictive covenants are important in a sale of business, he concluded thenon-competition agreements in Martin’s case were overly broad. In such cases, the Canadiancourts will not “read down” the covenant to better suit the circumstances. Itwill either be upheld or struck down in its entirety.The Simple Facts:Martin works for Company X, in which he owns a small stakealong with its sister company, Company Y. Both companies are sold to Company Zand their assets sold to one of its entities. (Still with me? We’ll break thisdown nice and easy.)Since Martin retained 25% of the limited partnership units inCompany Z, as part of the sale he was required to sign a non-competition andnon-solicitation agreement relating to use of confidential information, whichwould end 24 months after Martin disposed of the units in question.Six months after the sale Martin was terminated. Eight dayslater he started a competing business. Companies X and Y sued and won. Martinappealed seeking the covenants to be declared ambiguous and unreasonable andtherefore unenforceable, which they were last week by the Ontario Court ofAppeals.The Court considered three things.
- Geographic scopeof the limitation: The geographic scope was not considered problematic.Being a national company, in made sense that the restriction would applynationally.
- Extent ofprohibited activity: Martin’s contract included a non-solicitationagreement that barred him from dealing with “any products or services thatcompete with products or services offered by [Company X/Y], whether or notoffered, or planned to be offered, [...] at the time of the sale transaction.”Given the vague nature of this limitation, the scope of prohibited activity wasconsidered too broad.
- Duration oflimitation: Since the duration was calculated from a time that hinged onthe consent of a third party (the disposition of his partnership units), thecourt concluded that there was no fixed limit on the restriction. Had it beencalculated from the time of the sale of business or from the time Martin ceasedacting as an officer or director of Company Y/Z, it may have been decidedotherwise.
Even when a contract is concluded between knowledgeable partiesof equal bargaining power, it must still pass the test of reasonable duration,activity and geographic scope. Though Martin had legal counsel when negotiatingthese agreements and acknowledged their reasonableness, the judge concludedthat, “while these areimportant factors, they do not entirely immunize the clause fromscrutiny,"Key Points of theDecision:There are afew key things we can take away from this decision, which further enforced lastyear’s decision on Mason v. Chem-Trend.
- A fixed time limit is essential.
- Restrictive covenants are lookedat on a case by case analysis of their reasonableness.
- Overly broad restrictions will bedeemed unenforceable.
Note thatthere may be more room for broader non-competition agreements imposed onemployees of senior rank, especially those in executive positions.While this sort of protection may be necessary in somesituations, restrictive covenants are not generally looked on favourably by theCanadian courts. An employer that seeks to protect himself by includingnon-competition or non-solicitation agreements would do well to use themsparingly, or else risk jeopardizing the effectiveness of the agreement.A more reliable alternative might be to look at employeeretention, to ensure employees are not only paid market rates but also offeredperformance-based compensation. An employee who feels valued by his employer isnot an employee likely to be seduced by the competition.If the staff are happy, restrictive covenants are essentially amoot point.Amy Knapp writes about audaciousand unconventional career management tactics for Australian job search site InsideTrak. She holds a BFA from Concordia University and alsocompleted three misguided years at law school. Her travel memoir, I Am The Swallow, will be published this Spring by Iguana Books. She lives in Ontario, Canada.
