Non-Competition Covenants: Cautions for Employers

Ryan Macklon

By Ryan Macklon and Wendy Woloshyn.

Many employment contracts contain clauses known as restrictive covenants. The most well-known of these are non-competition clauses, which prohibit an employee from competing with their ex-employer’s business after the employment contract is terminated. (Non-solicitation and non-disclosure or confidentiality clauses are the two other categories of restrictive covenants that are sometimes found in employment agreements.) Non-competition clauses are typically in effect for a specific period of time and are often restricted to a specified geographic area.

It might seem like sound business practice for an employer to include a non-competition clause in an employment contract; in principle, however, they often violate public policy as they can prevent people from earning a living. While such provisions are legally permissible, employers wishing to impose a non-competition covenant on their employees must make sure that the clause is drafted properly and precisely, otherwise it will be at risk of being struck down in the courts.

In this post, we provide an overview of the key elements of a non-competition clause and discuss when the courts are likely to find them invalid and therefore unenforceable, noting a number of recent BC court decisions as examples.

Limits on Time, Space and Activities

As noted above, non-competition covenants impose restrictions on an employee’s post-termination employment for a certain period of time, often within a certain geographic area and in terms of certain activities.

Not surprisingly, then, the case law shows generally that courts will be quick to find a non-competition clause unenforceable where it is excessive or uncertain as to the length of time, geographic scope and/or nature of activities it prohibits. The employer bears the responsibility (or “onus”) of proving that such a clause is reasonable and not overly broad, and that it goes only as far as necessary to protect the employer’s legitimate proprietary interest in, for example, its trade secrets, confidential information or customer lists.

Blue Pencil vs. Entire Clause Approach (Shafron and Ambiguous Geographic Scope)

Before the Supreme Court of Canada decision in KRG Insurance Brokers (Western) Inc. v Shafron, 2009 SCC 6 (“Shafron”), British Columbia courts would occasionally rewrite a restrictive covenant to narrow its scope and make it enforceable in the circumstances, or use something known as “blue pencil” severance to remove (or sever) unenforceable portions of the clauses to make them reasonable in the circumstances.

In Shafron, however, the Court held that the entire non-competition clause was unenforceable after finding that “Metropolitan City of Vancouver” constituted an ambiguous geographic scope because there is no legal or judicial definition of that phrase. Since the decision in Shafron, if any part of a non-competition covenant in an employment contract is ambiguous, BC courts will strike down the entire clause.

Case Law Examples

Activities or Services – Not Previously Performed by Employee

When it comes to limits on future employment activities, non-competition clauses will likely not be enforceable where they restrict an employee from engaging in activities or services that the employee did not perform for their previous employer.

In IRIS The Visual Group (Western) Canada Inc. v Park, 2017 BCCA 301 (“Park”), an optometrist’s employment contract contained a non-competition clause that prohibited her from competing “directly or in partnership or in conjunction with” any other person or business that carried on the business of the employer. The employer’s business, in addition to providing optometric services, also sold eyewear products such as glasses and contacts. The optometrist, Dr. Park, would have therefore been restricted from selling eyewear products, which she did not do during her employment with her former employer. Even though the length of the clause (three years) and the geographic scope (within five kilometres of the business) were reasonable in the circumstances, the BC Court of Appeal affirmed the trial judge’s decision that the clause was unenforceable because it attempted to limit her post-employment activities beyond the scope of the services she performed for her former employer.

Services and Geographic Scope – Use Non-Solicitation as Alternative

Nor will an overly broad or ambiguous non-competition clause be enforceable where the employer’s legitimate proprietary interest could be protected by a less restrictive non-solicitation clause. (A non-solicitation clause prohibits an employee from soliciting the ex-employer’s customers and / or employees for a specified period of time.)

Similar to Park, above, the plaintiff in 0777792 B.C. Ltd. v. Da Costa, 2019 BCSC 1839, was unsuccessful in enforcing a non-competition clause that prohibited the employee from competing with all of the services offered by the plaintiff, including services that the employee was not engaged in under the employer. In addition to being overly broad, the clause was also unreasonable because it did not contain any geographic limit.

Aside from the unreasonableness of the non-competition clause, the trial judge declined to enforce the non-competition clause, noting that the plaintiff’s legitimate proprietary interests could have been protected by a non-solicitation clause. In his decision, the trial judge reiterated the holding in Valley First Financial Services Ltd. v Trach, 2004 BCCA 312 that: “when a non-solicitation clause could have substituted for a non-competition clause in an employment agreement, the non-competition clause will generally be unenforceable”.

Geographic Scope – Enforced!

By contrast, the BC Court of Appeal enforced a non-competition clause in Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97. The plaintiff’s employment contract contained a non-competition clause which stated that if the plaintiff set up a competing dairy veterinary practice within 25 miles of the defendant’s clinic, she would have to repay the defendant a certain amount of money in contemplation of the costs the defendant incurred training and providing equipment to the plaintiff, as well as the impact on the goodwill of the defendant’s business since competition would decrease the volume of business available to the defendant’s clinic. Even though the non-competition clause did not prohibit the plaintiff from opening a business competitive with the defendant, it was still a restraint of trade for imposing a financial consequence on her for doing so. Nevertheless, the BC Court of Appeal held that the terms of the clause were not ambiguous, and that because the plaintiff set up a dairy veterinary practice within the geographic scope of the clause, it was enforceable.

It is worth noting that at the time of the appeal, there were only eight dairy herds in the entire Creston Valley, all serviced by the defendant’s clinic. Therefore, any competitive dairy veterinary practice would more than likely have a significant economic impact on the defendant’s business.

Geographic Scope – Alberta Court Sharpens its Blue Pencil!

One last decision, this one from Alberta’s highest court, is worth noting – as something of an anomaly.

In City Wide Towing and Recovery Service Ltd. v Poole, 2020 ABCA 305, the Alberta Court of Appeal applied the blue pencil doctrine to save a non-competition covenant from being struck down. In that case, the clause occurred in the context of the sale by Mr. Poole of the assets of his towing business to City Wide. Payment of a portion of the sale proceeds was conditional on Mr. Poole remaining with City Wide as an employee for 2 years; as part of the sale, Mr. Poole entered into both an employment agreement and a non-competition agreement.

The geographical scope of the non-competition clause in question was “Alberta, British Columbia and Saskatchewan”, as well as “any other location within Canada” where City Wide “and its Affiliates are carrying on the Business at any time during the Restriction Period”. When Mr. Pool resigned from City Wide to join an alleged competitor before the “Restriction Period” was up, City Wide was able to obtain an interim injunction which prevented Mr. Poole from competing until the courts could rule on the clause’s validity.

In considering whether the clause was enforceable, the Court of Appeal acknowledged the SCC’s decision in Shafron and its approach to “blue pencil severance”. Ultimately, however, a majority of the Court concluded that the Shafron case does NOT apply to such covenants in commercial contracts like the one in Poole. Therefore, while the clause as drafted was unreasonably broad because City Wide was not carrying on business anywhere outside of Alberta, it could and should be read down to apply to Alberta only, rather than being struck down entirely.

While the decision in Poole may give employers hope that the blue pencil severance approach is experiencing a resurgence, it is important to remember that the majority in this Alberta case distinguished its decision from Shafron on the basis that the restrictive covenant was negotiated in the context of the sale of a business – Poole was a “vendor/purchaser” case as opposed to a strict “employer/employee” case. As the Court of Appeal affirmed, “courts should not come to the assistance [i.e. by using severance] of an employer who has drafted an overly broad restrictive covenant” [emphasis added].

Summary and Takeaways

The courts in British Columbia continue to apply the Supreme Court of Canada ruling in Shafron, declining to alter an unenforceable non-competition clause in an employment contract to make it reasonable in the circumstances. Nor will they enforce such clauses where they go so far as to restrict an employee from engaging in services beyond those they provided for the employer, or where a less restrictive non-solicitation clause would protect the employer’s legitimate proprietary interest.

The lesson for employers hoping to rely on these type of restrictive covenants should first consider whether a non-solicitation clause will suffice to protect their interests. If it won’t, we would encourage all employers to seek the assistance of an employment lawyer to help ensure that the contractual limits they place on their employees’ future employment are specific and reasonable in the circumstances.

 

 

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