Non-Competition / Non-Solicitation Disputes

Many employers require employees to sign non-solicitation and non-competition clauses (otherwise known as restrictive covenants) either before starting work or sometime thereafter.

A non-competition clause stops the employee from working at a competitor for a certain number of months after separating from the company while a non-solicitation clause allows the employee to work anywhere, but with one caveat: they cannot solicit their former employer’s clients.  Therefore, while a non-competition is much more restrictive than a non-solicitation, they both have the potential to damage a person’s re-employability. With that said, the good news is that both of these clauses are very often unenforceable. This article will explain how this occurs and under what circumstances.

A non-solicitation and non-competition clause will be unenforceable if the employee was wrongfully dismissed

The first way a non-competition and non-solicitation clause will be unenforceable is if the employer wrongfully dismisses the employee. The below explains this principle in more detail.

Specifically, employment agreements include an implied term requiring employers to give employees reasonable notice of a without-cause termination. While employers can replace this implied term with an express provision reducing or even eliminating an employee’s entitlement to reasonable notice, such provision must satisfy certain requirements to be enforceable, including limiting language that’s clear and unambiguous.

Absent an enforceable and express provision, courts determine an employee’s reasonable notice period based on various factors such as age, length of service, and character of employment. However, in practice, most employers terminate employees effective immediately without providing them with notice at all. When this happens, the employer has breached the implied term of reasonable notice and is liable to the employee for the damage that results. These damages are also called pay in lieu of reasonable notice or severance.

In the event that an employer fails to provide the employee with reasonable notice or payment equal to that notice, then they will be unable to turn around and enforce any non-solicitation or non-competition clauses against that employee. As the Alberta Court of Appeal stated:1

An employer that wrongfully terminates a contract of employment should not be able to capitalize on its failure to give notice or damages in lieu of notice by enforcing prospective obligations [restrictive covenants] against an innocent employee.

A non-solicitation and non-competition clause will be unenforceable against an employee if they received nothing in exchange for it

In addition to wrongful dismissal, a non-solicitation and non-competition clause will be unenforceable if the employee didn’t receive anything in exchange for it. This is otherwise known as not receiving any “consideration”.
Specifically, if the non-solicitation and non-competition clause is included in the employee’s offer of employment before they start work, there will be consideration: the employee will receive the job and payment for work.

In contrast, if an employer requires the employee to sign a non-solicitation or non-competition clause after starting work, they must provide the employee with something new for there to be consideration: a salary increase, a signing bonus, or a promotion. Further, it is important to note, that consideration of “employment” or “continuing” employment is not enough.

The next step: analysis of the restrictive covenants

If an employee receives consideration for the restrictive covenants and the issue outlined in Section B is absent, this still does not mean that the clauses are enforceable. This is because, the clauses must also satisfy certain other factors/tests that courts have developed through case law. To demonstrate how this works in practice, we will provide a factual scenario involving both a non-solicitation and a non-competition clause and then provide a short analysis.

Fact Scenario

Suppose “Doctors X”, an Optometry Clinic in Calgary Alberta, provided “Mr. Jones” with an offer of employment (the Offer) on June 1, 2015 as an Optometrist. On June 3, 2015, Mr. Jones accepted the offer and started work the following week.  The Offer included the below clauses:

For a period of 12 months after the Employee’s separation from the Company, The Employee will not:

  1. solicit any firm, person or company who is or was a customer of the Company and with whom the Employee had dealings while employed with the Company; and will not
  2. own, manage, operate, consult, lend money to, or be an employee in a business substantially similar to or competitive with the Company in the Calgary area.

In his position, Mr. Jones completed not only eye exams but also acted as a sales person for prescription glasses. Further, Mr. Jones also helped out, in a limited capacity, with customer service by answering customer questions and booking appointments over the phone when the receptionist was unavailable. While Mr. Jones enjoyed his job, he always had an entrepreneurial personality. As a result, Mr. Jones resigned in 2017 and opened his own clinic a couple of months later at a location within Calgary.

Thereafter, 10 out of 150 of Mr. Jones’ patients from Doctors X followed him to his new clinic. Mr. Jones solicited 9 of them while only 1 left wholly out of their own volition. Because Doctors X is unhappy about the loss of business, it sues Mr. Jones for breach of the above non-solicitation and non-competition clauses. The question in Mr. Jones’ mind is now as follows: Are the restrictive covenants enforceable?

The non-solicitation clause is likely unenforceable

Luckily for Mr. Jones, courts only uphold non-solicitation clauses if two conditions are met. First, the clause must be clear and unambiguous. As the Supreme Court of Canada stated2:

An ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity.

Second, even if the clause is clear and unambiguous, it must also be reasonable in both the scope of the activities restricted as well as its temporal (time) limitation.

Fortunately for Mr. Jones, the clause in the above scenario is highly likely to be unenforceable because it is both ambiguous and overly broad.

In respect of ambiguity, the word “dealings” is unclear. It could include clients who Mr. Jones actually completed an exam on but it also could include clients who Mr. Jones spoke with only briefly over the phone and would have no chance of identifying in the future. This problem is exactly the same as the situation in an Globex Foreign Exchange v Kelcher3, where the Alberta Court of Appeal held that the word “dealings” was ambiguous to the point where the employee wouldn’t know how to comply with it. The result was that it was unenforceable. 

Further, the clause is overly broad in respect of the scope of activities it restricts because it stops Mr. Jones from soliciting clients that used to be, but are no longer, clients of Doctors X. See for example Evans v. Sports Corp4, where the Court stated the following: “… the clause can also be read as prohibiting solicitation of past clients of TSC. It is difficult to understand why it would be reasonable to restrain Evans from soliciting past clients which have already left the company.”

The non-competition clause is likely unenforceable

Like the non-solicitation clause, a non-competition clause also must be clear and unambiguous. However, even if it is, a court will only uphold it where:

  1. The employer has some proprietary interest entitled to protection.  For example, the employer’s trade connection with its clients could qualify;
  2. The clause is reasonable as between the parties having regard to the scope of activities restricted; the temporal (time) limitation; and the geographic area covered; and
  3. The clause is not against competition generally.

The clause in the above scenario is highly likely to be unenforceable both because it is ambiguous and because it fails, at least, the third requirement outlined above.

In respect of ambiguity, the clause restricts Mr. Jones from competing in the “Calgary area”. The underlined word is unclear: would this include Airdrie? Okotoks? Or, just Calgary’s city limits? Because Mr. Jones wouldn’t know how to comply with the clause it is unenforceable.

In respect of the third requirement, the court will ask itself the following question: does an employer need a non-competition clause to protect its proprietary interest (ie. its clients) or would a non-solicitation do the job? If a non-solicitation would suffice, the non-competition clause will be unenforceable. This will generally be the case other than in exceptional circumstances where the employee became a personification of the employer.

For example, in Lyons v. Multari5, Joseph Multari, an oral surgeon signed a non-competition clause with his employer, Bernard Lyons, upon starting work. However, after about 17 months, Dr. Multari resigned and went to work part time in a nearby dental office.  Thereafter, Dr. Lyons brought an action against him for breach of contract. Ultimately, the Court held that the non-competition clause was unenforceable because a non-solicitation would have been enough to protect Dr. Lyons’ interests. The Court specifically stated the following:

[Dr. Multari]… did not manage the practice; Dr. Lyons did. Dr. Multari was a junior associate dentist who worked for Dr. Lyons for less than two years… Dr. Multari dealt with some patients. However, the records of the practice during the relevant two years establish that in every respect, including billings, Dr. Lyons was the dominant figure. Dr. Multari simply handled the patients who were referred to him. On a monthly basis, he received a printout of his patients and the dentists who referred them. However, he was not the front man, or principal contact person, for communication with those dentists. That role, which had been played for almost a quarter century by Dr. Lyons, continued to be played by Dr. Lyons after Dr. Multari's arrival.

In Friesen v. McKague, supra, Scott C.J.M. stated that a non-competition clause should be enforced "where the nature of the employment will likely cause customers to perceive an individual employee as the personification of the company or employer" (at p. 346). In my view, that description does not fit Dr. Multari as he embarked upon his career as an oral surgeon. In the eyes of referring dentists, the personification of Dr. Lyons' practice was the same person it had been for almost 25 years -- Dr. Lyons.6

Like the above case, it is likely that a non-solicitation clause would have been enough to protect Company X’s proprietary interests from Mr. Jones, thus making the clause unenforceable. Specifically, while the facts in the example are somewhat limited, we know that Mr. Jones only worked for Doctors X for two years. Him becoming the personification of the company in that amount of time is unlikely. Further, and more telling, is the fact that only 10 (all but one being solicited) of Mr. Jones’ clients from Doctors X moved with him to his new location. If Mr. Jones had been Company X’s personification, a much higher percentage of his clients would have moved with him.7

The practical reality of non-competition and non-solicitation clauses

While non-competition and non-solicitation clauses are often unenforceable, employees still need to think twice when agreeing to these clauses (the non-competition in particular) for a couple of reasons: (i) an employee may have no choice to breach a valid non-compete in the event of termination in order to earn a living; and (ii) whenever there is a non-competition or non-solicitation clause, whether enforceable or not, it may nevertheless result in litigation.

Process

If your employer, or potential employer, has recently presented you with a contract that includes either a non-solicitation or non-competition clause, booking a consultation with one of our lawyers will help you to determine what the clause prohibits you from doing post-employment. This will enable you to determine whether the risks of agreeing to such a clause outweigh the potential opportunities.

Further, if you have recently been terminated, or have resigned, and are subject to either of these clauses, booking a consultation with one of our lawyers will help you determine your rights and options according to the law.

In the event that your employer has brought an action against you to enforce these provisions, our lawyers have the knowledge and skills to aggressively advocate on your behalf, both in respect of a possible negotiated settlement, and if not, in court.

1 Globex Foreign Exchange Corp v Kelcher, 2011 ABCA 240.

2 KRG Insurance Brokers (Western) Inc. v. Shafron 2009 SCC 6 at para 27.

3 2011 ABCA 240 at para 16.

4 2013 ABCA 14 at para 28.

5 [2004] OJ No 558.

6 [2004] OJ No 558 at paras 43 & 44.

7 See also Globex Foreign Exchange Corp v. Kelcher 2005 ABCA 419 at para 40.

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