While different principles apply to parties involved in the sale of a business, the Ontario Superior Court of Justice has provided a recent summary of the limitations that apply to restrictive covenants in the employment context.
This summer Justice Gray delivered the decision in Crawford Packaging Inc. v. Dorata, 2020 ONSC 3555, where an employer was attempting to enforce certain restrictive covenants against an employee who had left to join an organization which was, to some extent, a competitor.
The Plaintiff did not vigorously pursue the non-competition provision in the Employment Agreement, and rightly so, according to the court, which confirmed that:
"Ordinarily, a non-solicitation clause provides adequate protection, and only in exceptional cases will a non-competition clause be upheld as being reasonable."
Elsley Estate v. J.G. Collins Insurance Agencies Ltd., [1978] 2 SCR. 916
Lyons v. Multari (2000), 50 OR 3(d) 526 (C.A.)
In this case the court was being asked to assess the enforceability of a non-solicitation provision which read as follows:
"During the period of the employee's employment and extending for eighteen (18) months thereafter, the employee shall not, without the prior written consent of the President of CPI either directly or indirectly, as an employee, a self-employed person, a consultant or independent contractor, solicit, attempt to serve or accept business from any person with whom the Employee dealt during the preceding eighteen (18) months of his employment, with respect to supply of goods or services that are substantially similar to those supplied by CPI."
The problem for the Plaintiff was that the non-solicitation provision was not restricted to solicitations but required that the employee not "…attempt to serve or accept business from any person with whom the employee dealt during the preceding eighteen (18) months of his employment…"
The Ontario Court of Appeal previously dealt with a similar clause in H.L. Staebler Company Limited v. Allan, 2008 ONCA 576 involving a so-called "hybrid provision". There the court held the prohibition against doing business with clients and customers tainted the entire restrictive covenant rendering the same a non-competition clause. A "non-servicing" provision is not a non-solicitation provision.
As for the court's ability to remedy the situation by engaging in either "blue pencil" or "notional" severance, the Supreme Court of Canada decision in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, stands for the proposition that:
- blue pencil severance (removing part of a contractual provision), may be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant; and
- notional severance (reading down a contractual provision so as to make it legal and enforceable), is not an appropriate mechanism to cure a defective covenant in an Employment Agreement.
The Crawford Packaging decision goes on to discuss the different thresholds applicable to injunctions involving non-competition as opposed to non-solicitation provisions and there is also an interesting analysis of quia timet injunctions (those sought prior to any actual harm occurring in anticipation of the same).
However, at its heart, this case is a reminder of the caution required when drafting restrictive covenants in Employment Agreements. A pure non-solicitation provision ought to be restricted to actual solicitations and should not include a prohibition against accepting work from or servicing clients who initiate contact.
For additional guidance on the preparation and enforcement of post-employment restrictive covenants for employees, please contact a member of Gowling WLG's Employment, Labour & Equalities Group.