It is common for employers with sales employees to insist on non-competition, non-solicitation and confidentiality clauses in their standard employment contracts (referred to generally as "restrictive covenants"). However, due to ever evolving case law on the topic or poor drafting, non-competition clauses are notoriously difficult to enforce, with non-solicitation and confidentiality clauses in close second.
In a recent decision, Stress-Crete Limited v. Harriman, 2019 ONSC 2773, the Ontario Superior Court provides some guidance on drafting such clauses and what courts will consider to be reasonable terms or not.
What Happened
The employee was hired as a Regional Sales Manager by Stress-Crete, a company engaged in manufacturing and supplying commercial, municipal, utility and industrial lighting. He was responsible for a large sales territory spanning parts of the United States. In September 2014, he was promoted to Sales Manager of U.S. Northeast and Canada.
The employee was subject to a non-competition, non-solicitation and confidentiality agreement with Stress-Crete, given his knowledge and access to customer lists, pricing, etc.
In 2018, the employee resigned from his employment with Stress-Crete to work for a direct competitor, Cyclone, as a Sales Representative.
Stress-Crete sought injunctive relief to enforce the employee's restrictive covenants, alleging that the employee breached his non-competition clause by working for a direct competitor and non-solicitation and confidentiality clauses by retaining confidential client information after his resignation. Stress-Crete argued that its business would be irreparably harmed if an injunction preventing the employee from working for Cyclone and using the confidential client information was not granted.
The employee argued that the restrictive covenants were vague, overly broad, unreasonable, and contrary to public interest. He argued that to grant the injunction would cause irreparable harm to him, given that he was the primary breadwinner for his family.
Decision
The Court granted the injunction in part: it found the non-solicitation and confidentiality clauses to be enforceable, but the non-competition clause to be unenforceable.
Because this issue was heard as an injunction, as opposed to a regular civil trial matter, Stress-Crete was required to show:
- there was a serious issue to be tried;
- that it would suffer irreparable harm if the injunction was not granted; and
- that the balance of convenience favours granting the injunction (i.e. that it would suffer greater harm if the injunction was refused than the employee would if the injunction was granted).
The court found:
- there was a serious issue to be tried, accepting the evidence that the employee clearly and objectively intended to solicit business away from Stress-Crete to Cyclone;
- that Stress-Crete would suffer irreparable harm given the unique nature of Stress-Crete's business (notably the long-term contracts and finite amount of customers); and
- that the balance of convenience favoured Stress-Crete, finding that it would be "inequitable" to permit the employee who "voluntarily signed and potentially benefited" from the breach of the non-solicitation and confidentially clauses to claim he would be "more hurt" by the granting of the injunction.
Ultimately, the court found the non-competition clause unenforceable due to ambiguity: it was not clear if the radius applied to each facility Stress-Crete was operating in North America.
Fortunately for Stress-Crete, the non-solicitation was enforced. The non-solicitation was reasonable and clear as to (i) the length of time (24 months), (ii) the activity (the sale of street lights), and (iii) the geography (750 miles from the employer’s head office in Toronto). Interestingly, the court found that the broader restriction to any customer of the company during the employee's tenure was reasonable. The employee had argued that he could not have known all of the company's customers in light of his particular territory, but the evidence showed that he had actual knowledge of the company's clients in North America.
The confidentiality covenant was also enforced, even if it did not have a precise definition of "confidential information". The employee had created a separate file on his home computer that consisted of information and documentation owned by Stress-Crete, and he was ordered not to use or disclose such information and to return it to the company.
Key Takeaways
The court reminded the parties that restrictive covenants in employment agreements are unenforceable unless the employer can show they are reasonable.
Employers should not overreach when drafting restrictive covenants. It is preferable to be narrower than to risk compromising the covenants. Employers should seriously consider reasonable temporal, activity, and geographical restrictions to meet the legitimate needs of the business and be prepared to justify each one.
