A. Employees have 5 main arguments around onerous employment terms.
Given Ontario courts’ default position against enforcement of these covenants in restraint of free/natural trade, employer bears onus of proving vulnerable/proprietary interest justifying exception enforcement of employee’s non-compete/non-solicitation terms.
Even then, employee can still argue these clauses (a) over-reaching/unreasonable, (b) vague/ambiguous, (c) not fully understood/appreciated upon signing, (d) signed under duress only after having already forfeited prior/competing employment opportunities at the time, and/or otherwise (e) outgrown/outdated given long time passage and employment changes since original signing.
While not without risks and potential employer application for court injunction and/or lawsuits against both employee and their new employer – employee nevertheless holds strong arguments against enforcement of anti-competitive restraints based on personal freedoms of association and free-market right to earn a living in their field.
Sunday, December 31, 2006
Q. Are outdated employment terms enforceable in court?
A. Original contract provisions can be outgrown.
According to the Ontario Court of Appeal in Wallace v. Toronto-Dominion Bank, [1983] O.J. No. 2969 (Ont. C.A.):
Certainly, there are readily imaginable cases where an employee's level of responsibility and corresponding status has escalated so significantly during his period of employment that it can be concluded that the substratum of an employment contract entered into at the time of his original hiring has disappeared or it can be implied that that contract could not have been intended to apply to the position in the company ultimately occupied by him.
In many cases, arguable that employee outgrew original contract terms over past years of advancing employment, raises, promotions, responsibility, and changing circumstances overall.
According to the Ontario Court of Appeal in Wallace v. Toronto-Dominion Bank, [1983] O.J. No. 2969 (Ont. C.A.):
Certainly, there are readily imaginable cases where an employee's level of responsibility and corresponding status has escalated so significantly during his period of employment that it can be concluded that the substratum of an employment contract entered into at the time of his original hiring has disappeared or it can be implied that that contract could not have been intended to apply to the position in the company ultimately occupied by him.
In many cases, arguable that employee outgrew original contract terms over past years of advancing employment, raises, promotions, responsibility, and changing circumstances overall.
Q. Do employment terms need to be fair?
A. Employment terms unenforceable without equal bargaining power of negotiation.
According to Sheridan’s Fraud in Equity (London, 1957), at p. 73:
The cases in which equity has relieved from a bargain where there is no misrepresentation, no fiduciary relation, no mistake or undue influence or duress, and no question of a party being an expectant heir or the like, are difficult to classify. Probably the only safe generalisation is that the court considers each case on its individual merits to see whether one party has taken advantage of the weakness or necessity of the other to an extent which strikes the judge as being a greater advantage than the current morality of the ordinary run of business men allows.
In many cases, arguable that employer exploited unequal bargaining power in forcing unconscionable restraint of trade provisions against employee’s free bargaining will.
According to Sheridan’s Fraud in Equity (London, 1957), at p. 73:
The cases in which equity has relieved from a bargain where there is no misrepresentation, no fiduciary relation, no mistake or undue influence or duress, and no question of a party being an expectant heir or the like, are difficult to classify. Probably the only safe generalisation is that the court considers each case on its individual merits to see whether one party has taken advantage of the weakness or necessity of the other to an extent which strikes the judge as being a greater advantage than the current morality of the ordinary run of business men allows.
In many cases, arguable that employer exploited unequal bargaining power in forcing unconscionable restraint of trade provisions against employee’s free bargaining will.
Q. What level of understanding required for enforcement of onerous employment terms?
A. Enforceable contract provisions require fair understanding and appreciation at signing.
Did your employee really understand/appreciate contract provisions signed so many years ago?
In Cantol Ltd. v. Brodi Chemicals Ltd. et al. (1978), 23 O.R. (2d) 36, 94 D.L.R. (3d) 265, 42 C.P.R. (2d) 111, restraint of trade provisions were not enforced where the employee did not have much opportunity to not sign the contract, or if he did sign he did not read it or was not given the opportunity for independent legal advice.
In a similar case of Cradle Pictures Canada Ltd. v. Penner et al. (No. 2) (1977), 34 C.P.R. (2d) 34, restraint of trade provisions were not enforced where the defendant had not read over the employment contract, nor received reasonable opportunity for independent legal advice.
In many cases, employee may not have fully understood/appreciated legal impact of non-compete/non-solicit provisions, signed without prior/independent legal advice, signed under duress/only after having already forfeited competing employment opportunities, etc..
Did your employee really understand/appreciate contract provisions signed so many years ago?
In Cantol Ltd. v. Brodi Chemicals Ltd. et al. (1978), 23 O.R. (2d) 36, 94 D.L.R. (3d) 265, 42 C.P.R. (2d) 111, restraint of trade provisions were not enforced where the employee did not have much opportunity to not sign the contract, or if he did sign he did not read it or was not given the opportunity for independent legal advice.
In a similar case of Cradle Pictures Canada Ltd. v. Penner et al. (No. 2) (1977), 34 C.P.R. (2d) 34, restraint of trade provisions were not enforced where the defendant had not read over the employment contract, nor received reasonable opportunity for independent legal advice.
In many cases, employee may not have fully understood/appreciated legal impact of non-compete/non-solicit provisions, signed without prior/independent legal advice, signed under duress/only after having already forfeited competing employment opportunities, etc..
Q. When are employment terms too vague for enforcement?
A. Unrestricted employment covenants are often unenforceable at law.
In Drake International Inc. v. Tennenbaum (1986), 10 C.P.R. 119 (Ont. H.C.J.), Callaghan A.C.J.H.C. held a covenant to be unenforceable on the basis that it was vague as to time and silent as to geographical area.
Similarly, many non-compete provisions are too vague for enforcement by Ontario courts, unnecessarily broad/open-ended, unrestricted by geographic area and/or particular field, and therefore overreaching in so far as potentially including entire public at large.
In Drake International Inc. v. Tennenbaum (1986), 10 C.P.R. 119 (Ont. H.C.J.), Callaghan A.C.J.H.C. held a covenant to be unenforceable on the basis that it was vague as to time and silent as to geographical area.
Similarly, many non-compete provisions are too vague for enforcement by Ontario courts, unnecessarily broad/open-ended, unrestricted by geographic area and/or particular field, and therefore overreaching in so far as potentially including entire public at large.
Q. When are restraint of trade provisions too onerous for enforcement?
A. Overreaching employment terms will not stand in court.
In Mercury Marine Ltd. v. Dillon (1986), 56 O.R. (2d) 266, 30 D.L.R. (4th) 627, Henry J., on an application for an interlocutory injunction, considered the covenant given by a distributor of outboard motors that, for a period of 18 months, he would not be employed or render services to any third party who was a competitor of the plaintiff, or any third party where trade secret information might be useful. Henry J. concluded that the covenant was not reasonable because there was no territorial limit. On the issue of balance of convenience, he held against the plaintiff since the defendant's livelihood was at stake.
In Crain-Drummond Inc. v. Hamel, Charron J. considered a restrictive covenant given by a sales representative in which he agreed that for a period of one year after departure, he would not engage in any business carried on by the plaintiff in the territories in which he had been assigned as sales representative and would not solicit customers of the plaintiff in those territories. Charron J. concluded that, while the plaintiff arguably had a proprietary interest entitled to protection, she thought it unlikely that a court would enforce the covenants in the broad fashion in which they were drawn. She dismissed the application for an interlocutory injunction.
In Jet Print Inc., Nordheimer J. denied an interlocutory injunction against printing and sales employees who had covenanted, for a period of two years, to not solicit or perform services for any client for two years. "Client" was defined as those currently existing, those who existed for the year prior to termination and any prospective clients to whom a presentation had been made in the past two years. Nordheimer J. concluded that the covenant would likely be found to be unreasonable because of the length of time given the nature of employment of the defendants and the broad list of "clients".
In Mercury Marine Ltd. v. Dillon (1986), 56 O.R. (2d) 266, 30 D.L.R. (4th) 627, Henry J., on an application for an interlocutory injunction, considered the covenant given by a distributor of outboard motors that, for a period of 18 months, he would not be employed or render services to any third party who was a competitor of the plaintiff, or any third party where trade secret information might be useful. Henry J. concluded that the covenant was not reasonable because there was no territorial limit. On the issue of balance of convenience, he held against the plaintiff since the defendant's livelihood was at stake.
In Crain-Drummond Inc. v. Hamel, Charron J. considered a restrictive covenant given by a sales representative in which he agreed that for a period of one year after departure, he would not engage in any business carried on by the plaintiff in the territories in which he had been assigned as sales representative and would not solicit customers of the plaintiff in those territories. Charron J. concluded that, while the plaintiff arguably had a proprietary interest entitled to protection, she thought it unlikely that a court would enforce the covenants in the broad fashion in which they were drawn. She dismissed the application for an interlocutory injunction.
In Jet Print Inc., Nordheimer J. denied an interlocutory injunction against printing and sales employees who had covenanted, for a period of two years, to not solicit or perform services for any client for two years. "Client" was defined as those currently existing, those who existed for the year prior to termination and any prospective clients to whom a presentation had been made in the past two years. Nordheimer J. concluded that the covenant would likely be found to be unreasonable because of the length of time given the nature of employment of the defendants and the broad list of "clients".
Q. What legal interest does employer maintain in employee's personal skills?
A. No proprietary interest in employee’s personal skills.
According to Cheshire & Fifoot, Law of Contract (7th Ed.) Part IV. Ch.VI at p.347:
It has already been seen that a restraint imposed upon a servant is never reasonable, unless there is some proprietary interest owned by the master which requires protection. The only matters in respect to which he can be said to possess such an interest are his trade secrets, if any, and his business connection.
According to Ian Martin Associates Ltd. v. Reale, [1971] O.J. No. 308 (Ont. High Ct.):
In addition, the defendant was a young junior salesman among numerous salesmen employed by the plaintiff. His contacts were thus distinctly limited and there was no evidence that he had acquired any influence over the plaintiff's clients. Much stress was laid in this connection on the acquired knowledge of the precise individual to deal with among the executive personnel of any particular client. This argument seems naive to me since the factors which would bring about a business contract between a service company like the plaintiff's and a client are constantly changing. To be successful, the defendant must, in the end result, employ his own skill and personality to the fullest extent, and the plaintiff has no proprietary interest in these characteristics.There are numerous cases where business connection with customers and clients has been protected but when one examines them, one finds that in virtually every case the employee has been the sole representative of the employer in an area distant from the employer's principal place of business and, hence, to all intents and purposes in the eyes of the public and the employer's customers, is the person providing the service or goods.
In Drake International Ltd. v. Miller et al., 9 O.R. (3d) 652, the plaintiff company carried on an employment agency business and sought to restrain a former employee from competing with it and relied upon the non-competition covenant contained in its contract of employment with the defendant Miller. Mr. Justice Grange concluded that the restrictive covenant ought not to be enforced and that it was not necessary for the protection of a legitimate interest of Drake International. Page 660 states:
As I see the problem, we must examine carefully the facts of the business to determine whether the nature of the employment produces the conditions precedent in the validity of a covenant in restraint of competition by the employee and whether a Court would deem such a covenant therefore reasonable in the circumstances. This examination is very difficult upon an application in Weekly Court where normally only affidavit evidence is offered. After giving the matter the most careful consideration, and not without a great deal of doubt, I have reached the conclusion that the nature of the business with which we are here concerned is closer to the estate agent business depicted in Bowler v. Lovegrove, supra, than it is to the catering business in the Jiffy Foods case. I say that for the following reasons:
a) I can find no evidence of any real "trade secrets" in the operation of the business;
b) there is the widest latitude in the trade in the obtaining of custom. The agents canvass businesses regularly without restraint; they search out the advertisements placed by businesses for employees; they realize that they are in a competitive market where the only criterion for further employment is results;
c) there is no physical or geographic benefit to the solicitation of business. Any agency is restricted only by the cost of the long distance telephone or on rare occasions by the inconvenience of personal interviews at some distance from their own location;
d) every agency realizes and appreciates that the businesses with which they deal and the job applicants who seek the positions with those businesses are perfectly free to, and very often do, consult other agencies simultaneously.
It follows that I have concluded that the plaintiff, upon whom the burden lies, has not satisfied me that the covenant it exacted from the defendant was necessary for the protection of a legitimate interest.
In Gerrard v. Century 21 Armour Real Estate Inc., Feldman J. considered the application by the plaintiff for an interlocutory injunction to compel its former sales manager to comply with her covenant that, for one year following termination, she would not provide the same services for a competitor within a proscribed area, would not solicit or encourage other employees to leave, and would not agree to a business association with any individual who was employed by the plaintiff. Feldman J. held that the covenants were likely to be found to be unreasonable based on the broad definition of client and the apparent objective of prohibiting competition generally rather than as protection of the plaintiff's interest in its customers.
In Robbins & Myers Canada Ltd. v. Washington, [1993] O.J. No. 1264, Belleghem J. refused to grant an interlocutory injunction. The employed sales representative had covenanted that, for a period of two years after termination of employment, he would not engage in or represent, directly or indirectly anybody engaged in the sale or solicitation of products which were similar to or competitive with any of the products covered at the time the covenant was given. The court concluded that the covenant was unreasonable because the time frame would have eliminated the defendant as effective competition.
In many cases, employee’s personal, sales, and professional skills are their own and don’t stem from nor dependent on their employer. Therefore, employer has no vulnerable/proprietary interest in need of protection so as to justify restrictive non-compete/non-solicitation terms.
According to Cheshire & Fifoot, Law of Contract (7th Ed.) Part IV. Ch.VI at p.347:
It has already been seen that a restraint imposed upon a servant is never reasonable, unless there is some proprietary interest owned by the master which requires protection. The only matters in respect to which he can be said to possess such an interest are his trade secrets, if any, and his business connection.
According to Ian Martin Associates Ltd. v. Reale, [1971] O.J. No. 308 (Ont. High Ct.):
In addition, the defendant was a young junior salesman among numerous salesmen employed by the plaintiff. His contacts were thus distinctly limited and there was no evidence that he had acquired any influence over the plaintiff's clients. Much stress was laid in this connection on the acquired knowledge of the precise individual to deal with among the executive personnel of any particular client. This argument seems naive to me since the factors which would bring about a business contract between a service company like the plaintiff's and a client are constantly changing. To be successful, the defendant must, in the end result, employ his own skill and personality to the fullest extent, and the plaintiff has no proprietary interest in these characteristics.There are numerous cases where business connection with customers and clients has been protected but when one examines them, one finds that in virtually every case the employee has been the sole representative of the employer in an area distant from the employer's principal place of business and, hence, to all intents and purposes in the eyes of the public and the employer's customers, is the person providing the service or goods.
In Drake International Ltd. v. Miller et al., 9 O.R. (3d) 652, the plaintiff company carried on an employment agency business and sought to restrain a former employee from competing with it and relied upon the non-competition covenant contained in its contract of employment with the defendant Miller. Mr. Justice Grange concluded that the restrictive covenant ought not to be enforced and that it was not necessary for the protection of a legitimate interest of Drake International. Page 660 states:
As I see the problem, we must examine carefully the facts of the business to determine whether the nature of the employment produces the conditions precedent in the validity of a covenant in restraint of competition by the employee and whether a Court would deem such a covenant therefore reasonable in the circumstances. This examination is very difficult upon an application in Weekly Court where normally only affidavit evidence is offered. After giving the matter the most careful consideration, and not without a great deal of doubt, I have reached the conclusion that the nature of the business with which we are here concerned is closer to the estate agent business depicted in Bowler v. Lovegrove, supra, than it is to the catering business in the Jiffy Foods case. I say that for the following reasons:
a) I can find no evidence of any real "trade secrets" in the operation of the business;
b) there is the widest latitude in the trade in the obtaining of custom. The agents canvass businesses regularly without restraint; they search out the advertisements placed by businesses for employees; they realize that they are in a competitive market where the only criterion for further employment is results;
c) there is no physical or geographic benefit to the solicitation of business. Any agency is restricted only by the cost of the long distance telephone or on rare occasions by the inconvenience of personal interviews at some distance from their own location;
d) every agency realizes and appreciates that the businesses with which they deal and the job applicants who seek the positions with those businesses are perfectly free to, and very often do, consult other agencies simultaneously.
It follows that I have concluded that the plaintiff, upon whom the burden lies, has not satisfied me that the covenant it exacted from the defendant was necessary for the protection of a legitimate interest.
In Gerrard v. Century 21 Armour Real Estate Inc., Feldman J. considered the application by the plaintiff for an interlocutory injunction to compel its former sales manager to comply with her covenant that, for one year following termination, she would not provide the same services for a competitor within a proscribed area, would not solicit or encourage other employees to leave, and would not agree to a business association with any individual who was employed by the plaintiff. Feldman J. held that the covenants were likely to be found to be unreasonable based on the broad definition of client and the apparent objective of prohibiting competition generally rather than as protection of the plaintiff's interest in its customers.
In Robbins & Myers Canada Ltd. v. Washington, [1993] O.J. No. 1264, Belleghem J. refused to grant an interlocutory injunction. The employed sales representative had covenanted that, for a period of two years after termination of employment, he would not engage in or represent, directly or indirectly anybody engaged in the sale or solicitation of products which were similar to or competitive with any of the products covered at the time the covenant was given. The court concluded that the covenant was unreasonable because the time frame would have eliminated the defendant as effective competition.
In many cases, employee’s personal, sales, and professional skills are their own and don’t stem from nor dependent on their employer. Therefore, employer has no vulnerable/proprietary interest in need of protection so as to justify restrictive non-compete/non-solicitation terms.
Saturday, December 30, 2006
Q. What respect do Ontario courts have for restraint of trade contracts?
A. Public policy sides against non-compete/non-solicit enforcement.
As a starting point, public policy sides against enforcing restraint of trade provisions. According to Nordenfelt v. Maxim Nordenfelt Guns Ammunition Co., [1894] A.C. 535, [1891-4] All E.R. Rep. 1, at page 565:
The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable -- reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
More recently, the Supreme Court of Canada addressed very limited conditions under which non-compete/non-solicit provisions are indeed enforced on a case-by-case/exceptional basis. According to Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, at pp. 923-24:
A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. As in many of the cases which come before the courts, competing demands must be weighed. There is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants. On the other hand, the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power. In assessing the opposing interests the word one finds repeated throughout the cases is the word "reasonable". The test of reasonableness can be applied, however, only in the peculiar circumstances of the particular case. Circumstances are of infinite variety. Other cases may help in enunciating broad general principles but are otherwise of little assistance.
It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment, of the clause, the agreement within which it is found and all of the surrounding circumstances.
Meanwhile, according to Computer Centre Personnel Ltd. (c.o.b. Computer Centre) v. Z [1976] O.J. No. 810 (Ont. High Ct.):
The covenant is in restraint of trade and therefore is prima facie unenforceable. However, if the plaintiff has interests that can or should receive protection by an injunction, then the covenant will be enforced if it is (a) reasonable and (b) consistent with the interests of the public.
Finally, Shaw Laboratories Ltd. v. Rilett, [1984] O.J. No. 1138 confirms employer’s onus in passing four-step test for enforcement of non-compete/non-solicit provisions in issue:
In deciding on the validity of a covenant in restraint of trade it is useful to follow the four stage inquiry referred to by Blair, J. in Tank Lining Corp. v. Dunlop Industrial Ltd., 40 O.R. (2d) 219 at 223. The first question is whether or not the covenant was in restraint of trade. There is no doubt here that the covenant not to compete within the City of London for two years was in restraint of trade. The second question is whether the restraining clause is against public policy and is therefore prima facie void. The third question is, can the restraint be justified as reasonable in the interests of the parties. The fourth question is, can the restraint also be justified as reasonable with reference to the interests of the public.…The burden of proof is on the plaintiff to show on a balance of probabilities that the restraint is justified as reasonable in the interest of the parties.
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