No NCA Where Non-Solicitation Will Fit the Bill

The Ontario Court of Appeal noted in Lyons v Multari that, generally speaking, a court will not enforce a non-competition clause if a non-solicitation clause would adequately protect an employer’s business. It is an exceptional case which will allow for the employer to be protected by a non-competition covenant. ¹

The Court of Appeal noted 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”, as was the finding in Elsley v J. G. Collins, a 1978 decision of the Supreme Court of Canada.

In Elsley in upholding the non-compete term, the Court noted that “it is difficult to envisage a factual situation in which an employee would be in a better position than that of Elsley in the present case, to obtain ‘personal knowledge of and influence over the customers of this employer’”. (at page 927)

Non-solicitation clauses and not conduct business with past client

An agreement which restricts the departed employee from not only soliciting but also from conducting business with past clients is not reviewed as a non-solicit covenant but rather as a restrictive covenant. The substantive difference is that the employee is forbidden from accepting accept business from past clients, even when such business was not solicited by the employee but rather the past employee was contacted at the initiative of the past client.

Such was the conclusion in 2008 of the Ontario Court of Appeal in H.L. Staebler Company v Allan et al, (leave to appeal refused) reversing the trial judge on this issue, who at trial had found this clause to be a “hybrid” and in favour of the employer.

This was a case involving a large insurance brokerage business seeking to restrain two salespersons selling commercial insurance. The Court of Appeal examined the usual tests applied to a determine the enforceability of the clause as a restrictive covenant, including (1) the temporal and spatial limits which in this case were 2 years without a geographical limitation, and (2) the nature of the alleged competitive business which was any business with past clients.

The Court of Appeal reversed the trial decision and found the covenant unenforceable in the application of this test.

As noted in Lyons v Multari, above, as a general rule non-solicitation clauses will be permissible, subject to the comments below.

A 2023 decision of the Alberta King’s Bench considered a non-solicitation clause which had been agreed to between the parties. ²

The company’s business model allowed for the seconding of engineers to third party contractors. One of the plaintiff’s most significant clients was a company known as CNRL. Mai was aware that his employer relied upon him to deliver on its contract with CNRL. He requested a further $10,000  of annual salary due to this awareness.

10 months into the employment relationship, Mai resigned his employment. His notice of resignation was given December 17 and was effective January 3. Mai had new employment waiting for him as of January 6. Mai requested that he be allowed to work for CNRL through a competitive agency. His new position was to perform the same tasks as had performed with the plaintiff. CNRL then ceased its working relationship with the plaintiff.

The non-solicitation clause prevented Mai from contacting, directly or indirectly, or soliciting any customer of Catch with whom he did business in the 12 month period prior to the last date of employment. The clause was effective during his employment and for 12 months following his last date.

The trial judge applied the unusual analysis, namely, that all such restrictive covenants are presumed invalid. The employer must then show that this was reasonable in the context of this case.

The court concluded that the clause was enforceable, based on this factors:

The nature of Catch’s business required a way to protect the partnership’s client relationships from employees who were directly engaged with those clients.

The non-solicitation clause was narrowly focused to protect only Catch’s legitimate business interests. It did not otherwise interfere with the right of an employee like Mr. Mai to utilize his or her knowledge, skills and expertise in the job market. In Mr. Mai’s case, the clause was specific to clients with whom he had worked and was restricted to the 12 months following the termination of his employment.

Mai’s ability to go into the job market and find work was not unreasonably restricted.

The activity proscribed by the non-solicitation cause was clear and unambiguous.

There was no power imbalance in the negotiation of the terms of Mr. Mai’s employment with Catch and indeed he had negotiated an additional $10,000 in salary at the time he was hired.

The claim succeeded. The damage sum was determined to be $112,000.

The clause may have been drafted to be less restrictive to support Mai’s position. Often the non-solicitation clause prevents only the active solicitation of clients in this context. This would then allow the employee to be recruited by the CNRL equivalent. This clause, as drafted, precluded Mai from even accepting such a position which adds a further dimension to the context.

Often the person in Mai’s position may be bringing with him a previously existing business relationship. This was not the case in this instance. A careful drafting will allow the employee the right to retain that the relationship post termination. The solution in this circumstance may be to required a fixed period of working notice and perhaps a pre-determined genuine assessment of damages upon its breach.

Non-Solicit – Any Client or Prospect

Clauses which purport to protect solicitation from “any client or prospect” have been found to be overly broad and unenforceable. Such was the conclusion in the 2006 Ontario Court of Appeal decision in Cameron v IT/NET. Had the agreement limited the covenant to the client with whom the employee was in contact, and had it imposed a spatial time period seen as reasonable, it would have been enforced. The Court stated, on the issue of the protection to be afforded to the employer to its current clients:

  As Aiken J. said in Berthiaume, supra, in the circumstances of this case, a restrictive covenant would be entirely reasonable if it simply prohibited a contractor in Cameron’s position from assisting a competitor to obtain a contract with a client of IT/NET to fill the very position he had occupied with that client because of his contract with IT/NET. By allowing the competitor to put in a bid including his name, the contractor would be taking unfair advantage of the links he had been permitted to develop with the client because of the relationship IT/NET had nurtured with that client.

The clause in question was overly broad as the degree of protection was all clients and prospects of the company, not simply those with whom the employee was in contact:

However, clause 4 goes considerably beyond what is needed to protect this proprietary interest. The language of clause 4.2 prevents the contractor from soliciting business from any IT/NET client or prospect, not just from the client where the contractor has been placed. This prohibition applies whether or not the contractor knows that the target of his solicitation is an IT/NET client or prospect or whether he has any prior relationship with that client or prospect due to his work for IT/NET. ³

A decision to the same import is Valley First Financial v Trach, of the B.C. Court of Appeal. The non-solicitation covenant was seen as overly broad as it applied to areas of business with which the past employee had no connection. The Court of Appeal upheld the trial judgment:

The trial judge concluded that Valley First had a proprietary interest in the clients whose business the appellants solicited and that the temporal and spatial restrictions were not overly broad.  However, he found that the covenants were unreasonable between the parties and were against the public interest.  He said:

[73] Trach was only hired in and only carried on business in the group benefits department.  The plaintiff’s business covered all aspects of insurance as is demonstrated in the preamble to their contract of November 3, 1995.  At no time, did Trach or any of the other defendants sell life insurance, general insurance, or financial services.  Clause 4.02(a) proscribes competition in the areas of “general insurance” and “financial services”, and clause 4.02(b) proscribes solicitation of clients in the same broad categories.  Clauses 4.02(a) and (b) are drafted so broadly that they cannot be considered reasonable as between the parties and with reference to the public interest.

The Alberta Court of Appeal considered a similar issue in Global Foreign Exchange v Kelcher, and set aside the non-solicit term and reversed the trial judge in the process. The Court of Appeal found the clause ambiguous and overly broad. The clause in question read as follows:

2. That for a period of twelve (12) months from the date of termination of the Employee’s employment with Globex, for whatever reason, he/she will not, for any reason directly of (sic) indirectly as principal, agent, owner, partner, employee, consultant, advisor, shareholder, director or officer or otherwise howsoever, own, operate, be engaged in or connected with or interested in, the operation of or in any way guarantee the debts or obligations of, or have any financial interest in or advance, lend money to, or permit his/her name or any part thereof to be used, or employed in any operation whether a proprietorship, partnership, joint venture, corporation, or other entity, or otherwise carry on, engage in, solicit customers in any manner whosoever, in any business or activity for any client of Globex with which he/she had dealings on behalf of Globex at any time within the twelve (12) months preceding the date upon which the Employee left the employment of Globex.

The term “dealings” was found to be ambiguous, as was the prohibition against soliciting “clients….for Globex”. Also the wording of the covenant should not have related to all aspects of the company’s business. It should have been limited to the aspect of the business in which the employee worked. Again an overly broad and in this case, ambiguous, covenant was set aside.

A similar conclusion was reached by the Ontario Court of Appeal in setting aside the non-solicitation clause which arose from the sale of a business in Martin v ConCreate as the terms of the covenant were found to be overly broad:

[70]      My difficulty arises with respect to s. 2.2(a), the non-solicitation clause. That clause, which is reproduced in Appendix A, was not addressed by the application judge in his reasons.

[71]      The restrictions in s. 2.2(a) extend to communicating or dealing with any persons who were customers, dealers, agents, or distributors of SDF or Target LP, at the time of the sale transaction or afterwards. Further, the section is drafted in relation to “any products or services that compete with products or services offered by [SDF or Target LP]”, whether or not offered, or planned to be offered, by ConCreate or SDF at the time at the time of the sale transaction. Moreover, the prohibitions are not limited by reference to the “Concreate Business” or “SDF Business”. The restriction is effectively broader than the general non-competition provision and goes far beyond what was properly required to adequately protect the goodwill of the purchased business.

[72]       Section 2.2(a)’s prohibitions also extend to persons who did not start conducting business with the respondents, and products and services the respondents did not offer, until after Martin ceased to be a director of Target LP’s and  TriWest LP’s respective general partners and SDF, and after MartinCo disposed of the Units. The restrictions go beyond what is reasonable to protect the respondents’ interests.

[73]      Martin would have no basis to know if persons unassociated with the respondents at the time he ceased to have any involvement with SDF and Target LP had since commenced business relations with them. Likewise, Martin cannot be expected to know about every new product or service the respondents offer or plan to offer. This is particularly so given that the section purports to apply to businesses not included in the definitions of “Concreate Business” and “SDF Business”.  

[74]      Given the litigation between the parties, I am not convinced that a prompt response to any queries by Martin would be forthcoming. A potential, permitted customer could be lost while waiting for a response.

Echoing the same refrain is the June 2014 decision of Myers J. in ThyssenKrupp v Amos et al in which the court again found that the non-solicitation clause was overly ambitious and unenforceable:

A valid non-solicitation clause must clearly advise the former employee which customers are off-limits to her or him. (See Mason, supra, at para. 30) The non-solicitation clause in this case, article 7.3, purports to prohibit Mr. Amos from any soliciting any “business, client, prospective client or contract of the Corporation then existing or contemplated by the Corporation within 12 months prior to the termination of Amos”. The plaintiff operates across Canada. There is no way for Mr. Amos to know what business the plaintiff was contemplating at any time in the past year anywhere in the country. Nor could he know what customers it might have considered to be a “prospective client” over the year prior to his termination anywhere in the country. Mr. Medeiros admitted as much in his cross-examination. He tried to limit the clause to clients known to Mr. Amos. That is not what the clause says however. The plaintiff presented no evidence that Mr. Amos could have any basis to know or determine the identities of those whom he was to be restricted from approaching. I do not need to get to the issue of breadth - to consider, for example, why the plaintiff needs protection across the country or why it needs protection against Mr. Amos for customers with whom he had no dealings or why it needs protection for prospective clients that the plaintiff itself might have rejected as being not worth chasing. It is sufficient to find that the provision is “not only ambiguous in its practical implementation, but effectively prohibits [Mr. Amos] from competing with the [plaintiff] for a year”. (See Mason, supra, at para. 30.) There is no issue of material fact requiring a trial as to the validity of the non-solicitation clause.