Another One Bites The Dust – The Plentiful Pitfalls Of Non-Competition Clauses
Tuesday, January 22, 2019 - Filed in: Court Cases
A recent decision of the BC Supreme Court is a good reminder of the importance of extremely careful drafting of non-competition clauses.
In Campbell & Fairweather Psychology Group, 2018 BCSC 1916 ("Campbell"), Justice Baird dismissed an application for an interlocutory injunction based a non-competition clause. The plaintiffs owned a psychology clinic in Nanaimo, BC and brought an application to enforce a restrictive covenant that sought to prohibit a psychologist from practicing anywhere in "the mid-Vancouver Island region". Specifically, the non-competition clause stated:
The clinician ... will not engage in or collect any other private practice income outside of Campbell & Fairweather Psychology Group. If the clinician chooses to leave Campbell & Fairweather Psychology Group, the clinician shall not own, manage, operate, consult, be employed by or otherwise conduct clinical work in a business in the mid-Vancouver Island region, specifically from the northern-most boundary of the City of Duncan to the southern-most boundary of the City of Campbell River, and eastward to and including the City of Port Alberni, west to the Strait of Juan de Fuca, substantially similar to or competitive with Campbell & Fairweather Psychology Group for a period of 24 months.
The BCSC cited the recent BC Court of Appeal decision, IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301, in finding that the restrictive covenant in this case warranted a heightened degree of scrutiny, or a "keen eye" as the Court put it, on the basis that:
- there was a power imbalance between the parties;
- the agreement was a standard form contract;
- the defendant did not receive legal advice prior to signing; and
- the agreement was more akin to an employment contract than to a contract for the sale of a business.
Justice Baird referred to Shafron v. KRG Insurance Brokers, 2009 SCC 6 at paragraph 43, where the Supreme Court of Canada reiterated that a restrictive covenant is prima facie unenforceable unless the party seeking its enforcement can demonstrate it is reasonable. As the Court in Campbell found, a non-compete cannot be reasonable if it is unclear or ambiguous about the geography over which the restrictions are intended to apply.
Without any particular description of why, the Court in Campbell held that the non-competition clause lacked geographical clarity, and furthermore, was overly broad. The Court also held that a less restrictive measure, such as a non-solicitation clause, would have provided adequate protection for the plaintiffs and that, in evaluating whether injunctive relief should be granted, the balance of convenience favoured the defendant. Somewhat surprisingly, the Court did not make any comment on the length of the restriction. Two years is typically not considered a reasonable period of prohibition against competition in an employment context.
The plaintiff's application was denied and the defendant awarded costs.
This case demonstrates the significant obstacles that businesses may encounter enforcing a non-competition clause and a reminder of the following considerations when assessing the need for a non-competition clause:
- Consider whether a non-compete is necessary – non-solicitation clauses often provide a business with sufficient protection by restricting competition with respect to established client, employment and other business relationships.
- Be cautious of factors in the relationship that may invite a court to assess enforceability through an employment lens. Courts will always evaluate the substance of the relationship over the formal structure of the agreement, and employment relationships invite much closer scrutiny than arm's length commercial relationships, such as in the sale of a business. Examples of when an employment lens may be applied to another form of relationship is when an individual is formally engaged as an independent contractor, though demonstrates the hallmarks of an employment relationship, and where parties wear more than one hat, such as when individuals are parties to both an employment, or independent contractor, agreement as well as a shareholders agreement, with overlapping restrictive covenants or restrictive covenants in one agreement that are triggered by actions in another. It is important to understand all of the relationships at play and, if there are any factors that relate to an actual or potential employment relationship, consider drafting the restrictive covenant with a view towards enforceability in that context.
- Ensure precise language – while such an effort was clearly made in Campbell, the Court nonetheless found that the clause lacked clarity. The more specific and limited the language in the clause, the better the chance of enforceability.
- Ensure the restrictions proposed are the least intrusive necessary to protect legitimate business interests. Do not overreach in terms of the geographical scope of the restriction, the kinds of activities that are restricted and the length of time for the restriction. Aside from precise language, it is often a good idea to compromise somewhat on the ideal restriction in the interest of maintaining an enforceable restriction against competition, rather than overreaching and being left with nothing. If a court determines a non-competition clause is overly-broad with respect to either geography, duration, or the nature of the activities restricted, the entire clause will be unenforceable and a court will not re-draft the provision to be compliant, even if the parties have included contractual language permitting it to.
Note: This a reprint of an article by Ryley Mennie and Dan Fogarty of Miller Titerle + Company LLP.