Employee's Attempt To Solicit Clients From Former Employer Proves Costly
Wednesday, June 19, 2019 - Filed in: Court Cases
Restrictive covenants (such as non-competition and non-solicitation clauses) are a common feature of many employment agreements. It is relatively rare, however, that companies resort to litigation to enforce these requirements by way of an injunction. This may be down to the costs associated with doing so, or that the required legal threshold to obtain an injunction is high.
There are circumstances, however, where it will make sense to seek an injunction. In order to obtain an injunction against a former employee (i.e. to force a party to stop doing something), an employer must be able to demonstrate that:
- there is a serious issue to be tried; and
- the employer will suffer irreparable harm if the injunction is not granted (i.e. harm that cannot be quantified in monetary terms or cannot be cured by the payment of damages).
The Stress-Crete Case
In a recent Ontario case, Stress-Crete Limited ("Stress-Crete" or the "Company") applied for a permanent injunction to restrain a former employee (the "Respondent") from working for a direct competitor (Cyclone) in an alleged breach of his contractual non-competition and, non-solicitation obligations.
The Respondent worked for Stress-Crete for almost 7 years in sales. During his employment with the Company he signed an employment agreement which included the following terms:
Non-competition: I shall not, for a period of two (2) years after the termination of my employment for any reason whatsoever, be employed by a director, officer, shareholder, principal, agent or partner of, operate, act as consultant to, invest in, loan money to, or directly or indirectly engage or be involved in, any person, corporation, association, firm, partnership, or business which has all or part of its undertaking the manufacture, sale or lease of:
- poles used to carry utility services; or
- lighting fixtures; or
- any other products manufactured or sold by Stress-Crete or any of the Stress-Crete association corporations, (King Luminaire Co. Inc.), at the time of my termination of my employment, or
- any or products similar to, or competitive with the products described in (a) (b) or (c) within a 750-mile radius of any Stress-Crete Ltd, Stress-Crete Inc. or King Luminaire Co. Inc. production facilities.
Non-solicitation: I shall not, for a period of two (2) years after the termination of my employment for any reason whatsoever:
- Solicit or entice, or attempt to solicit or entice, either directly or indirectly, any of the employees of Stress-Crete to enter into employment or service with any business described in Clause 2 above; or
- Contact any person, firm, corporation, or governmental agency who was a customer of Stress-Crete at any time during my employment with StressCrete.
In October 2018, the Respondent resigned from Stress-Crete. In response, the Company offered to continue employing the Respondent until he could obtain a new position with a non-competitor of the Company. The Respondent, however, refused this offer and took a sales role with Cyclone.
Upon learning that the Respondent was working for Cyclone, the Company informed the Respondent that they considered his actions harmful to their market share in Ontario.
Serious Issue to be Tried
As a general rule, a restrictive covenant in an employment agreement is unenforceable, unless it can be shown that the restriction is reasonable between the parties and not adverse to the pubic interest.
In order to assess whether the contractual clauses in the Respondent's employment agreement were reasonable, the court considered whether they were in any way ambiguous (with respect to duration of time, activity or geographic scope).
The Court determined that the non-competition clause was unenforceable on the basis that the Company's 750-mile radius prohibition was vague and imprecise. The court noted:
the scope of the restrictive geographical boundary is not clearly defined as it relates to the various production facilities across North America. In other words, the restriction covered by this clause is not just delineated or restricted to the Burlington head office location, which was likely the intention for clause 2... As such, the specific provision is unreasonable.
The court then addressed the non-solicitation clause and found it to be reasonable and enforceable, noting specifically that it did not prohibit or constrain the Respondent's ability to work in a sales field or other related occupation. The court's decision to uphold the non-solicitation clause was likely influenced by evidence which came to light during cross-examination. The Respondent was found by the court to be self-serving and he was judged likely to attempt to solicit Stress-Crete clients in future.
Irreparable Harm to the Company's Business
In addition to demonstrating there was a serious issue to be tried (in the form of the application of restrictive convents in light of the Respondent's conduct), the Company was required to show that it would suffer irreparable harm if not granted the relief sought from the court. Irreparable harm describes the nature, rather than the magnitude, of harm suffered. If the harm can be quantified in monetary terms or cured by damages, it will not be considered "irreparable."
The court concluded that Stress-Crete would suffer irreparable harm. In so doing, however, it stated that "frankly, the evidence presented by the applicants on the issue of irreparable harm and damages is far from detailed or comprehensive." It appears, upon review of the court's decision, that it likely reached its conclusion on the existence of irreparable harm more due to its disapproval of the Respondent's conduct rather than on the basis of any hard evidence of the same.
Conduct the of Respondent that the court cited as part of its rationale included the following admissions garnered during pre-hearing cross-examinations: that the Respondent intended to compete against Stress-Crete; his sales on behalf of Cyclone to Stress-Crete customers would result in a loss to Stress-Crete; and prior to resignation, the Respondent created a file on his home computer that consisted of confidential information and documentation belonging to Stress-Crete – which he had failed to return to the Company upon his resignation from employment.
Having concluded its assessment of the applicable legal test, the court granted (in part) the Company's request for a permanent injunction, and required the Respondent to comply with the terms of the non-solicitation and confidentiality clauses in his employment agreement. In addition, the Respondent was ordered to return all Stress-Crete information or other confidential or private records or documents in whatever format, forthwith.
Takeaways for Ontario Employers and Employees
Employers can learn from the steps taken by Stress-Crete which ultimately allowed it to successfully obtain an injunction: include in your employment agreements clearly-drafted (and constrained) restrictive covenants and consider offering a departing employee an opportunity to offset loss of income by remaining with your organization until he/she can find work with a non-competitor business. The Company's actions in this regard certainly paid dividends in the course of litigation and helped make it look like the more reasonable party.
Employees, on the other hand, should carefully review with legal counsel any restrictive covenants prior to agreeing to the same. It is important to understand how a restrictive covenant may constrain future conduct, and to take proactive steps to limit your obligations in this regard where feasible.
Finally, while the Stress-Crete decision offers a helpful review of the factors that can influence the outcome of a case, it is, in our opinion, potentially ripe for appeal. The court's finding of irreparable harm is vulnerable to attack on the basis that it must be proved with clear evidence, yet the court readily admitted that the Company's evidence in this regard was seemingly deficient – being "far from detailed or comprehensive."
Note: This a reprint of an article by Paul J. Willetts of Vey Willetts LLP.