The recent ruling from the Ontario Superior Court of Justice in Stress-Crete Limited v. Harriman provides a helpful reminder of the factors that courts will assess in determining the enforceability of agreements not to compete with one's employer or solicit its customers after departing.
Such agreements regarding post-employment activities are called restrictive covenants. They are notoriously difficult to enforce and often viewed with skepticism by the courts. This recent ruling from the Ontario Superior Court of Justice provides a helpful reminder of the key factors that courts will assess in determining their enforceability.
Mr. H worked as a Sales Manager with Stress-Crete Limited and King Luminaire Company Inc. (collectively, "Stress-Crete") — a company carrying on business internationally in manufacturing and supplying lighting solutions. After working for Stress-Crete for a number of years, Mr. H resigned from his employment to accept a sales position with Cyclone Lighting ("Cyclone"), a direct competitor. Mr. H's employment agreement with Stress-Crete contained non-competition and non-solicitation clauses intended to prevent him from working with competitors like Cyclone. Stress-Crete sought a permanent injunction to enforce these restrictive covenants.
The Restrictive Covenants
The employment agreement contained a non-competition clause that prevented Mr. H, from being employed by a competitor within a "750-mile radius of any [Stress-Crete] production facilities" for a period of 2 years following the termination of his employment.
The agreement also included a non-solicitation clause that prevented Mr. H from contracting with "any person, firm, corporation or governmental agency who was a customer of [Stress-Crete] at any time during [his] employment with [Stress-Crete]" for a period of 2 years.
Mr. H claimed that the restrictive covenants in the Agreement were vague, overly broad, and unreasonable. H also claimed that the restrictive covenants were unconscionable as he was never encouraged to seek legal advice before signing the Agreement.
The court reiterated the general rule that post-employment restrictions in employment agreements are unenforceable, unless they are reasonable between the parties and not adverse to the public interest. The court also re-confirmed that if a restrictive covenant is ambiguous with regards to time, activity, or geography, it will probably be found to be unreasonable and unenforceable.
In applying these principles, the court concluded that the non-competition clause in the Agreement was unenforceable because the geographical area described in the clause was not clearly defined. The court found that the geographic restriction of a "750-mile radius of any production facilities" was likely intended to only apply to its headquarters in Burlington, Ontario, but instead, was drafted to encompass a much broader geographical area.
The two-year non-solicitation clause, on the other hand, was found to be enforceable. It was reasonable, clear, and in line with general industry norms. The court also stated that where a non-solicitation provision is limited to customers or clients of the employer, a geographic limit is irrelevant and not required.
The court rejected Mr. H's claim that the restrictive covenants were unconscionable. The court found that Mr. H was given the opportunity to seek legal advice prior to signing the Agreement, but failed to do so. Stress-Crete did not rush or pressure him into signing.
Injunctive Relief Ordered
The court issued an injunction order based on the non-solicitation clause. It found that Stress-Crete would suffer irreparable harm if the injunction were not granted. Mr. H's knowledge of proprietary and confidential information concerning Stress-Crete's business processes and sales operations could be used by Cyclone, or any competitor, and would create an unfair competitive advantage that would significantly undermine Stress-Crete's business. The harm could not be remedied by an award of damages, thus an injunction was appropriate.
Lessons for Employers
The narrower the better
Restrictive covenants should be drafted as narrowly as possible in terms of time, activity restricted, and geography. In order for a restrictive covenant to be enforceable, an employer must be able to justify it as being no more than is reasonably required to protect its valid proprietary interests. In this case, Stress-Crete's geographic restriction was much broader than necessary and, therefore, resulted in its non-competition clause being unenforceable.
Clearly define the geographical limit
The scope of the restrictive geographical limit should be defined as clearly as possible. Employers should consider including the specific cities and/or municipalities within which a departing employee is prohibited from competing.
Do not rush an employee to sign an agreement
Employers should give employees adequate time to review and seek legal advice prior to signing an employment agreement with restrictive covenants. Where an employer does so, like Stress-Crete, it is more likely to defeat a claim that the restrictive covenant is unconscionable and, therefore, unenforceable.