Restrictive Covenants

Many employees are required to sign Non-Competition and Non-Solicitation Agreements either when they are hired by a company or at the end of their employment. Most employees want to know whether and how such agreements will restrict them in pursuing a career following their employment.

Although the Courts generally view Non-Competition Agreements as a restraint on trade and therefore unenforceable, there are plenty of case where such agreements have been held enforceable. Let's look at a few cases.

In a 2004 Ontario case, a martial arts instructor was prohibited from teaching at, owning or operating a martial arts school within a ten-mile radius of his employer's business for one year. After his employment concluded, the instructor and his girlfriend opened a martial arts school half a block from his former employer. The Court awarded the instructor's former employer $10,000 damages for the employer's loss of business and the instructor's gain of competitive business.

In a 2005 Manitoba case, an investment agent employed by the plaintiff-company was prohibited from directly or indirectly approaching or soliciting away any investment business from the plaintiff's clients. The covenant was for one year for non-solicitation of any of the plaintiff's clients and two years in respect of the clients the agent dealt specifically with. The agent left the defendant and sent a letter to his clients advising that he had joined another firm. The Court found that there were several features of the letter expressing appreciation for their business, which amounted to a solicitation. The Court awarded an interim injunction against the agent.

In a 2001 Ontario case, a traffic logistics company sued its former Director of Marketing who as an independent contractor. The covenant restricted the defendant (Director of Marketing) for two years, from contacting any of the plaintiff's employees. The covenant further provided that if the defendant breached this provision and if the company lost any one of its employees to the defendant, the defendant would pay a penalty equivalent to the employee's yearly salary, upon demand. The defendant left the company and engaged in discussions with another employee who was still working for the company. The defendant wanted this employee to help him set up a competing business and provide computer software. The employee assisted the defendant during the employee's employment with the plaintiff-company and then eventually left the company. Upon commencing employment with the defendant's new business, the employee utilizing the software he had created while still working for the plaintiff-company. The Court held that the covenant was enforceable and that the amount of damages proposed in it did not amount to a penalty clause. The defendant was ordered to pay the plaintiff $66,367 representing one year of the employee's salary.

If you are being asked to sign a restrictive covenant, please call me to discuss your situation and any potential ramifications of breaching the covenant. This area of employment law is evolving and is very fact-driven.