January 30, 2017
The Court of Appeal has re-affirmed the principle arising from the series of employment insurance broker cases of J. G. Collins Insurance Agencies, H.L. Staebler and Shafron, all of which addressed the interpretation of non-solicitation covenants in employment contracts. In Donaldson Travel Inc. v. Murphy, the employer was a travel agency.
The employee moved to a competitor, and her former employer commenced an action against her as well as her new travel agency employer and its principal. The Defendants brought a motion for summary judgment to dismiss the claim on the basis that the non-solicitation covenant was unenforceable, that allegations of breach of confidentiality had not occurred and accordingly, there was no foundation for the claim to proceed.
The covenant in issue provided as follows:
“[The employee] agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the employer], directly, or indirectly.”
The Court considered what appeared on its face to be a non-solicitation covenant, and found it to be non-enforceable as it was in reality a non-competition provision. Further, because it contained no temporal limitation, the clause was unreasonable and unenforceable. This finding was upheld on appeal.
The former employer alleged the employee had taken confidential information and had given it to her new employer. The Court went on to consider whether to also dismiss these allegations of breach of confidentiality. In the absence of any evidence being put forward by the former employer, the Court held that this claim should also be dismissed, finding there to be no factual foundation illustrated by the new employer in response to the motion.
The actions against the new employer then had to fall. The first claim related to inducing the employee’s breach of contract, and no breach of contract having been found to have occurred, the new employer could not have induced same. Similarly, as the employee had not disclosed any confidential information, her new employer could not have participated in such disclosure, and accordingly no grounds existed upon which to maintain that second cause of action either.
This decision re-affirms that restrictive covenants continue to be an important and hotly litigated matter before the Courts in Ontario, and caution should be exercised (i) when acting for employees in deciding what covenants should be entered into; (ii) by employers in hiring new employees who may have existing contractual obligations; and (iii) by employers in the appropriate drafting of non-competition and non-solicitation covenants.
It should be noted that this decision does not say that non-competition covenants are always unenforceable. There is a very strict test for enforceability, and most certainly, such covenants should be thought of as the exception rather than the rule.