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Ben's Research Notes

Case Briefs

Elsley v JG Collins Insurance Agents, [1978] 2 SCR 916

  • Test of reasonableness is particular to the facts of the case.
  • RC restricts business involvement without regard for public interest and beyond what is needed for Collin's protection.
  • "A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest."
  • Public interest in maintaining free and open trade unencumbered by RCs.
  • Courts disinclined to restrict right to contract.
  • Validity of an RC can be determined only by assessing the entire agreement.
  • 924: a RC of an employment agreement cannot be edited by a sale agreement.

H.L. Staebler Company Limited v. Allan, 2008 ONCA 576 (CanLII)

  • 2: were not to "conduct business with any clients or customers of H. L. Staebler Company Limited that were handled or serviced by you at the date of your termination".

[39] In Lyons v. Multari (2000), 50 O.R. (3d) 526 (C.A.) at para. 31, MacPherson J.A. explained the difference between the two types of clauses in these terms:

The non-competition clause is a more drastic weapon in an employer's arsenal. Its focus is much broader than an attempt to protect the employer's client or customer base; it extends to an attempt to keep the former employee out of the business. Usually, non-competition clauses are limited in terms of space and time.

[41] Similarly, at para. 33 of Lyons, MacPherson J.A. states, "Generally speaking, the courts will not enforce a non-competition clause if a non-solicitation clause would adequately protect an employer's interests".

Lyons v. Multari (2000), 50 O.R. (3d) 526 (C.A.)

  • 1: the sanctity of a clear contract between equals set against, on the other side, the law's long-standing aversion to contracts that attempt to restrict competition generally.
  • 25: case law supporting the proposition that employers in the professions have a proprietary interest in their client base: see, for example, Gordon v. Ferguson (1961), 30 D.L.R. (2d) 420 (N.S.S.C.) with respect to physicians; Friesen v. McKague (1992), 96 D.L.R. (4th) 341 (Man. C.A.) with respect to veterinarians; and Simoni v. Sugarman, [2000] N.J. No. 28 (Nfld. S.C.T.D.) with respect to podiatrists.
  • 31: [31] The non-competition clause is a more drastic weapon in an employer's arsenal. Its focus is much broader than an attempt to protect the employer's client or customer base; it extends to an attempt to keep the former employee out of the business. Usually, noncompetition clauses are limited in terms of space and time.

Elsey 925 The next and crucial question is whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer.

Is this one of those "exceptional" cases?

**exceptional case = elsley was the business (i.e.: not just a regular employee).

Shafron v. KRG Insurance Brokers (Western) Inc, [2009] 1 S.C.R. 157

  • 1987 S sold business to KRG.
  • S employed by KRG Western from 1987-2001.
  • The trial judge dismissed the action, finding that the term "Metropolitan City of Vancouver" in the restrictive covenant is neither clear, certain nor reasonable.
  • There is no objective bright-line test for reasonableness and applying notional severance simply amounts to a court rewriting a covenant in a manner that it subjectively considers reasonable.
  • 22 It is also accepted that there is generally an imbalance in power between employee and employer. For example, an employee may be at an economic disadvantage when litigating the reasonableness of a restrictive covenant because the employer may have access to greater resources.
  • 26: [26] As a general rule, according to Dickson J. in Elsley, at p. 925, the geographic coverage of the covenant and the period of time in which it is effective have been used to determine whether a restrictive covenant is reasonable. The extent of the activity sought to be prohibited is also relevant.
  • 27: The onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms.

Outline: Restrictive Covenants Rule

General Principle

1. Restrictive covenants are prima facie void as contrary to the public interest in free and unrestrained trade and competition. Except that:

  1. Courts balance the public interest in unrestrained trade with the right to contract when it is exercised by knowledgeable parties with equal bargaining power and
  2. Courts will enforce restrictive covenants that are reasonable and that do not prohibit competition generally.

(CED IV.7.(a) s679- 680)  ;Elsely followed in HL Staebler v Allan; Elsey v JG Ins Agencies)

2. Restrictive covenants in employment agreements are more highly scrutinized than those in business sale agreements based on public policy considerations including:

  1. a restrictive covenant in a business sale protects the good will being sold which has value to both the seller and buyer
  2. there is a generally a power imbalance between employees and employers

Reasonableness Standard

3. Reasonableness is based on all the surrounding circumstances including the nature of the business and the employee's role and considers the following factors:

  1. The covenant protects an employer's valid proprietary interest such as:
    1. confidential information
    2. trade secrets
    3. trade connections
  2. The covenant's temporal and spatial features, and the activities curtailed are:
    1. unambiguous  and
    2. not too broad.
  3. The covenant is a non-solicitation clause that only proscribes contacting the former employer's clients and does not prohibit competition generally except that:
    1. A  non-competition covenant can be justified by exceptional circumstances where a non-solicitation is not sufficient to protect the employer's proprietary interests such as when:
      1. the employee has special personal knowledge or influence over the employer's customers and
      2. the employee has a pivotal  role in the business and
      3. The employer deals with customers to the virtual exclusion of the employer and.
      4. The public interest in competition is not unduly proscribed
        1. a non-compete clause prohibiting the former employee from working in the industry for 5 years is valid because it protected the employer's trade connections and the employee dealt with clients to the exclusion of the employer (Elsley v JG Collins Ins Agencies)
    2. In HL Staebler v Allan, the restrictive covenant was found unenforceable because it was unrestricted in geographical scope, functioned as a non-competition clause because it prohibited employees from doing any business with the former clients (not just soliciting), and it wasn't limited to activities that competed with the employer's business but applied to any business whatsoever (but these employees didn't have exceptional roles in the company)

Severance of Terms

4. An ambiguous term in a restrictive covenant is per se unreasonable and cannot be corrected by a court by reading down the provision to bring it within the law.

  1.  through notional severance invalid court will not re-write a restrictive covenant, but can sever unenforceable parts and enforce the rest, even if taken as a whole the covenant exceeds what is reasonable (s 692)

5. notional severance, which involves reading down a contractual provision to make it enforceable, is not available to fix an ambiguous term in a restrictive covenant (Sharfon v KRG)

Sale of Business, Employment, and Imbalance in Bargaining Power

  • distinction b/w restrictive covenants in sale of business versus employment contracts (s697)
    • restraints are regarded as more reasonable in sale of business, but not as reasonable for employees
    • also restrictive covenants for employees are more highly scrutinized because of the imbalance in bargaining power (s 699)
  • there is a greater freedom to contract between buyer and seller than between employer and employee (Neumann 4.4.1)
  • courts are disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power (Neumann 4.4.1)
    • was Bradley constructively dismissed when they reassigned his secretary and moved his office?