As many employers know, restrictive covenants are notoriously difficult to enforce because they must be “reasonable” in relation to their subject matter, temporal and geographic scope, as well as unambiguous in their meaning. Every year, restrictive covenants in employment contracts are struck down by courts leaving employers with little or no recourse against departed employees engaging in competition.
In Rhebergen v. Creston Veterinary Clinic Ltd., the plaintiff, a newly qualified veterinarian, signed an employment contract in which she agreed to pay a certain amount of money to the defendant if she set up a veterinary practice in the same town as the defendant, or within 25 miles of the defendant’s premises, in the first 3 years after the termination of the contract. If she set up a practice within 1 year, she had to pay the defendant $150,000; if within 2 years, $120,000; and if within 3 years, $90,000. The figures were not without foundation; they had been calculated with consideration to the investment made in employing the plaintiff (including mentoring, training and equipment), as well as the impact her competition with the defendant would have on the defendant.
While the Court found that the term did constitute a “restraint of trade” (albeit not a classic restrictive covenant), and was thus subject to the “reasonableness” analysis, it rejected the argument that the term was a penalty. The Court also held that the term was reasonable in the circumstances and unambiguous in its meaning.
Drafting of restrictive covenants must be done very carefully, ideally with the assistance of legal counsel. As this case shows, thinking outside of the box can be very beneficial. If the employment contract had simply prohibited the plaintiff from working as a veterinarian for 3 years within 25 miles of the defendant’s premises, it is quite possible that the covenant would have been held to be unenforceable. But because it allowed the plaintiff to practice her profession, albeit at a cost, it seems the Court was more willing to enforce the covenant.