The Alberta Court of Appeal Weighs in on Restrictive Covenants

March 20, 2012

Late in 2011, the Alberta Court of Appeal considered the enforceability of restrictive covenants.  Unfortunately for employers, it further narrowed the scope of circumstances in which this will be the case, at least in Alberta. As the decision was not unanimous, employers can hope that the dissenting judgment will become the law at some point in the future. In the meantime, in Globex Foreign Exchange Corporation v. Kelcher, the following key principles were set out:

  • to be enforceable, a restrictive covenant must be supported by consideration, which cannot just be continued employment;
  • simply referring to an employee’s “dealings” as the basis for a restrictive covenant is ambiguous and won’t be enforced; and
  • if an employee is wrongfully dismissed (i.e. reasonable notice or pay in lieu is not provided) then any non-solicitation and non-competition covenants set out in the applicable employment contract will not be enforceable, even where it is stated in the contract that that they will apply on termination for ‘whatever’ reason.

Background

In this case, three employees worked for a currency exchange company. Either at the commencement of, or during the course of, their employment with the appellant they each agreed to certain covenants that limited their future activities when they no longer worked for Globex. MacLean accepted restrictions on his ability to solicit clients and compete against Globex as an initial term of his employment, but was later wrongfully dismissed. Kelcher and Oliverio agreed to the restrictions during the terms of their employment, but received no consideration for doing so.

In 2005 all three employees were presented with new employment agreements, with more onerous non-competition and non-solicitation clauses. Kelcher refused to sign the new employment agreement and resigned, MacLean was terminated for refusing to sign it and Oliverio resigned shortly after signing it. All three employees went to work for a competitor during the period covered by the restrictive covenants. Globex sued them as a result.

Court of Queen’s Bench Decision

In his decision, the trial judge reconciled two different lines of cases dealing with the issue of consideration being required to make a new, more onerous, contract term enforceable. One line of cases said that you can’t present an employee with a new contract with more restrictive terms and say, “sign it or you’re fired,” as there is no fresh consideration. The second line of cases said that where the employer decides to forebear termination for a reasonable period of time, that can constitute consideration as something of value flows to the employee. The Court agreed with the first line of cases. For this reason the restrictive covenants in Kelcher and Oliverio’s employment agreements were unenforceable.

The trial judge did recognize that where both parties understood that the employer was forbearing from terminating the employee for a period of time, there could be consideration, but that was not the case in this instance. If there had been consideration, only Kelcher’s non-solicitation clause would have been enforceable. Oliverio’s was overly broad and therefore unreasonable.  It prohibited solicitation by Oliverio even if he had not had any contact with the client, or if they moved to a place where Oliverio was able to solicit their business. The non-competition clauses in both agreements were found to be unreasonable as they prohibited any competition with Globex at all.

Court of Appeal Decision

The Court of Appeal disagreed with the Court of Queen’s Bench with respect to Kelcher’s non-solicitation restrictive covenant. It found that the covenant was unenforceable as it was ambiguous and overbroad regardless of whether or not there was valid consideration. In effect, it was impossible to comply with as Kelcher could not tell when he was in breach of his obligation as he was prohibited from contact with all clients he had ever had ‘dealings’ with. The reference to ‘dealings’ was too broad. It was also unreasonable as it prohibited him from soliciting any client of Globex for any reason, even a business completely unrelated to currency exchange. This was the only reviewable error that the Court of Appeal found. In this regard the decision is in keeping with the recent Ontario Court of Appeal decision of Mason v. Chem-Trend Limited Partnership.

The Alberta Court of Appeal supported the trial judge’s conclusion that the wrongful dismissal of an employee will make that employee’s restrictive covenants unenforceable. The same rule is codified in Quebec.

How to Mitigate Risk – Do’s and Don’ts

To improve the prospect that a restrictive covenant will be enforceable:

  • Do provide fresh
    consideration such as a raise or discretionary bonus if imposing a more
    onerous provision.
  • Do provide reasonable notice on termination where there is no explicit termination clause, and honour agreed upon severance where explicitly set out in an employment agreement.
  • Do only impose restrictive covenants that are unambiguous and reasonable in terms of geographic scope, length of time and the activity that is restricted, otherwise they will be deemed to be contrary to the public interest and unenforceable. As the Court of Appeal stated in Globex, “[i]f it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable”.
  • Do only try to protect legitimate proprietary interests.
  • Do “right-size” the restrictive covenant. One that is right for the president of a national company may be wrong for a sales employee working in a limited geographical area in the same company.
  • Don’t use a non-compete where a non-solicit will adequately protect.
  • Don’t forget that a restrictive covenant in an employment agreement will be scrutinized more closely than one in a sale of a business.

Also of note, the Court of Appeal found that Kelcher, MacLean and Oliverio did not breach the common law duties owed to their former employer. The Court of Appeal confirmed that an employee has certain common law and non-fiduciary obligations. First, an employee’s common law duty of good faith and fidelity is generally restricted to the period of employment and will not normally prevent a departing employee from soliciting a former employer’s clients.  Second, an employee may be liable for improper use of the employer’s confidential information during the notice period. Third, post-employment, there is a duty not to misuse confidential information.

In this case, there was no evidence the employees took confidential information when they left their employment. There wereoccasional and inadvertent breaches, but the employees did attempt to abide by the non-solicitation provisions in their agreements. The list of former clients that they made post-termination was for a legitimate purpose – to avoid running afoul of their restrictive covenants. They did not take customer lists with them.   They simply used the names and phone numbers of former clients, since that information can easily be compiled from memory and a telephone book. As noted in the case, knowledge of customer names in and of itself is not confidential information, especially in the world of sales.

Citations: Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240 (CanLII) and Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII)

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