Can Professionals Enforce Non-Competition Agreements?

Can professionals use non-competition agreements to protect their practices when hiring and training a junior?  This issue has been the subject of a great deal of debate in court decisions across Canada.  In a surprising ruling, the B.C. Court of Appeal recently upheld an onerous non-competition agreement between two veterinarians.

I wrote about the trial court decision in Rhebergen v. Creston Veterinary Clinic last year.  The B.C. Court had held that a three year non-competition agreement was unenforceable.  This decision was recently overturned.  The B.C. Court of Appeal has now ruled that the non-competition agreement in question was enforceable.  It is worth looking at some of the key facts.

Factual Background and Key Clauses

Creston Veterinary Clinic (“CVC”) is located in Creston B.C.  There are no other clinics within a 100 mile radius.  Most of CVC’s business comes from servicing eight dairy farms in the Creston area.

CVC hired a newly graduated physician, Dr. Rhebergen, to train and work in the field of dairy medicine.  The parties signed an employment contract with some key terms:

1.  This was a three year contract, that could only be terminated for “cause” or under certain other conditions;

2.  The contract provided that Dr. Rhebergen could not set up a veterinary practice within a twenty-five mile radius of CVC within three years of the end of her employment.  If she were to breach this clause within a year of leaving CVC, she would have to pay $150,000.  The amount would decline by $30,000 for each of the subsequent two years.

3.  Dr. Rhebergen was being paid $65,000 per year.  When differences arose some fourteen months later, Dr. Rhebergen brought a court application asking the B.C. court to rule that the clause was unenforceable.

Trial Court Ruling:

As I discussed in May 2013, the trial court held that the clause was unenforceable.  It ruled that that the clause was vague and uncertain.  Could Dr. Rhebergen set up a practice 30 miles away but still service those eight dairies?  What if she was set up 50 miles away and was serving two of the dairies in question with most of her work from other sources?  Would this be a violation?  At what point would the damages payment kick in?

The trial court also ruled that the non-competition clause was a restraint of trade clause and  was unenforceable because it was unreasonable.  It was too long (three years) and provided for a payment of a very large sum of damages in the event of a breach, without any proof of actual damage caused.  The trial court judge held that a payment of $120,000 for setting up a practice within a 25-mile radius was a “penalty” clause rather than a genuine pre-estimate of liquidated damages to be incurred.

All of this seemed quite logical to me in reviewing the decision last year.

Court of Appeal Ruling:

The B.C. Court of Appeal overturned the trial ruling in a two to one majority decision.

The Court of Appeal agreed that this clause was a “restraint of trade” clause.  However, it held that the clause was a reasonable one.

The Court of Appeal accepted the argument that the damages clause was a reasonable calculation of the cost of “mentoring, training and equipment costs to the clinic” if Dr. Rhebergen were to leave before the conclusion of the three year period.  The Court of Appeal also looked at the impact on the clinic’s “goodwill and volume of business.”  The court concluded that this clause was not a penalty and that the only question was whether, overall, the clause was reasonable.

The court seems to have blended in costs of mentoring and training – that the clinic would have had during the three years of the agreement as a factor in assessing a possible breach of the agreement even after the end of the three year period.

The majority concluded that the clause was not ambiguous.  It applied a far reaching definition and held that Dr. Rhebergen would be barred from serving the eight dairy farms that are within a twenty-five mile radius of Creston.  If she were to “provide…services on a regular or continuous basis…” to those eight dairies, regardless of where she was actually based, this would constitute a breach of the agreement and trigger the payment.

The dissenting appellate court judge held that the clause was unenforceable since it was uncertain.  It was unclear at what point Dr. Rhebergen would have been taken to have “established” a practice and at what point the entire $150,000 damages clause would kick in.

Conclusion

The Court of Appeal accepted the underlying premise that CVC was entitled to protect its business with this type of three year agreement.  In doing so, the Court of Appeal must be taken to have viewed this type of arrangement as more of an business contract than an employment relationship.  CVC agrees to train, mentor and develop a new veterinarian – but in exchange it is largely insulated from competition for three years after the initial three year period.  Presumably, the majority of the court felt that the amounts set out as damages for breach would be reasonable business costs of competing in the in specific area.  Perhaps the majority felt that the $150,000 or $90,000 payment was more like a licence to compete – after having received all of the training and mentoring in the field from CVC.

While there is something to be said for this type of analysis, there are some other compelling factors that come into play.  Dr. Rhebergen was only earning $65,000 and was bound to work for three years in an area in which CVC had a virtual monopoly.  To continue working in her chosen field (dairy medicine) in the same area, Dr. Rhebergen would have to pay an amount close to two and a half year’s salary.  Is it really in the public interest to assist professionals, whether veterinarians, lawyers or dentists, in their efforts to  protect lengthy geographic monopolies over the provision of professional services?  In this case, Dr. Rhebergen received training and mentoring from CVC during the initial fourteen month period but, presumably, CVC earned money as a result of her work as well.  It seems far from clear to me that the costs of training, mentoring etc., should be factored in to the reasonableness of the post-employment non-competition provision.

While it would seem reasonable to allow CVC to protect its client base from competition from a newly trained competitor, a much shorter time period ought to have been adequate.  This provision would require Dr. Rhebergen to pay one and half year’s salary in exchange for setting up a vet practice three years after having left CVC.  That does not seem consistent with much of the established law across Canada on “reasonableness.”  Reasonableness should be measured between the parties and as it relates to the public interest.  It seems like quite a stretch on reasonableness to say that CVC requires three years of non-competition to protect its legitimate proprietary interests from a newly graduated vet.

It is unclear to me whether Dr. Rhebergen intends to ask the Supreme Court of Canada to hear this case.  The Supreme Court has adjudicated a number of non-competition cases and will sometimes agree to hear these cases where there is a split court of appeal and an interesting theoretical issue that raises concerns of national importance.   This seems like the type of case that would meet those criteria.

Assuming that the case is not heard by the Supreme Court of Canada, the decision in Rhebergen v. Creston Veterinary Clinic will stand as a decision that further clouds the judicial waters in assessing non-competition agreements.  Moreover, it may give employers renewed hope that they can enforce these agreements by using reasonable damages clauses in their restrictive covenant agreements.

 

 

 

 

Non-Competition Agreements Enforceable When Commercial: SCC

When will Canadian courts enforce non-competition agreements?  The latest Supreme Court of Canada decision in Payette v. Guay Inc. confirms that, in a commercial context, even wide-ranging, lengthy non-competition agreements may be enforceable.

Guay Inc. is a crane rental company.  It purchased a group of crane companies from Payette and his partner for $26 million.  To assist with the transition, Payette and his partner agreed to employment contacts, that contained five year non-solicit and non-competition agreements.  Four years later, Payette was dismissed by Guay and paid an agreed upon sum.  Shortly after that, he began working with a competing crane company and promptly hired seven former employees away from Guay.

Guay brought an application for an injunction to enforce the five year non-competition agreement and the five year non-solicitation agreement.  The Quebec Superior Court dismissed the application.  It held that the non-competition clause was overly brought since it sought to prevent Payette from working anywhere in Quebec, even though the business that had been sold had only operated in the Montreal area.

The Quebec Court of Appeal overturned the lower court ruling and imposed a permanent injunction against Payette.  It held that since the non-competition agreement arose from a commercial contract, its purpose was to protect the assets that Payette had sold to Guay.  The Court of Appel was therefore prepared to uphold a broad geographic scope and time period.  Payette appealed to the Supreme Court of Canada.

The Supreme Court released its decision on September 12, 2013.  It upheld the Quebec Court of Appeal decision.  It emphasized that there is a big difference between the enforceability of a non-competition agreement in an employment context versus in a commercial context.  The Court noted that there is an imbalance of bargaining power in most employment contract situations, which is a factor to be considered when assessing a non-competition agreement.  In a commercial context, however, there is deemed to be much less, if any, of a power imbalance.  The Court went on to say that “in a commercial context, a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable.”  The Court noted that factors to be considered should include “the sale price, the nature of the business’ activities, the parties experience and expertise and the fact that the parties had access to legal counsel and other professionals.”

Given all of these factors, including in particular the specialized nature of the business, five years was not viewed as unreasonable, especially since Payette was paid $26 million.  Further, even though the scope of the agreement might cover areas in which Guay did not operate, this was still permissible as Guay could operate in these areas.  The Court also accepted the submission that the non-solicitation agreement did not need a territorial restriction.  The Court emphasizes the need to enforce the intention of the parties and the need to uphold a fairly negotiated commercial arrangement.

In some ways, this case contrasts nicely with Shafron v. KRG Insurance Brokers (Western) Inc., another commercial type case in which the Supreme Court struck out a non-competition agreement that was overly vague.

Looking at these two decisions together and other Supreme Court of Canada cases, it is fair to say that Canadian courts will now be required to make significant efforts to enforce commercial non-competition agreements.  It also seems to fair to conclude that courts will continue to be wary of non-competition agreements in a purely employment context.  The interesting question will be the extent to which courts take this type of “commercially reasonable” approach when dealing with sophisticated executives and senior management personnel.  The emphasis on the assessment of each side’s respective bargaining power may cause courts to become more willing to enforce non-competition agreements where the employer can demonstrate something closer to equality of bargaining power on the part of an employee.

Can Professionals Enforce Non-Compete Agreements?

In a recent B.C. case, http://casealert.canadalawbook.ca/summaries/acws/acws-13029018.html, a court had to decide whether a non-compete agreement between two veterinary practices was enforceable.  The court concluded that the non-competition period was too vague, too lengthy and included a damages clause that was more of a penalty, which is prohibited.

Dr. Stephanie Rhebergen became licensed as a veterinarian in June 2010 in B.C.  She obtained a position with the Creston Veterinarian Clinic just after graduating.  As a term of joining Creston VC, she signed an employment agreement which, among other things, stated that if she “set up” a veterinary practice in Creston B.C. or within 25 miles of it, she would pay various penalties ranging from $150,000 in year 1 to $90,000 in year 3.

A little over a year later, she resigned.  She then filed a court application to ask the B.C. Supreme Court to declare that the non-competition covenant was void and unenforceable.

The court agreed.  It had little difficulty concluding that the large amount to be paid if Dr. Rhebergen were to open a competing veterinary clinic was really functioning as a type of restrictive covenant.  Justice Betton of the B.C. Supreme Court concluded that language of the covenant itself was vague and unreasonable as it did not define what it would mean to “set up a veterinary practice” within 25 km of the Creston V.C.  The Court also concluded that this non-compete agreement contained a “penalty clause” that would be an unreasonable restraint of trade.  As well the three year time period was unreasonably lengthy.

The case is another example of the fact that courts, across Canada, simply do not like non-competition agreements and are usually quite willing to strike them down.

The only drawback is that litigation is expensive.  To actually wind up with a Court decision like this, that makes it clear that a person is free to ignore a signed non-compete agreement, can be a costly and sometimes lengthy process.

However, given the amounts at stake for Dr. Rhebergen in this case, it was well worth her while to bring the application and get the court order, even though she still may face an appeal by Creston VC.  Given the court decisions that are prevalent across the country, it seems likely that the B.C. Court of Appeal would uphold the lower court’s decision.

 

 

 

 

 

 

 

Non-Competition Clause Can Increase Wrongful Dismissal Damages Award

Will a court award extra damages in a wrongful case where the employee is subject to a non-competition clause?  A recent Ontario case held that this would be entirely reasonable.

The case of Dimmer v. MMV Financial (2012 ONSC 7257) is a wrongful dismissal case involving a 50 year old senior vice president.  The plaintiff had been recruited by a corporate search firm and was employed for just under four years.  At the time he joined the company, he signed a one year non-competition agreement.  When he was dismissed on a without cause basis almost four years later, he abided by the non-competition agreement and was unable to find alternate employment for about a year.   At trial, he was awarded one year’s compensation, including compensation for his average historical bonus and his car allowance.

The defendant tried to argue that Mr. Dimmer had failed to mitigate his damages properly and had failed to conduct a sufficient job search.  But the Court pointed to the non-competition agreement and noted the difficulty that the plaintiff would have finding work while subjec to the agreement.  Moreover, the defendant was unable to demonstrate that there were available positions that the plaintiff could have obtained if he had taken different steps in the course of his mitigation efforts.

The Court held that the plaintiff was entitled to twelve months’ compensation, in part, because of the signficant level of responsbility, the high income level and the senior nature of the position that that plaintiff held.  In the circumstances, twelve months’ compensation was appropriate for a four year senior vice president.

Although this case does not address a large number of ground breaking legal principles, there are two interesting points that we can take from the decision:

1.  Senior executives will be entitled to significant notice periods even with relatively short service.  A one year notice period for a three to four year senior executive is within the reasonable range, even if it is at the higher end.

2. Courts may be willing to take into account draconian non-competition agreements when assessing notice.  For employers who choose to try to impose unreasonable non-competition agreements on their employees, they may wind up facing lengthier notice periods after dismissal.  Employees will not be required to try to get out of the non-competition agreement as part of reasonable mitigation efforts.

This reliance by the Court on a non-competition agreement in assessing notice is a useful step for plaintiffs.  In my view, it still does not go far enough.  To really level the playing field, courts should be willing to award damages for “loss of opportunity” where an employer has imposed an unreasonable non-competition agreement.  This would further ensure that employers make every effort to keep post-employment restrictions as narrow as possible to protect their reasonable proprietary interests.

For now, dismissed employees must choose between abiding by the agreement, ignoring it and facing litigation or commencing costly legal proceedings to obtain a court ruling on the enforceability of the agreement.  None of these steps are wholly satisfactory.  This recent Dimmer case provides employees with some comfort that they may be entitled to a lengthier notice period if they abide by an imposed non-competition agreement.

 

 

 

Restrictive Covenant Void – Ontario Court of Appeal

The Ontario Court of Appeal has confirmed once again that restrictive covenants are subject to careful judicial scrutiny, and will often be struck out.  According to the Court’s decision in Martin v. Concrete USL Limited Partnership,   post-employment restrictions that are overly broad or otherwise unreasonable will be struck down and considered void, even where the dismissed employee was a shareholder.

The dismissed employee, Derek Martin,  was a twenty year employee with a minority share in his employer’s business. When the assets of  the business, Concreate USL were sold, Martin received significant compensation.  However, he was required to sign a far-reaching non-competition and non-solicitation agreement.  After later being dismissed, Martin asked the Ontario Superior Court to rule that the restrictive covenants were unreasonable and therefore unenforceable.  The Ontario Superior Court held that the restrictions were reasonable and enforceable in the circumstances.

On appeal, one of the key issues was whether the duration of the agreements was uncertain.  Martin would be bound to certain restrictive covenants as long has he continued to hold shares in the company.  He could not dispose of these shares without the consent of third parties, including lenders and bonding companies with whom he had no connection.  It was therefore, arguably, unclear how long these agreements might remain in place.

A second issue on appeal related to the overly broad scope of the prohibited activities.  If the restrictions were enforceable, Martin would be prohibited from dealing with numerous potential customers, dealers and agents with whom he had not even had contact while working for Concreate.

Martin was successful with both of these arguments.  The Court of Appeal held that the scope of the restrictions went “far beyond what was properly required to adequately protect the goodwill of the purchased business…”  The unanimous decision of the Court references and relies on its prior decision from 2011 in Mason v. Chem-Trend Limited Partnership, in which it had held that it would not enforce an overly broad non-solicitation restriction.

The Court of Appeal noted that Martin had received independent legal advice about the restrictive covenant and he had signed a clause indicating that he agreed it was reasonable.  However, the Court held that it must still scrutinize these types of agreements to determine whether they are in the public interest, even where the situation involves more of a business transaction than an employment contract.

In light of these decisions, employers seeking to impose and enforce restrictive covenants must be extremely careful.  They must ensure that they are only restricting the employee from activities that would affect proprietary interests that they are entitled to protect and nothing more.  As the Ontario Court of Appeal has indicated, employers who overreach will be left with little or no protection from post-employment activities, other than their continued ability to enforce restrictions on the use of their confidential information.

 

Breach of Fiduciary Duty and Non-Competition: Two Ontario Court of Appeal Decisions: Two Very Different Results.

The Ontario Court of Appeal has issued two recent decisions dealing with breach of fiduciary duty in an employment context.  In one case, GasTOPS Ltd. v. Forsyth (2012) ONCA 134, issued on March 1, 2012, the Court of Appeal upheld an award of almost $20M against a group of four former employees of GasTops.  In the second case, Veolia ES Industrial Services Inc. v. Brulé (2012) ONCA 173, issued on March 20, 2012, the Court of Appeal overturned a trial award of $465,000 that had been issued against Mr. Brulé, a former employee of Veolia.  Both cases provide some useful information about the nature of fiduciary duties in employment relationships and the potential costs of breaching these duties.

The GasTOPS case took seven years until it was completed.  There were 295 days of evidence spread over 3 years, with 70,000 pages of exhibits and 3,000 pages of written submissions.  It took the Court two years to produce the trial reasons, which were 668 pages in length.  The Court of Appeal heard the appeal in the matter over a period of four days and issued a 32 page decision.  One aspect of breach of fiduciary duty cases is that they can be very expensive and time consuming, regardless of who eventually wins.

The Trial Court had held that the four defendants were the designers of the core program of the GasTOPs products.  They were part of the senior management.  They all left to start up a new competing business together and took additional employees with them.  They then pursued “virtually every existing and potential GasTOPS’ customer, used the confidential information that they had obtained while at GasTOPS and also used GasTOPS’ technical information.  In short, they took virtually the whole of the business from GasTOPS and used it in their new venture.  In their first three years of business, nearly 80% of their business came from GasTOPS’ clients.  The Court ordered 10 years of lost profits against these four defendants and their new company.   The Court of Appeal had little difficulty upholding the finding that all four employees were fiduciaries, that 10 years was a reasonable time period for measuring damages and that the four defendants were jointly and severally liable.

The other decision issued by the Court of Appeal very different.  Mr. Brulé had been the acting CEO of Veolia ES Industrial Services Inc., a company that he had originally founded and then later sold.  He had an employment contract with Veolia that contained a non-competition provision.  The clause was poorly designed and did not wind up providing the protection that Veolia thought it had.  Mr. Brulé resigned from Veolia and provided notice of resignation as he was required to do.  On his way out the door, he made copies of company binders which contained various tenders and bids for public projects.  A few months later, he successfully bid on a project with the City of Ottawa with his new company.  Veolia sued for breach of fiduciary duty.

At trial, Veolia was awarded $465,000 plus costs against Mr. Brulé.  The Trial Court held that the poorly worded employment contract should be “blue-penciled” and fixed in a way that seemed to reflect the parties’ intention.  It ruled that Mr. Brulé was subject to a two year non-competition agreement and that he had breached it.  On appeal of this issue, the Ontario Court of Appeal overturned this finding.  It referred to the Supreme Court of Canada decision in KRG Insurance v. Shafron and underscored the fact that Canadian courts will rarely “blue-pencil” non-competition agreements.  Since the agreement could not be “fixed,” Mr. Brulé had not breached any agreement.

The Trial Court also held that Mr. Brulé breached his fiduciary duties.  Since he took the binder and since he bid on the City of Ottawa project without telling his former employer, the Trial Court found him liable.  The Court of Appeal overturned both of these findings.  It held that the binders were filled with public documents and there was no proof that Mr. Brulé had taken or used anything that was confidential.  Moreover, it emphatically stated that he had no duty to his former employer to tell them that he was bidding on a project against them.  In short. unlike in the GasTOPS case, Mr. Brulé did not take a big chunk of his former employer’s business.  He entered into a bidding competition and won it fairly, without breaching any duties.  The Court of Appeal fully overturned the award of damages and ordered that Veolia pay Mr. Brulé’s legal costs.

Either or both of these cases may yet be appealed to the Supreme Court of Canada.  But they each provide different information about the nature of fiduciary duty claims and non-competition issues.  Where an employee or group of employees takes confidential information, uses it and competes unfairly against a former employee, significant damages may be awarded.  But where an employee, even a very senior employee, leaves and winds up competing against his or her former employer, that is not a breach of fiduciary duty on its own.  There must be some proof that the employee has misused confidential information that belonged to the former employer.

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