Published on March 20, 2012
Posted in: Blog
Businesses in competitive industries that rely on customer lists or intellectual property may want to take a second look at the non-competition agreements which they ask their employees to sign. In the recent case of Mason v. Chem-Trend Limited Partnership, the Ontario Court of Appeal held that a non-competition clause was completely unenforceable for the reason that it was too strong a restriction on competition. The decision highlights the need for employers to draft reasonable, nuanced and workable non-competition clauses that clearly lay out the conditions upon which a former employee may not compete with his or her former employer.
General counsel have known for years (at least since the landmark 1978 Supreme Court of Canada case of J.G. Collins Insurance Agencies Ltd. v. Elsley Estate) that non-competition clauses in employment contracts cannot be overly broad. However, the Mason case suggests that such clauses must be very narrowly drafted, meeting the three requirements of being unambiguous, commercially reasonable and practically workable.
In the Mason case, the employer Chem-Trend was a Michigan corporation in the business of formulating, manufacturing and selling chemical agents. Chem-Trend’s processes were proprietary and highly confidential. Tom Mason worked as a technical salesperson for Chem-Trend for 17 years prior to his termination, allegedly for cause.
When Mason was hired, he was required to sign the Chem-Trend Confidential Information Guide and Agreement (CIGA). The CIGA contained a restrictive coventant which said that Mason could not, for a period of one year following the termination, “engage in any business or activity in competition with the Company by providing services or products to, or soliciting business from, any business entity which was a customer of the Company during the period in which [he] was an employee.”
After his termination, Mason brought an application to the Ontario Superior Court of Justice challenging the validity of the clause. Although the lower court upheld the validity of the clause, this was overturned on appeal to the Court of Appeal. The Court of Appeal agreed with the trial judge that the wording of the clause was unambiguous and that Mason knew precisely what he was agreeing to when he signed it. However, the Court held that a complete prohibition on competition for one year was overly broad and unworkable in practice, making the non-competition covenant unreasonable and unenforceable in the circumstances.
Regarding the reasonableness of the covenant, Justice Feldman, writing for the Court, referred to the leading cases of Shafron v. KRG Insurance Brokers (Western) Inc. and H.L. Staebler Company Ltd. v. Allan. Justice Feldman reiterated the principle that although covenants in restraint of trade are contrary to the public policy in favour of trade, certain of such covenants will be upheld if they are found to be reasonable in the circumstances. Such covenants will be scrutinized especially closely in the case of employment contracts. The Court found the following factors to be significant in the case of Mason and Chem-Trend:
- There were other clauses in the CIGA which protected the employer’s trade secrets and confidential information. Specifically, there was a clause that restrained the employee from divulging any confidential information learned during his tenure as an employee, in perpetuity;
- Mason had worked for Chem-Trend for 17 years. The Court found that there was no rationale for restricting Mason from dealing with customers from early on in his employment; and
- Mason was part of Chem-Trend’s technical sales force, i.e. a relatively low-level employee. The Court noted that non-competition covenants are more justified for highly placed employees like presidents or chief financial officers than for low-level ones like Mason.
Additionally, the Court found that the restriction in the CIGA was not practically workable. The clause was broadly drafted to restrict Mason from dealing with any former customers of the company, whether he personally dealt with them or not. It would be impossible for Mason to know whether a prospective client was a past customer of Chem-Trend without having them vetted by his former employer, which the Court considered to be unrealistic.
The implication of Mason for employers and their lawyers is that they must be extremely careful in how they draft non-competition clauses in employment contracts. Such clauses must be i) unambiguous, ii) commercially reasonable, and iii) practically workable. In particular, the third requirement of practical workability is a new development in the case law, and employers would do well to consider whether their agreements would, in effect, completely restrain employees from competing during the applicable period. If non-competition clauses do not meet these three requirements then they are liable to be struck down as unenforceable should they ever be challenged.