How to Craft an Enforceable Non-solicitation Clause

December 19, 2011

The law of restrictive covenants has been touched on by commentators too numerous to mention.  While restrictive covenants are one of the most discussed subjects in labour and employment law, recent court decisions illustrate the reluctance of Canadian courts to enforce restrictive covenants that are more than what is reasonably necessary to protect the employer’s interests.

Generally speaking, a restrictive covenant acts to restrict the activities of a former employee after their employment has ended.  They usually come in one of two forms: non-competition clauses and non-solicitation clauses.  The law on restrictive covenants is that they are prima facie unenforceable as they are in restraint of trade and therefore against public policy.  In order to be enforced they must be proven by the party that seeks to enforce them as being a reasonable limit on trade.

Accordingly, one of the most common issues litigated with regard to restrictive covenants is whether they function to protect the employer’s interest and go no further (and are therefore reasonable and enforceable) or whether they go too far and limit the employee’s ability to earn a living or engage in trade (and therefore are unreasonable and unenforceable).

Another truism of the law regarding restrictive covenants is that a non-competition clause will almost never be considered reasonable if a non-solicitation clause would have sufficed to protect the employer’s interests. Generally speaking, the difference between the two is that a non-competition clause prevents the employee from working in the same industry as the employer at all, whereas a non-solicitation clause merely prevents the employee from contacting and/or soliciting the clients and/or other employees of the employer.

As a result, non-competition clauses are much more difficult to enforce than non-solicitation clauses.  However, non-solicitation clauses also often find themselves being overturned as being unreasonable with regard to the constraints they place on the employee.  When looking at these constraints, the Court will normally examine the geographical area covered by the clause, the length of time the clause operates, and most importantly with regard to non-solicitation clauses, the scope of the restriction.

In Phoenix Restorations Limited v. Brownlee, 2010 BCSC 1749, Phoenix sought an interim injunction against the former employee to enforce a non-solicitation clause.  In that case, the clause read as follows:

[Employee will not]…solicit, divert or hire, or attempt to solicit, divert or hire, to the competitive entity, any individual or entity, which was an actual or actively sought prospective client or customer of the company.

The Court refused to order the interim injunction because the clause covered all clients and aspects of Phoenix’s business and therefore was too broad to be reasonable.  In other words it was broader than necessary to protect Phoenix’s legitimate business interests.

In another recent case, Mason v. Chem-Trend Limited Partnership, [2011] O.J. No. 1994 (C.A.) (Q.L.) the contract in question contained both a non-competition and non-solicitation clause.  It stated:

…I [the employee] will not, for a period of one year following termination…[work with or for or solicit business from] any business entity which was a customer of the company during the period in which I was an employee…

The Ontario Court of Appeal ruled that this term was also unreasonable and therefore unenforceable because:

  1. The employer was already protected by a confidentiality clause.
  2. By virtue of its wording, the covenant also restricted the employee from working with former clients.  Over a 17 year period, this was a huge number of potential clients. The Court held that this was overly broad, and also not practicable, as the employee would have no way of knowing which potential clients may have done business with the employer over the last 17 years.
  3. The employee did not occupy a senior enough position to warrant the level of restriction.

By way of contrast, the recent case of Edward Jones v. Mirminachi, [2011] B.C.J. No. 402 (S.C.) (Q.L.) provides an excellent example of a non-solicitation clause that was not too broad and therefore was enforced by the Court.  The wording of the clause read as follows:

“[Y]ou agree for a period of one year following the termination of your employment, that you will not solicit by mail, phone, electronic communication, personal meeting, or any other means, either directly or indirectly, business from any customer of Edward Jones who you served or whose name became known to you during your employment with Edward Jones.  Your agreement not to solicit means that you will not, during your employment in any capacity, and for a period of one year thereafter, initiate any contact or communication, of any kind whatsoever, for the purpose of inviting, encouraging or requesting any Edward Jones customer to transfer from Edward Jones to you or to your new employer, to open a new account with you or with your new employer, or to otherwise discontinue its patronage and business relationship with Edward Jones.”

Mirminachi applied to the Court for a declaration that the non-solicitation clause was unenforceable because it was overly broad.  Mirminachi argued that the second sentence of the clause modified the first sentence such that Mirminachi would be restricted from any contact with any Edward Jones customer.

In response, Edward Jones (the employer) argued that when the clause was read in its entirety, the prohibition was not with respect to all clients of Edward Jones, but only with respect to those who had been known to Mirminachi.

The Court agreed with Edward Jones’ interpretation finding that the second sentence was in fact to be read in light of the first sentence in the clause, and that therefore the restriction against solicitation applied only to those clients who Mirminachi had served or had knowledge of during her employment.  As such it was not overly broad and could be enforced.

The Edward Jones non-solicitation clause is an excellent (and somewhat rare) example of a non-solicitation clause which was carefully drafted to reasonably protect the employer’s interest without unduly impacting the employee’s ability to earn a living.  Accordingly it is a good example of how a restrictive covenant should only be as restrictive as is necessary to protect the employer’s interests.

This Cox & Palmer publication is intended to provide information of a general nature only and not legal advice.

Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.

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Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.