I've commented before that, in the cases where an employer sues its former employees for unfairly competing, it is often a make or break issue whether or not the employees walked away with proprietary confidential information of the old employer.
A new case, Altus Group Limited v. Yeoman, highlights this.
Altus Group is involved in, among other things, Realty Tax consultation. In November 2011, the employment of its CEO, Gary Yeoman, was terminated. Gary's sons, who also worked for Altus, resigned shortly thereafter, as well as several other employees, and they have since established Yeoman & Company Paralegal Professional Corporation (YPC), which directly competes with Altus' realty tax business. They have poached 48 of Altus' clients thus far.
Altus argues that it has restrictive covenants - non-solicitation and non-competition agreements - binding the employees, and that they are in breach of those covenants, and so it moved for an injunction to shut them down.
The employees are challenging the enforceability of the restrictive covenants, on a number of bases. They also argue that Altus knew about and even supported their initial start-up efforts, until YPC started attracting more of Altus' employees. (Shades of the Dent Wizard case I discussed last year.)
Altus also believes that one of the defecting employees brought confidential information with him, and wanted an order appointing a forensic investigator to look into it. The employee's laptop was re-imaged before being returned, which suggests to Altus that the purpose was to conceal data transfers.
The Court declined to grant either order, finding that the 'irreparable harm' requirement for an interlocutory injunction wasn't met to enforce the restrictive covenants, and that the evidence of stealing confidential data was insufficient to warrant a forensic investigator.
The Law
There's some interesting discussion about the test for interlocutory injunctions. (For lay readers, an "interlocutory injunction" means an order to do something or refrain from doing something during the course of proceedings. Essentially, where you need relief and simply can't wait for a full trial, you ask the Court to grant you interim relief until the matters are finally decided.)
Traditionally, the test is three-fold. To obtain an injunction, you need to establish (1) a serious issue to be tried; (2) that you will suffer 'irreparable harm' if the injunction is not granted; and (3) that the balance of convenience favours granting the injunction (i.e. that the harm to you of not granting you the injunction is more serious than the harm to the other party of granting it).
But there has been some evolution in recent years, and it isn't completely settled. It harkens to the difference between a "serious issue to be tried" and a "strong prima facie case". The former requires a motions judge to say only that the case doesn't look frivolous - the plaintiff appears to be raising a case that is capable of succeeding. The latter is a much higher standard, requiring the Court to say that the plaintiff has led a case strong enough that it is likely to win the case. It used to be argued (until the Supreme Court dealt with it in 1994 in RJR MacDonald) that a "strong prima facie case" was required for an injunction to be granted. The Supreme Court found in RJR MacDonald that, in general, only a "serious issue to be tried" is required.
But that wasn't the end of the matter. In some Provinces, and in some cases, Courts over time have looked at certain cases as being outside of the framework of RJR MacDonald. Where a mandatory injunction is sought (requiring some positive act, rather than just restraining from a given act), the Courts may find that a "strong prima facie case" is required. (This is a difficult distinction. Many orders cannot meaningfully be defined in these terms, and once you're at the point of litigation, it usually means that the status quo is already changed. For example, when you have an employee who has breached a non-solicitation agreement and proceeded to enter into major contracts with clients of the employer, does an order requiring him to terminate those contracts require positive action, or merely restrain him from acts?)
Some Courts have held a plaintiff to the "strong prima facie case" standard where there are no material facts in dispute. This makes a certain amount of sense, making it akin to a motion for summary judgment. The logic is that the Court is able to fully decide the issue without needing a trial. (Of course, without material facts in dispute, it doesn't make sense that the standards would be different. If I'm the plaintiff, and the defendant agrees with me on all the material facts, and the judge still isn't satisfied that it's likely that I'll win, it doesn't make sense to go on to say that nonetheless there is a serious issue to be tried.)
Some Courts have required a "strong prima facie case" where granting the order will effectively render the litigation moot. Imagine a dispute arising as to an event in the near future. Let's say that we're approaching the Olympics, and I've succeeded in Olympic qualifying rounds, so I should be going to London. At the 11th hour, my sport's Canadian association says to me "You don't meet the criteria to represent your country in this sport." (Suppose it's a citizenship issue, or a disagreement as to the interpretation of the qualifying criteria. Some sports associations don't strictly require citizenship, but sometimes have looser requirements including residency or contribution to the sport domestically, the interpretation of which might be argued about.) So I sue them, and bring a motion seeking an interlocutory injunction that they reinstate me. If the motion is granted, the dispute is over - they have to send me to the Olympics, and I've won. In such a case, the Courts may require me to prove a 'strong prima facie case'.
So the standard to be applied has been increasingly loose over the years, but now there's a new hiccup: Some Courts are now beginning to say that, where you have a strong prima facie case, you may not need to prove irreparable harm or balance of convenience. If the Court is saying "I expect that you will succeed", it makes more sense to just grant the relief.
To my mind, there's a major theoretical problem with that argument: Injunctive relief of this nature is in the nature of 'equitable' relief, which is only available where common law remedies are inadequate. In other words, at the end of a trial, I can only force you to comply with the terms of our contract if my loss by your breach could not be compensated by payment of money. Let's use the example of a housing purchase - I'm buying your house, and you refuse to close. I *really* like your house. Its architecture, location, and character are precisely what I'm looking for, and there's no other house that suits my needs quite like it anywhere. In this case, I might be able to force you to close. However, these cases are quite rare, because the simple truth is that houses are increasingly mass-produced. If another similar house in the same neighbourhood is up for sale, but for a higher price, it's open to me to just buy that house instead and go after you for the extra cash. Because that option is available to me, I can't compel you to close. If we go to the end of the trial, and I succeed in proving that you breached the contract and it will cost me an extra $50,000 to get an equivalent house now, the only remedy available to me is the $50,000. To some extent, the "irreparable harm" requirement imports that principle, and if you ignore the irreparable harm, then at the interlocutory injunction stage you could simply say "strong prima facie case; therefore close the transaction", thereby awarding me a remedy to which I would never otherwise be entitled.
However, the law in Ontario seems to be leaning towards shades of grey - essentially that, the stronger the plaintiff's apparent case, the less important the irreparable harm and the balance of convenience. That might make sense, provided they never become altogether meaningless.
Application
In this case, the motion judge found that there was a serious issue to be tried, but the evidence was short of establishing a strong prima facie case, and there was no irreparable harm established.
*****
This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Showing posts with label non-competition. Show all posts
Showing posts with label non-competition. Show all posts
Tuesday, August 7, 2012
Friday, February 10, 2012
Wrongful Dismissal and Restrictive Covenants
Here's an interesting decision from the Alberta Court of Appeal, released last August: Globex Foreign Exchange Corporation v. Kelcher, which discusses, among other things, the effects of wrongful dismissal upon restrictive covenants. So suppose I sign an agreement that I will not solicit clients of my employer within two years after the end of my employment, and then my employer eventually fires me without cause and without notice. What happens to that non-solicitation agreement?
I think it's important to highlight, at the outset, the definition of "wrongful dismissal": You've seen me refer to Love v. Acuity Investments on a couple of occasions before to note that an employer's actual obligation on termination is to provide actual notice, and that firing without notice but providing pay in lieu is still a breach of contract; the pay in lieu is an attempt to compensate the employee for the breach.
The Alberta Court of Appeal similarly references Love v. Acuity Investments, with the result that we can safely understand that, when they're talking about "wrongful dismissal", they're talking about just about any termination without actual notice.
The conclusion the Court comes to is this: An employer who wrongfully dismisses an employee is not entitled to rely on restrictive covenants. They have repudiated the contract, and are not entitled to continue to hold the employee to his obligations thereunder.
There doesn't appear to be much jurisprudence on the point. A similar, but not quite the same, argument has been raised in respect of termination clauses: Some have argued that a failure by the employer to honour its contractual obligations means that it cannot rely on contractual language limiting pay in lieu of notice. The general conclusion is that this argument must fail: When you're fired without notice, but you're only entitled to a certain amount of notice, your employer's liability is still going to be limited to the notice that they should have provided you if they had complied with the contract.
But restrictive covenants are different. Termination clauses are about obligations of the employer (even though they usually work to the employer's benefit by contrast to common law), whereas restrictive covenants relate to obligations of the employee. So the jurisprudence on termination clauses essentially says: Employer, you breached the contract, so now you have to compensate the other party on the basis of what your contractual obligations were. For this restrictive covenant case, the logic runs much differently: Employer, you repudiated the contract, so now you are not entitled to expect the employee to continue to perform his obligations under it.
Pretty simple when you think about it that way.
The Alberta Court of Appeal relied on a rather old British case - General Billposting v. Atkinson - from 1909, which involved an employer trying to rely on a restrictive covenant after firing an employee with insufficient notice. The House of Lords concluded that the employee was relieved of obligations under the restrictive covenant by the breach of the contract. The case has been cited favourably by the Supreme Court of Canada in the past, but not in a restrictive covenant context.
The logic underlying this case isn't automatic, however: Not every breach of contract will relieve the other party of ongoing responsibilities, nor are all collateral covenant terminated even by a fundamental breach. There is a strong dissent in this case, pointing out that some covenants are clearly indicated to survive the end of an agreement, and that the body of Canadian case law suggests that - notwithstanding a breach of other contractual duties - these will survive. (The dissenting judge, Justice Slatter, points out that the employee is not relieved either of other obligations - for example, it's probably uncontroversial that it would still be wrong for him to misuse confidential information of the employer.)
My Thoughts
This is a close one. Justice Slatter has some very good points - it's hard to deny his logic. (He is also quite critical of some Ontario law jurisprudence on "fresh consideration", and as much as I think the fresh consideration doctrine in Ontario is useful law, his criticisms of it as being "artificial" are not unfounded.)
The majority points out several good reasons why an employer who dismisses without notice should not be entitled to rely on the restrictive covenant, yet they aren't necessarily persuasive on a closer look. The first two are from other British jurisprudence; the third is an addition of their own.
(1) Otherwise an employer could hire a potential competitor and dismiss them shortly thereafter just for the benefit of the restrictive covenant. This is true, and concerning, but not solved by the majority's approach here. The unfairness is not caused by the wrongfulness of the termination. Particularly if the employer used a well-drafted employment agreement with a good termination clause, the employment could be terminated shortly thereafter with very minimal responsibilities, without actually breaching the contract. Thus, the majority's solution...isn't a solution. Justice Slatter argues that enforcing a restrictive covenant in such a case would be unconscionable, which seems like a cleaner way of dealing with the problem.
(2) Enforcing a restrictive covenant in the face of a wrongful termination negates the consideration for the acceptance of the restrictive covenant. This one doesn't seem right: If I accepted a job with a restrictive covenant attached, the consideration was "the job", not "continued employment". If I performed services and received remuneration under the contract of employment, it's hard to say that, just because it's terminated without appropriate notice, the original contract is now devoid of consideration. The principle is framed separately as suggesting that the premature termination of the contract will deny the employee the "extra amount of remuneration" for having agreed to the restrictive covenant. Still seems wrong. Contracts are whole entities. You don't need separate consideration for each and every covenant in a contract. If there were, it isn't necessarily true that the employee would be denied it. ("Okay, I'll agree to the restrictive covenant, but in that case I'll want a premium on my wage rate throughout the employment.") Even if the consideration were tied to the termination of employment...well, let's run with this for a second.
Let's clear out the rest of the contractual terms, and discuss only contractual notice of termination and the restrictive covenant. Suppose I have a contract that entitles me to 3 months notice of termination, with no restrictive covenants. You're my employer, and you ask me to agree to a non-competition agreement for one year after the end of my employment. I answer, "Well, it will be harder for me to find a new job in a different field. I'll tell you what, I'll agree to the non-comp if you extend my contractual notice period to 9 months." We agree on those terms, and you later fire me without actual notice.
Okay, so I've lost the benefit of the extension of the notice period, right? No, still wrong. Because in fact, I am still entitled to a remedy for that breach, now being three times what it would have been but for my agreement to the restrictive covenant. That still smells like consideration to me.
(3) Mitigation. This is actually a good point, and the first thought that came into my head. The duty to mitigate by finding new employment, triggered by the wrongful dismissal, is in conflict with a restrictive covenant which limits the prospects of new employment. To wipe restrictive covenants off the plate where the duty to mitigate is triggered...well, it's a nice clean solution.
But it isn't the only solution. Indeed, where an employee is prevented from working in his/her field for a period of time, it would make more sense to argue that the duty to mitigate should be largely lifted through the running of the restrictive covenant.
Let's put these beside some of the legitimate concerns raised by Justice Slatter, namely that an employer can, without blameworthy conduct, fail to provide the necessary notice - for example, in a scenario where the notice provided falls slightly short of the notice period a court finds, or where the assessment at the time of "just cause" falls slightly short of the threshold at trial. It does indeed seem unjust to deny an employer of the benefit of such a clause under such circumstances.
*****
This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
I think it's important to highlight, at the outset, the definition of "wrongful dismissal": You've seen me refer to Love v. Acuity Investments on a couple of occasions before to note that an employer's actual obligation on termination is to provide actual notice, and that firing without notice but providing pay in lieu is still a breach of contract; the pay in lieu is an attempt to compensate the employee for the breach.
The Alberta Court of Appeal similarly references Love v. Acuity Investments, with the result that we can safely understand that, when they're talking about "wrongful dismissal", they're talking about just about any termination without actual notice.
The conclusion the Court comes to is this: An employer who wrongfully dismisses an employee is not entitled to rely on restrictive covenants. They have repudiated the contract, and are not entitled to continue to hold the employee to his obligations thereunder.
There doesn't appear to be much jurisprudence on the point. A similar, but not quite the same, argument has been raised in respect of termination clauses: Some have argued that a failure by the employer to honour its contractual obligations means that it cannot rely on contractual language limiting pay in lieu of notice. The general conclusion is that this argument must fail: When you're fired without notice, but you're only entitled to a certain amount of notice, your employer's liability is still going to be limited to the notice that they should have provided you if they had complied with the contract.
But restrictive covenants are different. Termination clauses are about obligations of the employer (even though they usually work to the employer's benefit by contrast to common law), whereas restrictive covenants relate to obligations of the employee. So the jurisprudence on termination clauses essentially says: Employer, you breached the contract, so now you have to compensate the other party on the basis of what your contractual obligations were. For this restrictive covenant case, the logic runs much differently: Employer, you repudiated the contract, so now you are not entitled to expect the employee to continue to perform his obligations under it.
Pretty simple when you think about it that way.
The Alberta Court of Appeal relied on a rather old British case - General Billposting v. Atkinson - from 1909, which involved an employer trying to rely on a restrictive covenant after firing an employee with insufficient notice. The House of Lords concluded that the employee was relieved of obligations under the restrictive covenant by the breach of the contract. The case has been cited favourably by the Supreme Court of Canada in the past, but not in a restrictive covenant context.
The logic underlying this case isn't automatic, however: Not every breach of contract will relieve the other party of ongoing responsibilities, nor are all collateral covenant terminated even by a fundamental breach. There is a strong dissent in this case, pointing out that some covenants are clearly indicated to survive the end of an agreement, and that the body of Canadian case law suggests that - notwithstanding a breach of other contractual duties - these will survive. (The dissenting judge, Justice Slatter, points out that the employee is not relieved either of other obligations - for example, it's probably uncontroversial that it would still be wrong for him to misuse confidential information of the employer.)
My Thoughts
This is a close one. Justice Slatter has some very good points - it's hard to deny his logic. (He is also quite critical of some Ontario law jurisprudence on "fresh consideration", and as much as I think the fresh consideration doctrine in Ontario is useful law, his criticisms of it as being "artificial" are not unfounded.)
The majority points out several good reasons why an employer who dismisses without notice should not be entitled to rely on the restrictive covenant, yet they aren't necessarily persuasive on a closer look. The first two are from other British jurisprudence; the third is an addition of their own.
(1) Otherwise an employer could hire a potential competitor and dismiss them shortly thereafter just for the benefit of the restrictive covenant. This is true, and concerning, but not solved by the majority's approach here. The unfairness is not caused by the wrongfulness of the termination. Particularly if the employer used a well-drafted employment agreement with a good termination clause, the employment could be terminated shortly thereafter with very minimal responsibilities, without actually breaching the contract. Thus, the majority's solution...isn't a solution. Justice Slatter argues that enforcing a restrictive covenant in such a case would be unconscionable, which seems like a cleaner way of dealing with the problem.
(2) Enforcing a restrictive covenant in the face of a wrongful termination negates the consideration for the acceptance of the restrictive covenant. This one doesn't seem right: If I accepted a job with a restrictive covenant attached, the consideration was "the job", not "continued employment". If I performed services and received remuneration under the contract of employment, it's hard to say that, just because it's terminated without appropriate notice, the original contract is now devoid of consideration. The principle is framed separately as suggesting that the premature termination of the contract will deny the employee the "extra amount of remuneration" for having agreed to the restrictive covenant. Still seems wrong. Contracts are whole entities. You don't need separate consideration for each and every covenant in a contract. If there were, it isn't necessarily true that the employee would be denied it. ("Okay, I'll agree to the restrictive covenant, but in that case I'll want a premium on my wage rate throughout the employment.") Even if the consideration were tied to the termination of employment...well, let's run with this for a second.
Let's clear out the rest of the contractual terms, and discuss only contractual notice of termination and the restrictive covenant. Suppose I have a contract that entitles me to 3 months notice of termination, with no restrictive covenants. You're my employer, and you ask me to agree to a non-competition agreement for one year after the end of my employment. I answer, "Well, it will be harder for me to find a new job in a different field. I'll tell you what, I'll agree to the non-comp if you extend my contractual notice period to 9 months." We agree on those terms, and you later fire me without actual notice.
Okay, so I've lost the benefit of the extension of the notice period, right? No, still wrong. Because in fact, I am still entitled to a remedy for that breach, now being three times what it would have been but for my agreement to the restrictive covenant. That still smells like consideration to me.
(3) Mitigation. This is actually a good point, and the first thought that came into my head. The duty to mitigate by finding new employment, triggered by the wrongful dismissal, is in conflict with a restrictive covenant which limits the prospects of new employment. To wipe restrictive covenants off the plate where the duty to mitigate is triggered...well, it's a nice clean solution.
But it isn't the only solution. Indeed, where an employee is prevented from working in his/her field for a period of time, it would make more sense to argue that the duty to mitigate should be largely lifted through the running of the restrictive covenant.
Let's put these beside some of the legitimate concerns raised by Justice Slatter, namely that an employer can, without blameworthy conduct, fail to provide the necessary notice - for example, in a scenario where the notice provided falls slightly short of the notice period a court finds, or where the assessment at the time of "just cause" falls slightly short of the threshold at trial. It does indeed seem unjust to deny an employer of the benefit of such a clause under such circumstances.
*****
This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Friday, September 16, 2011
Back to Basics: Why should we use an employment contract?
Most sophisticated employers use (or should use) written contracts for their employees. The advantages are myriad, in terms of setting out expectations for how the employment relationship should move forward, including remuneration, yet the most significant advantages arise upon termination of the employment relationship.
Termination by the Employee
This is a minor point, but not unimportant. Many employees wrongly think that 2 weeks notice of resignation is just a courtesy. Only in certain narrow circumstances is it statutorily required in Ontario, but under common law an employee must give "reasonable notice" of resignation. That's contextually based, and not the subject of much case law, but it's safe to say that 2 weeks isn't always the magic number. (If you have a great deal of responsibility, and you expect the employer to need time to assign your duties elsewhere, you might consider giving more notice.)
So the advantages of having a clause addressing this in the contract are two-fold: Firstly, it tells the employee in no uncertain terms that they are, in fact, required to give notice, rebutting the myth that they can leave at will if they want to. Secondly, it determines how much notice is required. If the employer thinks that 4 weeks is necessary to make the transition, 4 weeks notice can be required. Or longer, in the right case. Employees seldom feel very empowered to negotiate the terms of an employment contract, and even less so as regards termination clauses. (See this earlier entry regarding negotiating termination clauses.)
That being said, insisting on too much notice may send the wrong message to the employee. I have seen contracts requiring employees to give three months of notice, but in one of those contexts (being a contract that was being put to me personally by a prospective employer) it was coupled with other red flags that told me that the firm was having difficulties with employee retention, which factored significantly into me not accepting the offer.
Termination by the Employer
This is, by a large margin, the most common issue to arise from employment contracts. As I discussed in detail in this recent entry, when terminating an employment relationship without just cause, an employer is likewise obligated to give notice or pay in lieu thereof. There's the statutory minimum, which creates a floor for most employees, yet the implied term requiring an employer to give "reasonable notice" usually makes for much more significant liabilities.
So, once again, there are two advantages to the termination clause: It can be used to reduce liabilities to as low as the statutory minimum, and it also provides some degree of certainty. Calculating "reasonable notice" is not an exact science, and an employer shouldn't be surprised if the employee's lawyer is demanding a significantly higher amount of money than the employer's own lawyer opines they should need to pay. Just negotiating a settlement is going to drive up legal fees, and it gets even more expensive if it has to go to litigation.
As well, there are related advantages in terms of limiting the employer's responsibilities. When setting out the terms of the remuneration package in the written contract, Courts have held in some circumstances that terms requiring 'active employment' as of certain dates for bonus eligibility can be enforceable.
Post-Employment Obligations
A written contract at the outset of employment is really the best time to set out any restrictive covenants. If you're going to require non-solicitation or non-competition clauses, that's the place for them. Of course, there are certain requirements for restrictive covenants to be enforceable (which I previously discussed here).
Tomorrow, how to make a written employment contract binding.
*****
This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Termination by the Employee
This is a minor point, but not unimportant. Many employees wrongly think that 2 weeks notice of resignation is just a courtesy. Only in certain narrow circumstances is it statutorily required in Ontario, but under common law an employee must give "reasonable notice" of resignation. That's contextually based, and not the subject of much case law, but it's safe to say that 2 weeks isn't always the magic number. (If you have a great deal of responsibility, and you expect the employer to need time to assign your duties elsewhere, you might consider giving more notice.)
So the advantages of having a clause addressing this in the contract are two-fold: Firstly, it tells the employee in no uncertain terms that they are, in fact, required to give notice, rebutting the myth that they can leave at will if they want to. Secondly, it determines how much notice is required. If the employer thinks that 4 weeks is necessary to make the transition, 4 weeks notice can be required. Or longer, in the right case. Employees seldom feel very empowered to negotiate the terms of an employment contract, and even less so as regards termination clauses. (See this earlier entry regarding negotiating termination clauses.)
That being said, insisting on too much notice may send the wrong message to the employee. I have seen contracts requiring employees to give three months of notice, but in one of those contexts (being a contract that was being put to me personally by a prospective employer) it was coupled with other red flags that told me that the firm was having difficulties with employee retention, which factored significantly into me not accepting the offer.
Termination by the Employer
This is, by a large margin, the most common issue to arise from employment contracts. As I discussed in detail in this recent entry, when terminating an employment relationship without just cause, an employer is likewise obligated to give notice or pay in lieu thereof. There's the statutory minimum, which creates a floor for most employees, yet the implied term requiring an employer to give "reasonable notice" usually makes for much more significant liabilities.
So, once again, there are two advantages to the termination clause: It can be used to reduce liabilities to as low as the statutory minimum, and it also provides some degree of certainty. Calculating "reasonable notice" is not an exact science, and an employer shouldn't be surprised if the employee's lawyer is demanding a significantly higher amount of money than the employer's own lawyer opines they should need to pay. Just negotiating a settlement is going to drive up legal fees, and it gets even more expensive if it has to go to litigation.
As well, there are related advantages in terms of limiting the employer's responsibilities. When setting out the terms of the remuneration package in the written contract, Courts have held in some circumstances that terms requiring 'active employment' as of certain dates for bonus eligibility can be enforceable.
Post-Employment Obligations
A written contract at the outset of employment is really the best time to set out any restrictive covenants. If you're going to require non-solicitation or non-competition clauses, that's the place for them. Of course, there are certain requirements for restrictive covenants to be enforceable (which I previously discussed here).
Tomorrow, how to make a written employment contract binding.
*****
This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Sunday, August 7, 2011
Application is not appropriate for enforcing restrictive covenants
For non-law readers, let me first simply explain a point of civil procedure.
In civil litigation, there are really two kinds of proceedings: Applications, and actions. (It's really quite a bit more complicated than that, but let's keep it simple.) An action is what we usually think of as a law suit: I sue you, you defend, we go through disclosure and discovery, pre-trial conferences, then we set a trial date.
An application under the Rules of Civil Procedure is usually a much briefer and simpler process. If I'm issuing a Notice of Application, I will obtain a date from the Court before I even start the process, which could be just a couple of weeks out. I issue the documents, serve them on any respondents, and you have an opportunity to file responding materials...but we end up in Court fairly quickly. Witnesses aren't usually called to testify, but evidence is introduced through affidavit.
It's simpler and faster, but not always permissible under the Rules. Even in cases in which an application is permissible, if there are serious facts in dispute, such matters can be referred to a trial, and are then treated as an action.
In the recent case of Portable Packaging Systems Inc. v. Brackin, the employer attempted to proceed by application to enforce restrictive covenants against the employee, seeking damages and injunctive relief. The Court noted that injunctive relief is only available on an application where it is ancillary to other relief properly sought by application, and damages are seldom available on applications.
The proceeding by application is likely a consequence of the admitted difficulty in proving damages. But the Court ultimately concluded that an application was inappropriate and that the relief sought should be sought by way of an action. Accordingly, the Court dismissed the application.
I question why the decision does not address the applicability of Rule 14.05(3)(d), which permits applications seeking, among other things, "the determination of rights that depend on the interpretation of a ...contract...". Consider, for example, Mason v. Chem-Trend Limited Partnership, which I blogged about here: The employee brought an application for a declaration that restrictive covenants were unenforceable, and the Court of Appeal ultimately found them not to be enforceable.
*****
This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
In civil litigation, there are really two kinds of proceedings: Applications, and actions. (It's really quite a bit more complicated than that, but let's keep it simple.) An action is what we usually think of as a law suit: I sue you, you defend, we go through disclosure and discovery, pre-trial conferences, then we set a trial date.
An application under the Rules of Civil Procedure is usually a much briefer and simpler process. If I'm issuing a Notice of Application, I will obtain a date from the Court before I even start the process, which could be just a couple of weeks out. I issue the documents, serve them on any respondents, and you have an opportunity to file responding materials...but we end up in Court fairly quickly. Witnesses aren't usually called to testify, but evidence is introduced through affidavit.
It's simpler and faster, but not always permissible under the Rules. Even in cases in which an application is permissible, if there are serious facts in dispute, such matters can be referred to a trial, and are then treated as an action.
In the recent case of Portable Packaging Systems Inc. v. Brackin, the employer attempted to proceed by application to enforce restrictive covenants against the employee, seeking damages and injunctive relief. The Court noted that injunctive relief is only available on an application where it is ancillary to other relief properly sought by application, and damages are seldom available on applications.
The proceeding by application is likely a consequence of the admitted difficulty in proving damages. But the Court ultimately concluded that an application was inappropriate and that the relief sought should be sought by way of an action. Accordingly, the Court dismissed the application.
I question why the decision does not address the applicability of Rule 14.05(3)(d), which permits applications seeking, among other things, "the determination of rights that depend on the interpretation of a ...contract...". Consider, for example, Mason v. Chem-Trend Limited Partnership, which I blogged about here: The employee brought an application for a declaration that restrictive covenants were unenforceable, and the Court of Appeal ultimately found them not to be enforceable.
*****
This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Thursday, May 5, 2011
Reasonableness of Restrictive Covenants
An interesting case was just released from the Ontario Court of Appeal.
The case is Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344. Mason worked for Chem-Trend for 17 years, then was terminated, allegedly for cause. This case is not about whether or not there was cause; the wrongful dismissal case is a separate proceeding.
This decision deals with an application for a declaration on the enforceability of a restrictive covenant in Mason's contract, which he signed in 1992. The trial judge found that the clause was enforceable, and Mason appealed. The Court of Appeal allowed the appeal and found it unenforceable.
Here's the language of the clause:
But it does affect reasonableness. Indeed, that becomes a significant problem: It is a global company which has a very large customer list. In order to avoid doing business with any of its customers in competition, Mason would have to simply not compete at all. Anywhere. For a year.
Even beyond that, there seems something rather unreasonable about saying to a departing employee that a customer from 17 years earlier is off-limits today, in light of the fact that the restrictive covenant was only effective for a year. As well, the scale of activities being limited is beyond what is appropriate in the circumstances (Mason was just a technical sales representative with a limited territory).
There is also an interesting discussion on the doctrine of clean hands. It's out of place: As the Court notes, equitable relief isn't being sought. Still, it's useful to note that the Court, when asked to determine the enforceability of the restrictive covenant, shouldn't hold it against the employee if he is already breaching the restrictive covenant. As Justice Gray put it, "[t]he fact that the applicant is engaging in activities that are arguably contrary to the restrictive covenant is of no moment. If the restrictive covenant is invalid, the applicant is free to engage in those activities. If it is valid, the respondent has remedies."
*****
This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
The case is Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344. Mason worked for Chem-Trend for 17 years, then was terminated, allegedly for cause. This case is not about whether or not there was cause; the wrongful dismissal case is a separate proceeding.
This decision deals with an application for a declaration on the enforceability of a restrictive covenant in Mason's contract, which he signed in 1992. The trial judge found that the clause was enforceable, and Mason appealed. The Court of Appeal allowed the appeal and found it unenforceable.
Here's the language of the clause:
3. I agree that if my employment is terminated for any reason by me or by the Company, I will not, for a period of one year following the termination, directly or indirectly, for my own account or as an employee or agent of any business entity, 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 I was an employee of the Company, or take any action that will cause the termination of the business relationship between the Company and any customer, or solicit for employment any person employed by the Company. [Emphasis added by the Court of Appeal.]The main guts of Mason's argument is that he doesn't know all the company's customers, and so can't know who he isn't allowed to do business with. He argued that the clause was ambiguous. The trial judge disagreed and found that the language is, in fact, quite clear. The Court of Appeal agreed with that: There's nothing unambiguous about the language. To the extent that he can't know who he isn't allowed to do business with, that's a separate problem.
But it does affect reasonableness. Indeed, that becomes a significant problem: It is a global company which has a very large customer list. In order to avoid doing business with any of its customers in competition, Mason would have to simply not compete at all. Anywhere. For a year.
Even beyond that, there seems something rather unreasonable about saying to a departing employee that a customer from 17 years earlier is off-limits today, in light of the fact that the restrictive covenant was only effective for a year. As well, the scale of activities being limited is beyond what is appropriate in the circumstances (Mason was just a technical sales representative with a limited territory).
There is also an interesting discussion on the doctrine of clean hands. It's out of place: As the Court notes, equitable relief isn't being sought. Still, it's useful to note that the Court, when asked to determine the enforceability of the restrictive covenant, shouldn't hold it against the employee if he is already breaching the restrictive covenant. As Justice Gray put it, "[t]he fact that the applicant is engaging in activities that are arguably contrary to the restrictive covenant is of no moment. If the restrictive covenant is invalid, the applicant is free to engage in those activities. If it is valid, the respondent has remedies."
*****
This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Saturday, April 2, 2011
Enforcing a Non-Competition Clause
A recent decision from the Ontario Superior Court of Justice, Dent Wizard v. Catastrophe Solutions, could have important implications for non-competition agreements.
Robert Pietrantonio had been the head of Dent Wizard Canada, a paintless dent repair (PDR) company, the Canadian franchisee of Dent Wizard International. He sold the franchise back to DWI and became an employee, then later (in 2007) signed a termination agreement with a non-competition clause.
Following a major hailstorm in Calgary in 2010, DWI failed to take full advantage of the business opportunity presented thereby. Dent Wizard executives and technicians went to Pietrantonio, who at that point was enjoying his retirement on the links in Florida. Pietrantonio started up a new company, Catastrophe Solutions, primarily to capitalize on the Calgary storm.
By the time DWI came around and decided to send technicians to Calgary three weeks after the storm, it had already lost its major contracts with various insurers. Catastrophe Solutions, on the other hand, made millions.
But what about the non-competition clause?
Following the Shafron case, his non-comp was seen as being part of an employment contract (as distinct from a commercial sale contract), which calls for closer Court scrutiny of the reasonableness of its terms.
The issues in this case are complex and myriad, but while the Court's finding that the restrictive covenants are unenforceable is, perhaps, uncontroversial, some of the Court's alternative findings (i.e. if the covenants had been enforceable) are more interesting:
Dent Wizard was leaving its customers high and dry, so to speak, and was exposed to possible litigation for having done so. It was content to allow Catastrophe Solutions to step in and pick up the slack, and therefore was estopped from later suing Catastrophe Solutions. And further, the reason the customers refused to come back to Dent Wizard was because it had left them high and dry (and not because Catastrophe Solutions had come along), so Dent Wizard was the author of its own misfortune and suffered no damages through Pietrantonio's actions.
*****[189] Notwithstanding that DWC effectively abandoned the business opportunity of serving the PDR needs of Aviva and Intact following the July 12, 2010 hailstorm as a result of DWI’s withdrawal decision, Maracle imposes a significant burden on the respondents to establish promissory estoppel. Certainly McNamara did not give any express assurance to Pietrantonio which was intended to affect the legal relationship embodied in the Termination Agreement. Pietrantonio, through Morrison, floated the trial balloon of a royalty agreement, and it was shot down. Given that response by DWI’s President, I do not think that Pietrantonio could reasonably take from the reading of the Intact and Aviva Confirmation Emails to him by Morrison that DWI was providing him with an unambiguous assurance that it would not enforce the restrictive covenants; DWI was hedging its bets. I think Pietrantonio’s approach throughout was to the effect, “If you are not going to tell me to stop, then I’ll go ahead”. Pietrantonio elected not to clarify matters directly with McNamara, and by proceeding with CSI he took on the risk that he might be skating on very thin ice which could crack at any moment.
[190] Yet, at the critical times in July when CSI was moving to meet Aviva and Intact’s business needs with, as I have found, the knowledge of the applicants, that ice did not crack. The applicants’ executives stood by silent, content I think, to allow CSI to mollify Aviva and Intact, thereby reducing the risk that either customer would sue DWC for leaving them high and dry in their time of need.
This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
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