Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Labour & Employment, June 2011
In its recent decision in Mason v. Chem-Trend Limited Partnership, the Ontario Court of Appeal confirmed that a restrictive covenant that prohibited a former employee from competing with his previous employer by providing services to or soliciting business from all current and former customers of that company anywhere in the world for a period of one year was much too broad to be enforceable.
The Facts
In 1992, Tom Mason was hired as a salesperson by Chem-Trend Limited Partnership, a chemical developer and manufacturer. At that time, he signed a standard Chem-Trend Confidential Information Guide and Agreement, which contained the following clause restricting his future activities after his employment with Chem-Trend ended:
When his employment was terminated 17 years later, Mr. Mason's sales territory spanned all of Canada and certain mid-Atlantic U.S. states. As a result, he was familiar with a number of Chem-Trend's customers, some of which operated worldwide. Moreover, as a technical sales representative, he had acquired significant knowledge about Chem-Trend's business, including about its products and pricing.
The Reasons
The Court of Appeal gave four reasons for finding that the restrictions on Mr. Mason's post-employment activities imposed by the clause quoted above were not reasonable:
- As is the case with many such agreements, in the Chem-Trend
agreement there was a separate confidentiality clause prohibiting
Mr. Mason from using or disclosing any trade secrets or
confidential information after the termination of his employment,
so the additional restrictions on competition and solicitation were
not necessary to protect Chem-Trend's confidential information
or trade secrets.
- The prohibition against dealing with former customers was not
justifiable because, among other things, any information Mr. Mason
may have had about former Chem-Trend customers going back over a
period of 17 years was stale and likely of little competitive
value.
- Mr. Mason was not the president or CEO of the company, but
simply one of a number of salespeople who dealt with
Chem-Trend's customers in a limited territory, i.e., he did not
have a relationship with or special knowledge about all of
them.
- The scope of the prohibited activity was practically unworkable. It was not possible for Mr. Mason to be sure whether he was prohibited from dealing with a prospective customer since he neither knew all of Chem-Trend's customers nor had access to its full current and archival customer lists.
In balancing Chem-Trend's rights to protect its trade secrets and customer information with the public interest in free and open competition in the context of this case, the Court of Appeal concluded that "the complete prohibition on competition for one year is overly broad as well as unworkable in practice and makes the restrictive covenant unreasonable and unenforceable."
Conclusion
In summary, the Court of Appeal affirmed that any restriction on an employee's post-employment activities must, above all else, provide clear guidance to the employee and be reasonable. The prohibited activity, the geographic scope and the time-frame must be expressly tailored to the specific employee's role within and actual knowledge of the company's business and customers; the restrictions must be workable on a practical level (i.e., the employee must be able to determine what clients he/she is prohibited from soliciting); and the restrictions must be required to protect a legitimate business interest beyond the protection of trade secrets and confidential information that are already protected by other express provisions.
With this decision, the Court of Appeal reminds employers that they should not use one-size-fits-all restrictive covenants but must carefully consider what, if any, restrictions are reasonable to impose on each employee and then carefully draft restrictive covenants to ensure that they do not overreach.
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