Insurance company granted injunction against former senior insurance executive, barring the executive from soliciting clients, recruiting former employees or disclosing confidential information.
An employer was recently successful enforcing a non- solicitation and non-competition clause because it was not overly broad and freely agreed to.
The facts
The employer was a large insurance brokerage offering a broad range of commercial and consumer insurance to clients. In the insurance context, the point of contact between client and the company is a specialized sales representative who usually has intimate knowledge of the inner workings of the business and the needs and interests of each client. Due to this unique relationship between representative and employee, it is common to place provisions in employment agreements, which restrict the ability of an employee, post employment, to compete with or solicit clients from an employer in the event that an employee leaves an insurance brokerage.
In the present case, the employee became a key person in the marine insurance division, and was eventually appointed senior vice-president of the division, an executive position. Upon being appointed to this position, the employee's promotion was subject to an employment agreement, prohibiting him from competing with the employer, soliciting the employer's clients or employees, or using the employer's confidential information for a period of 12 months after leaving the employer.
The employee eventually resigned and asked the employer to sell its marine insurance division to him which was refused. The employee started his own business and aggressively solicited clients and several former employees of the employer who resigned and changed offices. The employer noted a substantial reduction in profits from its marine insurance division and brought an application for an injunction enforcing the non-competition clauses.
The Supreme Court of British Columbia's decision
The court reviewed the language of the clauses to determine enforceability, noting that the close relationship that develops between broker and client often leads to vulnerability on the part of the employer. The court placed distinct emphasis on the economic risk that the employer faced from the competing employee due to this unique relationship. The employee had acted as a medium between marine insurance clients and employer and employee had voluntarily agreed to the clauses. However, the non-competition clause was held to be unreasonable because the provisions were overly broad as it would prevent the employee from doing any function in any area of insurance brokerage. In addition, the use of uncertain language such as "concerned with" and "interested in" in conjunction with "in any business or enterprise that competes with the company" were deemed to be ambiguous and too broad.
The court held that the employer had established a prima facie case for enforcement of the non-solicitation and confidentiality clauses. Evidence supported the allegation that the employee had solicited both clients and employees subsequent to his departure and an injunction was granted against the employee for a period of 12 months following the termination of his employment. Furthermore, the employee was ordered to return all confidential client information and refrain from soliciting clients or recruiting employees of his former employer.
What this means for you
The Supreme Court of British Columbia's decision regarding non-competition clauses in Hub International (Richmond Auto Mall) Ltd. v. Mendham, 2011 BCSC 1780 reflects a similar attitude with regard to judicial interpretation of non-competition clauses, particularly in an insurance context. The general consensus is that, owing to the inherent vulnerability of employers in the insurance sector from having their clients and information used by former employees, courts will only uphold non-competition clauses in employment contracts if they are carefully worded and not overly broad.
As an employer, draft clear clauses in employment contracts. In the event that a clause is drafted in a manner that is overly broad or unreasonable, it will likely be held to be invalid and could potentially result in adverse economic effects. It is better to be prudent and diligent and protect business interests before a potential risk arises.
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