Superior Court of Justice Confirms Restrictive Covenants Voidable Unless Reasonable

Written by Lewis Waring, Paralegal and student-at-law, Editor, First Reference

In Stress-Crete Limited v Harriman, 2019 ONSC 2773 (“Stress-Crete”), the Ontario Superior Court of Justice (“the Court”) partially granted an injunction to an employer against its former employee, upholding two out of three restrictive covenants present in the parties’ employment contract. Namely, the Court upheld the contract’s non-solicitation clause and confidentiality clause, but refused to uphold its non-competition clause. In partially granting this injunction, the Court in Stress-Crete confirmed and clarified the law’s approach to restrictive covenants, that such clauses are unenforceable unless reasonable and are to be interpreted narrowly.

Parties

The applicants and employers in this case, Stress-Crete Limited and King Luminaire Company Inc., (“the Corporations”) are two family-run Ontario corporations under the same principal, Michael Schwenger. The Corporations carry on business internationally and have affiliated offices throughout southern Ontario and the United States. Services provided by the Corporations include supplying commercial, municipal, utility and industrial lighting. The respondent and employee, Stephen Harriman (“Harriman”), was hired on August 15, 2011, as a Regional Sales Manager with a salary of $60,000.00 per annum. On September 22, 2014, Harriman was promoted to Sales Manager of US Northeast and Canada and became responsible for the management of Regional Sales Managers within his assigned geographical area. Harriman continued working for the Corporations in this capacity until he submitted his resignation on October 22, 2018.

Facts

The Corporations’ suit against Harriman arose as a result of the effect of certain terms of the parties’ employment agreement on the circumstances of the latter’s resignation. The employment agreement signed by the parties included three restrictive covenants, a confidentiality clause, a non-solicitation clause and a non-competition clause. In the employee’s resignation letter, Harriman stated that he was “contemplating numerous offers of employment, some of which were from non-competitors of Stress-Crete (at para 7).” On October 24, 2018, the Corporations responded with an offer of “continued employment until such time that he obtained alternative employment with a non-competitor of Stress-Crete (at para 8).” The Corporations also offered to assist Harriman with finding alternative employment with a non-competitor.

Harriman, in stating that some of the offers he was contemplating were from non-competitors, implied he was, at a minimum, considering an offer from a competitor. The Corporations, in offering to assist Harriman in finding alternative employment, attempted to persuade Harriman against accepting an offer from a competitor. Despite their efforts, on October 26, 2018, Harriman communicated to the Corporations that he was accepting a sales representative position with Cyclone Lighting (“Cyclone”), a competitor of the Corporations.

Positions

The Corporations argued that their employment agreement with Harriman had been breached on two grounds. Firstly, by accepting a job offer from Cyclone, the employee had breached the non-competition clause of his agreement with the Corporations. Secondly, the Corporations alleged that Harriman had taken client information and thus breached the confidentiality and non-solicitation clauses of his agreement with the Corporations. As a result of these two breaches, the employer argued that the employee had caused them irreparable harm and therefore an injunction was an appropriate remedy.

Harriman argued that the agreement’s restrictive covenants were “vague, overly broad, unreasonable, and contrary to the public interest (at para 13).” He argued that granting the employer an injunction would cause him irreparable harm insofar as he would be rendered jobless. In contrast, Harriman held that the Corporations would suffer no irreparable harm if their requested injunction was not granted because he did not possess any “proprietary information, trade secrets, or otherwise confidential information (at para 13)” which required protection. Any information which he had accessed in his capacity as an employee was said to be either available to the public or not related to the position he had accepted with Cyclone.

Restrictive covenants

Restrictive covenants are only enforceable by courts in certain circumstances. In that sense, they are considered “voidable” and will only be enforced in accordance with certain exceptions. The voidability of restrictive covenants follows from the fact that such clauses are “restraints of trade (at para 30).” At paragraph 19, the Court stated as follows: “As a general rule, restrictive covenants in employment agreements are unenforceable, unless they are reasonable between the parties and not adverse to the public interest.”

Whether or not a restrictive covenant is reasonable and thus enforceable is a matter of whether the party seeking to enforce can prove that the clause permits “no more than is reasonably required to protect its valid proprietary interests (at para 30).” If ambiguity is found in interpreting a restrictive covenant, it is “prima facie unreasonable and unenforceable (at para 20).” The Court stated that such ambiguity may be with regards to “time, activity, or geography (at para 20).”

Injunctions

At issue in Stress-Crete was whether the strict criteria needed to obtain an injunction, determined in RJR-MacDonald Inc., v Canada (Attorney General), 1 SCR 311 (“RJR”), had been fulfilled by the supposed breach of contract committed by the employee. Those criteria are as follows:

a. that there is a serious issue to be tried;

b. that the moving party will suffer irreparable harm if the injunction is not granted; and

c. that the balance of convenience favours the granting of the injunction.

Applying this test, according to the Court, is a matter of examining the presence and nature of any irreparable harm caused by a breach of the restrictive covenants and the balance of convenience, that is, the irreparable harm caused to the respondent by granting the injunction versus the irreparable harm caused to the applicant by refusing the injunction. These considerations, then, are to be considered in context of the strength of the applicant’s case overall. If the applicant’s case is found to be strong, the irreparable harm caused and the balance of convenience will be less determinative. In other words, the more egregious the breach, the less important the harm caused by that breach will be.

Serious issue

The Court delved into each branch of the RJR test in applying it to the facts in Stress-Crete. With regards to the first branch, whether there was a “serious issue” to be tried, the Court made a distinction between types of restrictive clauses and stated that certain types were subject to a higher standard. Specifically, the Court said that when a restrictive covenant is a non-competition clause (as opposed to a non-solicitation clause) the question of whether there is a “serious issue to be tried” is to be substituted by the question of whether the applicant has a “strong prima facie case (at para 31).”

In essence, the Court stated that non-competition clauses are to be subjected to closer scrutiny because they are seen as particularly limiting and often unnecessary in the sense that another restrictive covenant, such as a non-solicitation clause, may accomplish the same ends. At paragraph 39, the Court stated this point as follows: “Various courts have been reluctant to uphold non-compete clauses where a non-solicitation clause would adequately protect an employer’s interest.”

Irreparable harm

Whether or not a party has suffered irreparable harm is a question that applies to the nature of the harm suffered rather than a matter of the degree. Harm that is irreparable is not necessarily harm that is particularly egregious, but instead that which is unquantifiable. An injunction is appropriate redress for unquantifiable harm because if harm cannot be calculated then it cannot be remedied by damages. In this sense, unquantifiable harm is not that which is unfinancial, but instead is often financial harm that cannot be calculated.

In Stress-Crete, the irreparable harm alleged was in the form of financial loss. However, the financial loss caused by the employee’s breach was a result of the employer’s loss of business or market share. Specifically, the employee’s breach of contract was found by the Court to be an example of unfair competition in pricing and product marketability, which the Court found to be a harm which “damages may not adequately compensate (at para 61)” because it would effect the employer’s ability to obtain further contracts.

Balance of convenience

The “balance of convenience” element of the RJR test was recognized by the Court as being similar to the irreparable harm element. However, its distinction from the irreparable harm element lies in its focus on non-monetary harm. While the irreparable harm branch in Stress-Crete focused on issues such as market loss, the balance of convenience instead was a matter of the protection of proprietary interests of the employer versus the employee’s inability to work within the lighting industry.

Findings

The Court considered each restrictive covenant separately and, as stated above, ultimately granted an injunction to the employer for its non-solicitation and confidentiality clauses but not for its non-competition clause.

The Court found the non-competition clause to be unreasonable because its spatial limitation was ambiguous. Specifically, the clause stated that Harriman was prohibited from working for a competitor of the Corporations “within a 750-mile radius of any Stress-Crete Ltd., Stress-Crete Inc., or King Luminaire Co., production facilities (at para 24)”. The Court found this spatial limitation to be ambiguous, questioning whether it would apply to every employer facility within North America.

The non-solicitation clause, on the other hand, was found to be reasonable. The temporal and spatial limitations were within 24 months of dismissal and within 750 miles of the employer’s head office, respectively. The 750-mile limitation was found to be limited to the employer’s head office because the arguments made by the parties regarding that clause were limited to Ontario. The activity stated in the clause was the selling of street lights. These details were found to be reasonably clear and thus, not voidable.

The Court also found that Harriman’s testimony, which included claims that he had only dealt with US clients, was not believable. In rejecting that testimony, the Court found that Harriman “has or will attempt to solicit clients of Stress-Crete immediately after his resignation from the applicant’s business. This is amply borne out in his evidence arising from the cross-examinations (at para 44).”

The confidentiality clause was also found to be reasonable. This clause was reasonable because it was discovered that Harriman had created a folder with the employer’s information on a home computer. Although the Court agreed that the clause did not define “confidential information,” that lack of definition was found to be irrelevant.

Takeaways

One takeaway for Ontario employers from the Stress-Crete case is that on a general level, restrictive covenants are considered unenforceable by the Courts, subject to the exception that they are reasonable. This means that when an employer uses a restrictive covenant, it starts from a point of being void. Although it may seem semantic, it implies that the court system has a strong instinct to void any and all restrictive covenants. Whether such clauses are upheld is a matter of carefully drafting them with regards to, at a minimum, space, time, and subject matter. If a court finds that a restrictive covenant can be interpreted in a variety of ways, it will be inclined to find it void.

A more specific takeaway for Ontario employers is that non-competition clauses are of particular distaste to Ontario courts. If Ontario employers wish to achieve a certain goal in drafting a restrictive covenant, it is advisable that they consider if their goals can be achieved through a different restrictive covenant, such as a non-solicitation clause. In particular, note that in Stress-Crete, the same 750-mile spatial limitation upheld in the non-solicitation clause was found unreasonable in the non-competition clause. However, if a non-competition clause is the only vehicle by which an employer can achieve its goals, it is imperative that such a clause be clear and unambiguous.

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