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Non-Competition Clauses: The Perils of Overreaching - International Law Office

International Law Office

Employment & Benefits - Canada

Non-Competition Clauses: The Perils of Overreaching

September 19 2001

Facts
Judgment
Comment


Employers often attempt to protect themselves from competition from former employees by including a non-competition or non-solicitation clause in employment contracts. Non-competition clauses prohibit direct competition for a prescribed period of time within a defined geographic area. Non-solicitation clauses are less restrictive; they only prevent the solicitation of company clients by departing employees.

In the case of Lyons v Multari(1) the Ontario Court of Appeal considered the relationship between non-competition and non-solicitation clauses. The court ruled that non-competition clauses are unenforceable in an employment agreement where a non-solicitation clause would adequately protect the employer's interest.

Facts

Lyons was an oral surgeon who had an established practice in Windsor for approximately 25 years. He was seeking a new associate. Multari had just completed his training in oral surgery and agreed to work for Lyons. To seal the agreement, they signed a handwritten contract less than a page in length, which contained the brief non-competition clause: "Protective covenant, 3 yrs - 5 mi."

After working with Lyons for 17 months, Multari gave six months' notice as was required under the handwritten contract. Soon afterwards Multari and an associate opened an oral surgery practice located 3.7 miles from Lyons' office. There was no dispute that Multari's new practice was in competition with Lyons' practice, nor that Multari had breached the non-competition clause in his employment contract. Lyons successfully sued Multari for damages. Multari appealed.

Judgment

The appeal was allowed. The Court of Appeal stated the general rule that non-solicitation clauses in employment contracts are usually permissible, whereas non-competition clauses are enforceable only in exceptional cases. The court characterized the non-competition clause as the "more drastic weapon" in the employer's arsenal: "Its focus is much broader than an attempt to protect the employer's client or customer base; it extends to an attempt to keep the former employee out of the business."

To be enforceable, a non-competition clause must be supported by three factors:

  • The employer must have a proprietary interest entitled to protection;
  • The temporal and spacial features of the clause must not be too broad; and
  • The nature of the employer's business must be such that the protection of a non-competition clause is required. A non-solicitation clause will not suffice.

The non-competition clause in Multari's employment agreement failed on the third ground.

The Court of Appeal found that while Lyons had a proprietary interest in some dentists who regularly referred patients to him, he had no proprietary interest in dentists in Windsor who had never sent him referrals or who had stopped sending referrals before Multari's arrival.

It was not a problem that the non-competition clause carved out a five-mile boundary for three years. As the court acknowledged, covenants with similar spacial and temporal limits are common.

The problem, as the court saw it, was that the non-competition clause went beyond prohibiting Multari from soliciting the clients of his former employer. It extended to an attempt to keep Multari out of the business in a particular location for a period of time.

The court also noted that non-competition clauses have been upheld in cases where the nature of the employment would be likely to cause customers to perceive a particular employee as the personification of the company or employer. However, such was not the case here. Multari was simply a junior associate who worked for Lyons for less than two years. In all respects, including billings, Lyons was the dominant figure. Multari handled only the patients who were referred to him. Although he received a monthly printout of his patients and the dentists who had referred them, he was not the front man or principal contact person communicating with those dentists. That role continued to be played by Lyons.

Nor could the non-competition clause be upheld on the ground that it was required to protect confidential information. Multari played no special role in the practice, and when he left he took no trade secrets or confidential information with him.

Considering all aspects of the employment relationship, the court found that a non-solicitation clause would have adequately protected Lyons' proprietary interest in his client base. By attempting to protect his interests with a non-competition clause, Lyons chose too drastic a weapon which the court would not enforce.

Comment

The case shows how important it is to understand the difference between non-solicitation and non-competition clauses in employment agreements, and not to overreach in drafting such clauses. If a non-solicitation clause will provide adequate protection, it is to be preferred over a non-competition clause which attempts to keep a former employee out of the business, at least for the time period and location specified.


For further information on this topic please contact Alan Freedman at Heenan Blaikie by telephone (+1 416 360 2865) or by fax (+1 416 360 8425) or by e-mail (afreedman@heenan.ca).

Endnotes

(1) September 2000.


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