Employers regularly include restrictive covenants, such as non-solicitation clauses and non-competition clauses, in employment agreements. Non-solicitation clauses enable employers to protect their business by prohibiting former employees from appropriating client business for a prescribed period after the termination of the employment relationship.
On May 1, 2018 the Ontario Court of Appeal released a new decision on the enforceability of non-solicitation clauses in MD Physician Services Inc v Wisniewski (“Wisniewski”). Although this decision largely affirms the existing law on restrictive covenants, it provides a useful example of behaviour that constitutes a breach of a non-solicitation clause.
The Law on Restrictive Covenants
The legal principles for determining whether a non-solicitation clause is enforceable were articulated by the Ontario Court of Appeal in H L Staebler Co v Allan. Under these principles, a non-solicitation clause will only be enforceable if:
- The employer has a proprietary interest entitled to protection;
- The clause is reasonable in terms of the public interest; and
- The clause is not ambiguous with respect to temporal length, geographical scope, or the scope of prohibited activities.
A non-solicitation clause is reasonable in terms of the public interest where there is an appropriate balance between maintaining open competition in trade and employers’ right to protect their legitimate business interests. A non-solicitation clause that is ambiguous in terms of length of time, geographical scope, or the scope of prohibited activities is prima facie unreasonable and unenforceable.
In Wisniewski, the employer alleged that two former employees breached the non-solicitation clauses in their respective employment agreements. The employee were investment advisors providing wealth management products and services to physicians and their families. The non-solicitation clauses prohibited the employees from soliciting or attempting to solicit any the clients they had serviced while working for the employer for two years after the termination of their employment. In 2013, the employees left their employment to work for a competitor. The competitor advised all competitive hires that it is permissible for them to contact and notify their former clients of their new employment. Accordingly, on their first day at the new employer, the employees wrote out the names and telephone numbers of clients that they had serviced from memory and proceeded to call them. In these “courtesy calls” the employees simply stated that they had left their former employer and were now working at its competitor as investment advisors.
In a 2017 decision, the Ontario Superior Court of Justice found that the employees had breached the non-solicitation clauses in their respective employment agreements. The trial judge found that the clauses were enforceable and that the “courtesy calls” breached the clauses because they were clearly made with the goal of bringing the clients to the competitor, despite the employees’ contention that the calls were solely for the benefit of their former clients. In making this finding the trial judge considered that the calls were made on the employees’ first day at their new employer, that the employees made direct telephone calls to the clients, and that the new employer instructed the employees to pause at the end of the calls in hopes that the clients would inquire about switching.
Furthermore, the trial judge held the new employer vicariously liable for the employees’ breach of the clauses because they were acting on the new employer’s instructions. The employees and their new employer appealed this decision to the Ontario Court of Appeal, which upheld the trial judge’s ruling.
Wisniewski illustrates that attempts to circumvent non-solicitation clauses are ill-advised, and that employers who instruct their employees to do so may face serious consequences. In particular, “courtesy calls” that are allegedly made to notify a former client of an employee’s new employment, but that are made with a view to obtaining that client’s business, will likely be found to breach an applicable non-solicitation clause.
Furthermore, employers that instruct their employees to engage in such activity may be held vicariously liable to pay damages for the breach of the non-solicitation clause. Even where “courtesy calls” are truly intended to be for the sole benefit of the former client, such calls may inadvertently solicit business from those clients and creates a risk of a court finding that such solicitation was intended. Therefore, employers should be cautious in considering whether to instruct new employees to contact former clients if they are subject to a non-solicitation clause.
This blog is provided as information and a summary of workplace legal issues.
This information is not intended as legal advice.