Understanding Restrictive Covenants: Non-Solicitation and Non-Compete

Non-solicitation and non-competition clauses are used to protect employers from losing customers or business as a result of a departing employee.

Over the course of their employment, employees may acquire specialized knowledge of a company’s trade secrets, expertise or other unique proprietary information about their employers. In many cases, particularly in sales, employees establish and maintain successful and close relationships with customers or clients. While these are positive elements of an employment relationship, when an employee changes jobs, the company intelligence they take with them and their subsisting relationship with company clients, can pose issues for employers.

As a result, employers often look for ways to protect their business interests, customer bases and other threats of competition. One way employers can do this is by imposing restrictive covenants on their employees in their employment contracts.

In this article, I will explain two of the most common restrictive covenants: non-solicitation and non-competition.

What are Restrictive Covenants?

Restrictive covenants are employment contract clauses that restrict, limit or prevent an employee from doing certain things following the end of their employment. Most often, these come in the form of a “non-solicitation” clause and/or a “non-competition” clause in the employment contract.

Non-Competition vs Non-Solicitation

The purpose of a non-competition clause is to limit a former employee’s ability to work for a competitor or open a competing business. These are generally only upheld in exceptional cases.

A non-solicitation clause prevents or limits an employee from “soliciting” clients (and often employees) of their former employer.

Soliciting has a very specific meaning. In the simplest of terms, it occurs when a person contacts a former customer or business contact, and asks them to keep giving them business at their new company. For example: a LinkedIn post about your change in role, wouldn’t count as soliciting, but sending a direct message, saying “Hey, I’ve moving to new company. Do you want to try out some of our products” probably would be.

The Court of Appeal in HJ Staebler Co v. Allan, 2008 ONCA 576, explains the difference between a non-solicitation clause and a non-competition clause as follows:

…A restrictive covenant may restrain either competition or solicitation. A noncompetition clause restrains the departing employee from conducting business with former clients and customers whereas a non-solicitation clause merely prohibits the departing employee from soliciting their business.

Whether a Restrictive Covenant is a Non-Competition or Non-Solicitation is Not Always Clear

In Donaldson Travel Inc. v. Murphy, 2016 ONCA 649, the parties had a dispute over whether a certain restrictive covenant was an enforceable non-solicitation clause or an unenforceable non-competition clause. The clause stated:

In the event of termination or resignation [the employee] will not solicit or accept business from any corporate accounts or customers [of the employer]

The Ontario Court of Appeal founded that the words “accept business” meant that the clause went beyond a mere non-solicitation agreement and was, therefore, unenforceable.

Enforcing Restrictive Covenants

Generally, Courts hesitate to uphold restrictive covenants on the basis that these types of clauses are often considered impediments to basic elements and principles of a healthy economy. Courts don’t like preventing people from using their skills, experiences and relationships with their next employer unless absolutely necessary.

Courts Prefer Non-Solicitation Clauses

In Lyons v Multari [2000] OJ No. 3462, the Ontario Court of Appeal reasoned that:

Generally speaking, the Courts will not enforce a non-competition clause if a non-solicitation clause would adequately protect an employer’s interests

Courts are more strict towards and less likely to enforce non-compete agreements because they limit an individual’s ability to earn a living or pursue a job for which they are qualified. Non-solicitation clauses, on the other hand, don’t go so far as totally limiting an individual from working in a certain industry all together, and therefore, are less restrictive and more likely to be enforceable.

The Legal Test: Reasonable and Necessary to Protect a Legitimate Interest

To be enforceable, both non-competition and non-solicitation clauses need to be reasonable to and necessary to protect a legitimate business interest. In addition, the language of the restrictive covenant must be clear and reasonable in terms of:

1. It’s geographic scope;
2. The length of time it is valid; and,
3. The type of activities that it limits

If a restrictive covenant is ambiguous or excessive with regard to time, activity, or geography, it will probably be found to be unreasonable and unenforceable.

For example, consider a Life Insurance Salesman working for a brokerage in the High Park area of Toronto. If a non-solicitation clause limited him from soliciting clients anywhere in Ontario, that might be an unreasonably large geographical area. A clause limited in scope to only to the City of Toronto is more reasonable and more likely to be enforceable.

Implied Duty Not to Solicit

Without an explicit non-solicitation agreement, ordinary employees are free to contact customers and clients of their former employers for the purpose of soliciting their business. However, senior executives, directors, officers and other key members of a business may have “fiduciary” duties, which survive the end of the employment relationship, which may include a common law duty to not solicit customers for a reasonable time period after termination of employment.

Senior executives owe fiduciary duties to their employer because the employer has placed significant trust in them to exercise discretion in the best interests of that employer or where the employer is particularly vulnerable to the executive.

Canadian courts consider fiduciary duty in a broad and flexible manner to respond to the facts of each particular case.

Key Points to Take Away

• Employers should consider what restrictions are appropriate on an employee by employee basis.
• Restrictive Covenants should be as minimal as possible while still maintaining protection of the employer’s proprietary interests.
• Courts are reluctant to enforce non-compete restrictive covenants as they are seen to obstruct basic economic activities including preventing individuals from working positively and achieving career aspirations. Hence, employers should consider omitting non-competition clauses when a non-solicitation clause would be adequate to protect their proprietary interests.
• Non-solicitation clauses should identify which customers the employee cannot solicit.
• Courts pay significant attention to the language of restrictive covenants and decisions to enforce are based on whether they are clear, specific and narrow in scope.
• Employers should use plain and unambiguous language in their restrictive covenants.