Williams HR Law LLP

ONTARIO COURT REMINDS EMPLOYERS THAT RESTRICTIVE COVENANTS MUST BE CLEAR AND UNAMBIGUOUS

June 2, 2021

In the recent decision in Labrador Recycling Inc v Folino [Folino], the Ontario Superior Court of Justice (the “Court”) reminds employers that any restrictive covenants contained in an employment agreement,

such as a non-solicitation or non-competition clause, must be carefully drafted in order to be enforceable. The decision also offers some guidance on when an employee might be found to be a fiduciary of their employer.

Facts

The defendant, Mr. Folino, had worked as a salesperson for the plaintiff, Labrador Recycling Inc. (“Labrador”) until he resigned. At some point, Mr. Folino founded Sempris Traiding Inc., a company that operated in the same industry of buying and selling scrap aluminum in direct competition with Labrador.

Labrador brought their claim for injunctive relief based on allegations that Mr. Folino breached his fiduciary duty to Labrador and breached the non-solicitation clause found in his employment agreement.

Decision

In assessing the request for an injunction, the Court applied the three-part test established by the Supreme Court of Canada (“SCC”) in RJR MacDonald Inc. v Canada (Attorney-General):

  1. There must be a serious question to be tried.
  2. The party must demonstrate that they will suffer irreparable harm if the injunction is not granted.
  3. The balance of convenience must favour granting the injunction.

The Court also stated that since the employer was seeking to impede Mr. Folino’s ability to earn a livelihood, the employer had to establish that they have a strong prima facie case, rather than merely establishing that there was a serious question to be tried. Ultimately, the Court determined that Labrador failed to satisfy the three-part test.

  1. No Prima Facie Case

The Court first turned to the question of whether Mr. Folino was a fiduciary employee of Labrador. Although Mr. Folino had held some measure of discretion and power over Labrador’s operations, given the volatile nature of the aluminum scrap industry, the Court found that Labrador was not “peculiarly vulnerable” to the exercise of power by Mr. Folino, particularly following his departure. Furthermore, the fact that Mr. Folino had knowledge of Labrador’s client list did not give him any competitive advantages over Labrador since the identity of customers, vendors, and purchasers in the aluminum scrap industry is widely available. In the end, Mr. Folino was not found to be a fiduciary employee.

The Court then addressed the restrictive covenant contained in the employment agreement which barred Mr. Folino from soliciting and accepting business from any of Labrador’s existing or prospective customers. These customers included any entity or individual with whom Mr. Folino had personal contact with, whether directly or indirectly, or access to confidential information, during the final two years of his employment. Notably, the clause did not say that a customer or potential customer is someone with whom Mr. Folino had contacted in connection with his employment duties. The Court stated that the restrictive covenant was too broad and commented by saying “as drafted, his [Mr. Folino’s] drycleaner would qualify” as a customer or prospective customer.

The Court held the restrictive covenant to be unenforceable for several reasons:

  • the one-year duration of the covenant was unreasonably long given the volatile and fast-paced nature of the aluminum scrap industry;
  • the clause had no geographic limit. The clause in question was “imprecise,” and cast a “very broad net” in its scope, meaning that a lack of geographic limit could not be justified; and
  • the terms of the restrictive covenant were not clear and unambiguous. For example, the covenant restricted Mr. Folino from accepting work from customers he may never have had contact with, but in respect of whom he had access to confidential information. The Court pointed out that, practically speaking, it was unclear how Mr. Folino would identify such individuals.
  1. No Irreparable Harm

The Court concluded that there was no evidence to suggest that Labrador would suffer irreparable harm by Mr. Folino starting his own business in the same industry. The employer argued that without injunctive relief, it would suffer irreparable harm which included the permanent loss of market share, damage to reputation, substantial loss of revenue, and the disclosure or misuse of confidential information. The Court stated that the employer’s position was largely “speculative, exaggerated, unsupported, or not forthright.”

  1. Balance of Convenience

The Court held that the balance of convenience favoured Mr. Folino. The order for injunctive relief sought by Labrador “would be a serious impediment to Mr. Folino’s ability to earn a living” since he had spent his entire working life in the aluminum scrap industry.

Takeaways for Employers

The Court in Folino reminds employers that restrictive covenants, such as non-solicitation and non-competition clauses, will be unenforceable if it is excessively long, fails to set a geographic limit, contains terms that are not clear and ambiguous, or too broad.

Employers should also consider the nature of the industry they service, the nature of the work performed by the employee, and the employee’s role at the organization. Depending on the industry, this will impact how to draft these covenants and the likelihood of them being enforceable after the employment relationship ends.

The Folino decision also highlights that on its own, the fact that an employee occupies a key role or position of power in their employer’s business may not be sufficient to demonstrate that the employee is a fiduciary.

Employers would be well advised to ensure that their employment agreements contain enforceable restrictive covenants that clearly and effectively minimize the harm which could be caused to the business if an employee decides to use or disclose what they have acquired during the course of employment.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.

Expertise