Given the shortage of skilled workers and senior management, it is not unusual to see employers trying to protect their interests by having such a skilled or senior employee sign a contract that restrict the employee from competing, or soliciting customers, after the employee leaves his employment.

Such restrictive covenants are frowned upon by the courts.  However, such contracts can be very effective if properly drafted.  In January, 2017, I provided a summary of how the law operates and the value of proper drafting by the employer (see: How to Protect Your Business Interests with Non-Competition and Non-Solicitation Clauses).  The case discussed in this article only underscores my advice that careful drafting of such a provision is essential for the employer.

In a recent decision of the BC Supreme Court, where Telus Communications Inc. applied for an interlocutory injunction against a former employee,  (see: Telus v Golberg), Telus discovered, the hard way, that the non-competition clause they included in a senior executive’s employment agreement, was unenforceable.  This finding by the Court was not affected by either Telus’ assertion that it paid $1 million to achieve such restriction (the court did not entirely agree with that assertion) or the fact that the employee had breached his fiduciary duties to Telus prior to terminating his employment.

Daniel Golberg was employed as a senior VP for Telus.  His activities and responsibilities were limited to the telecommunications industry.  He resigned from Telus and was hired by Rogers Media.  Although Rogers is a competitor of Telus, it assured Telus that Mr. Golberg would not be involved in any way with Rogers’ telecommunications division and would be subject to a confidentiality wall with respect to any matters that involved competition with Telus.  Notwithstanding these assurances, Telus sought an injunction preventing Mr. Golberg from accepting employment with Rogers Media.

The restrictive covenant read as follows (see para 2):

Accordingly the vice‑president agrees as follows:  A) during the term of the vice‑president’s employment with Telus or TeleMobile (determination) and for the trial period immediately following the date that the employment of the vice‑president ceases (determination date) regardless of who initiated the termination and whether the termination was with or without cause, the vice‑president will not, without the prior written consent of Telus, directly or indirectly either individually or in partnership or jointly or in conjunction with or on behalf of any person or persons, firm, association, syndicate, corporation or other enterprise, as principal, agent, employee, director, officer, shareholder or contractor or in any other manner whatsoever:

1) carry on or be engaged in executive, management, supervisory or strategic work or participate in, make decision in respect of, direct, assist with, contribute to, advise on, provide consulting or other services in respect of any strategic management, supervisory or executive matters for any person or persons, firm, association, syndicate, corporation or other business enterprise engaged in or concerned with or interested in any business which is competitive with the business of Telus within the provinces of British Columbia, Alberta, Ontario and Quebec.

Mr. Golberg did not disclose to Telus that he was having serious discussions with Rogers Media when he attended a series of meetings to develop Telus’ short-term and long-term strategies, nor during the period when Telus and Mr. Golberg were negotiating a severance package that included an enhanced non-compete clause at the time that he knew he was going to join Rogers Media.

As we reviewed in the January 2017 blog article referred to above, a court starts from the premise that a restrictive covenant is prima facie unenforceable because it is an unlawful restraint of trade.  One of the primary reasons for that position, is that there is an imbalance of bargaining power between an employer and an employee, which justifies a more rigorous scrutiny of restrictive covenants in employment agreements than in a commercial contract for the purchase and sale of a business. The employer must show a strong “prima facie” case that the restrictive covenant upon which it is relying, will be found enforceable at the hearing for a permanent injunction.  To do so, the employer must demonstrate that: (a) it has a legitimate interest to protect; (b) the clause, as drafted, is reasonable, having regard to the temporal, geographic and scope provisions of the clause; and (c) the clause is, overall, fair.

In the Telus decision, Mr. Golberg conceded that the clause was not unreasonable with respect to “its length or territorial reach” (the length of the period of non-competition ran for one year following the termination of employment and covered the Provinces of BC, Alberta, Ontario and Quebec).  However, Mr. Golberg argued, at para 31, that the clause was “overly broad because it prohibits him from taking a managerial role in any company that is in competition with Telus or any of its affiliates, including affiliates which come into existence after the date of execution of the covenant.”

Telus raised a unique argument that the requirement that it demonstrate a strong prima facie case was to a less-demanding standard because Mr. Golberg was a highly educated individual with extensive business experience when the parties negotiated his employment contract, including the bonuses he received which were in part consideration for him entering into the restrictive covenant. In doing so, Telus relied upon a statement in Quick Pass v Zhao, a decision of the BC Supreme Court.  In that decision, the Court noted that it will more closely scrutinize restrictive covenants in employment contracts than in other contracts such as agreements for the purchase and sale of a business.  It stated, at para 34: “However, the appropriate degree of scrutiny must reflect the reality [of] both of the parties’ relative bargaining power and of the bargain struck”.  Given the size of the employer, and the expertise of the employee, the Court, in Quick Pass, found, at para 35: “The inequality of bargaining power between the parties was less than that usually presumed in an employment relationship”.  Given that, and the fact that the employee was paid $15 per hour expressly in consideration of not competing, the Court concluded that “[t]he restrictive covenants in this case are not subject to a high level of scrutiny.”

The Court rejected Telus’ argument that the standard was lessened or that less scrutiny was required, stating, at para 26:

In this case I find that there clearly is an imbalance of resources between Telus and Mr. Golberg. The bonus to Mr. Golberg was agreed to [at] the outset of his employment and not at the time he left his employment. The bonus was based primarily on the longevity of his service rather than the granting of the restrictive covenant. This further distinguishes this case from Quick Pass.

Further, the Court in Quick Pass found that the plaintiff had, in fact, established a strong prima facie case that the restrictive covenant at issue was enforceable, thus distinguishing it from the Telus covenant.

The Court also noted that the Telus restrictive covenant was far too broad in restricting Mr. Golberg’s post-employment activities.  Telus argued it needed to protect its telecommunications business, yet the clause was not limited to that business.  The Court therefore concluded, at para 41:

However, it is the blanket prohibition against taking employment with any competitor of the employer or any of its subsidiaries regardless of whether the new position had any relationship to the duties and knowledge that the employee had while employed by the employer that makes the covenant overly broad in my view. This is particularly so given that the employer is a very large enterprise that has numerous subsidiaries or affiliates in multiple fields of endeavour. I therefore find that the covenant is overly broad in limiting Mr. Golberg’s ability to pursue his skills in management and is therefore prima facie unenforceable.

Breach of Fiduciary Duty

Telus argued, at para 47, “that Mr. Golberg “breached his fiduciary duty to Telus and that the only appropriate remedy for that breach is to enjoin him from working at any Rogers Media entity.”

The Court found, at para 49, that Mr. Golberg was, indeed, a fiduciary and that he had breached his fiduciary duties to Telus:

 I am also of the view that Mr. Golberg breached his fiduciary duty to Telus by actively pursuing a termination payment while negotiating the terms of his new employment at Rogers Media. When Mr. Golberg was seeking a termination package from Telus, he owed a fiduciary duty to provide Telus with frank and full disclosure about his employment situation.

However, that breach did not enhance the right of Telus to obtain an interlocutory injunction. The Court held, at paras 52 and 53,

Notwithstanding these findings, however, I do not regard his conduct as disqualifying him from being able to pursue his career. In the absence of a binding non‑competition agreement, a former fiduciary is entitled to compete with his former employer as long as he does so fairly. Acting fairly, of course, encompasses maintaining his duty of confidentiality with respect to the affairs of his former employer.

The more serious breaches of fiduciary duty on Mr. Golberg’s part involved his failure to make full and frank disclosure about his employment plans while he was attempting to obtain a severance package from Telus. These breaches do not constitute unfair competition on his part. I therefore find that notwithstanding his breach of fiduciary duty, Mr. Golberg is entitled to compete with Telus in the absence of an enforceable non‑competition covenant.

Takeaways

The Court noted, at para 37:

In my view, the restrictive covenant is the product of overzealous drafting by Telus’s solicitors. The entire focus of the covenant appears to be directed to making the covenant as broad as possible without giving adequate consideration to the important interests that Telus seeks to protect in the covenant or the interests of Mr. Golberg as an employee.

When my clients ask me to draft a restrictive covenant, I encourage them to approach the task from the viewpoint of providing the least invasive restrictions necessary to achieve their goal of protecting their business, having regard to the courts’ approach that such clauses are prima facie unenforceable.   If, instead, a non-solicitation clause will achieve that goal, it may be preferable to include a non-solicitation clause rather than a non-competition restriction, as the courts look at the former more favourably than the latter.  This decision must be made after considering all factors, including that it may be much harder to obtain an injunction to enforce a non-solicitation clause.  Employers’ reach should not exceed their grasp.

If an employer can demonstrate the negotiation of the restrictions between the employee and the employer, that fact may be evidence that the parties did agree as to the reasonableness of the restrictions.  Paying a specific sum solely as consideration for the employee agreeing to the restrictive covenant, should be included in the employment agreement with great clarity, especially with very senior employees[1].  Following this approach will often produce a much better result than Telus achieved.  Even if the clause may be attacked in court, the closer the clause approaches reasonableness, the less likely an employee (or putative employer) will take the chance of breaching the agreement and incurring significant legal fees and potentially a large damage award. In certain circumstances, it may even be appropriate to require the employee to obtain independent legal advice.

The content in the Michael Weiler Employment + Labour newsletters and blog is for your general information and should not be taken as legal advice.  If you have a specific problem, please contact Michael Weiler to discuss your situation.

[1] Note that in the Telus case, the Court held that the consideration, despite the wording of the contract, was primarily to ensure a lengthy employment, not to support the restrictive covenant.