We get a lot of questions from employers and employees about restrictive covenants. Many employment contracts include a restrictive covenant – a contractual clause that seeks to limit an employee’s ability to solicit the employer’s clients and/or employees and/or to compete for those same clients in the same geographical area once the employee leaves the employer.
Courts generally find restrictive covenants in employment agreements unenforceable, unless they are reasonable between the parties and not adverse to the public interest. Typically, if a restrictive covenant is ambiguous with regards to time, activity or geography, it will not be enforceable. Let’s take a look at non-solicit agreements.
Non-solicitation agreements that restrict an employee from taking a former employer’s clients or staff post-employment are more likely to be enforceable than non-competition agreements. There are instances where a non-compete clause in an employment agreement is unenforceable, but the non-solicit is enforceable. When non-solicit provisions are reasonable, clear and inline with general industry norms, courts have found them enforceable, even where the non-compete provision was unenforceable. If an employee is soliciting and in contravention of their enforceable non-solicitation agreement, an employer can take court action against the employee. While the process if somewhat complicated, if an employer were successful a court could issue an injunction order (an order to stop soliciting immediately) and a former employer could seek damages for breach of the agreement. Though geographic limitations apply to non-competes, where a non-solicit provision is limited to customers or clients of the employer, a geographic limit is likely irrelevant and not required.
A valid non-solicitation clause must generally clearly advise the former employee which customers, clients or staff are off limits for soliciting. In some cases where specific customers have not been clearly identified, non-solicits have been found to be ambiguous in their practical implementation and therefore unenforceable and void.
How “Customer” is Defined
If the definition of “customer” or “client” is exceedingly broad, the non-solicit provision could be found to be unenforceable. This has been the case where non-solicits have contained language such as “all customers, suppliers, licensees, subcontractors or other business relations.” The term “other business relations” has been found to be exceedingly broad and unclear, rendering the non-solicitation agreement unenforceable. Another example of an overly broad definition is where the non-solicit provision includes all clients of an employer “at any time” – that language could also render the clause unenforceable. The key in these cases is that the employee bound by the non-solicitation agreement may have difficulty knowing who a client is and therefore have difficulty complying.
Preventing Former Employees from “Accepting” Clients
Some non-solicits not only prohibit soliciting, but also the mere act of accepting work from an employer’s former clients.
In Donaldson Travel Inc. v. Murphy 2016 ONCA 649, the Ontario Court of Appeal affirmed that a non-solicit provision in an employment contract that contained the language “or accept business” limited the employee’s actions in a way that restricted competition – therefore, the clause was not merely a non-solicitation clause, but effectively also a non-compete.
In this case, given that the provision was read as a non-competition clause (as opposed to a non-solicitation clause), and because it contained no temporal limitation, the Ontario Court of Appeal found that the clause was unreasonable and therefore unenforceable.
What is Solicitation?
Many employees want to know what the limits of solicitation are, and what they can and can’t do to abide by the non-solicitation provision in their employment contract with their former employer. Often departing employees want to know if it would be okay to let the clients they are leaving behind know where they are going. Departing employees don’t often see this as an active solicitation, but just providing their contacts with an FYI. What do courts think? Unfortunately the extent to which a departing employee is permitted to contact former clients to advise of their new employment is currently unclear and cases go both ways. What is and isn’t acceptable depends on context and sometimes even the employee’s profession. For example, investment advisors may have a duty to inform clients of their change in employment.
In BMO Nesbitt Burns Inc. v. TD Waterhouse Investor Services, 2006 CanLII 17338 (ONSC), the Ontario Superior Court a held that a financial advisor had to tell his clients that he was changing firms, but that the calls he made prior to and after his departure to his clients were solicitations. The Court found that the calls had nothing to do with any perceived obligation to advise his clients that he had left his employment, but everything to do with an attempt to retain the business of those clients.
In other cases, a mere courtesy call or email made to former clients to simply inform clients that the employee has left was found to fall outside the scope of solicitation. Anything beyond this could be seen as an attempt to solicit business. When informing your clients of your departure, the wording of calls or emails is important.
If you are an employee wanting to inform clients of your departure, our advice is to proceed with caution! Feel free to reach out to us for a consultation if you have questions about restrictive covenants.