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Non-Solicit Clause Upheld; Employee & Customer Penalized

By November 1, 2017August 17th, 2020Employment Law

Here at DMC, we keep a close eye on whenever courts in Canada have something to say about restrictive covenants and non-solicits (just like Michael Carabash did not too long ago).

A new from Quebec) that put a nice big check mark on the side of Principals and Employers and protecting their Non-Solicitation (non-compete) clauses and their businesses.

In a recently released Superior Court decision from Quebec, a Judge penalized a former employee and former customer of a business in an amount of over $100,000.00 for breaching a non-solicit clause regarding employees.

Facts

As we advise many dentists to do with their associates, the employee in this case had signed an agreement that prohibited him (while working for the employer) from soliciting any of the employer’s customers.

The employee eventually gave notice of resignation of his job, and then later agreed to continue working past this notice period (as an independent contractor) to allow the employer to have a better transition for the employer with the same non-solicit continuing during the contractor phase of employment.

Unbeknownst to the employer, the employee attended an interview with a customer of the employer during the notice period. Unbeknownst to the employee, the customer and the employer had previously agreed to a non-solicitation clause and corresponding penalty regarding the employer’s employees.

The employee worked for a short period of time as an independent contractor and then finished working for the employer. Two months later,the employer learned that the employee was working for its customer.

Court Case

The Quebec Superior Court ruled that both the employee and the customer were jointly and severally liable to pay the penalty provided in the employer/customer agreement, which equalled $104,751.96 (which was actually two years of the employee’s salary).

First, the Court found that the customer broke its agreement with the employer by soliciting its employee while the agreement was in place, because the employee had been interviewed by the customer while he was still working for the employee (notwithstanding that the employee only started working for the customer after the resignation was complete).

Then, the Court found that the employee did, in fact, assist the customer in breaking its promise under the employer/customer agreement and thus was liable for the damages. The Court stated the employee had breached his contractual obligation to “behave loyally” (as that Court said) and to maintain a duty of good faith (which Ontario Courts have upheld).

The Court further stated that the employee and customer breached their obligation of good faith by not acting transparently during the entire process; the Court wrote that it believed the employee and customer agreed to make the employee become an “independent contractor” in order to avoid breaching the employee’s non-solicit agreement.

When it came to the employer’s damages, the Court looked to the employer/customer penalty clause and found that the two parties had already agreed on the liquidated damages to which the employer would be entitled.

Commentary

This case, while not binding on Ontario judges, provides some more “firepower” (so-to-speak) for Principals who are considering hiring new associates.  As we actively tell our clients, having a strong non-solicitation clause in Associate Agreements is key to protecting your business and your DPC.

This also provides more insight on how courts will treat “liquidated damages” that are common in Associate Agreements.  Where there are true damages incurred by a party to a contract, a court will enforce the (reasonable) liquidated damages.  In this case, the Court upheld the equivalent of two-years’ salary for the former employee’s position.  This would compensate the employer for the reasonable costs of looking and training a replacement, and for the reasonable cost to the business for the change in employee numbers and corresponding service to customers.

Contact DMC for any questions you may have about restrictive covenants and associate agreements.

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