Ontario Court Again REFUSES to Enforce Non-Compete Clause

An Ontario Court has again REFUSED to uphold a non-compete clause against an employee.

It isn’t a surprise to anyone reading this blog (or who has attended our dinner seminars) that we help dentists with non-competition and non-solicitation clauses.

So it shouldnt come as a surprise that an Ontario Court once again struck down a non-compete clause against a former employee in a case that we haven’t yet told you about.

But let’s review the decision for ol’ times sake, shall we?

The Case

In Ceridian Dayforce Corporation v. Daniel Wright (a case decided about 7 months ago), a software developer was engaged by a corporation that needed assistance to design, build, and test certain components of its software. The employee signed an agreement that had a non-compete clause and he had no managerial duties.

Five years after the employee started working, he resigned and immediately took up employment with a competitor. The employer invoked the non-compete clause and sued the former employee based on the contract that was signed.

At the court hearing, the employer argued that the knowledge held by the worker was unique such that a non-solicitation or confidentiality provision was not sufficient to protect its business and its trade secrets. The employer specifically argued that those trade secrets were “kept in Mr. Wright’s head” and thus a non-compete was reasonable and necessary.

The non-competition clause included the following terms:

• The non-competition period was a period up to 12 months after the ending of the contract as determined by the Company in its sole unfettered discretion, provided that the Company informs the Employee of the length of the period within 5 business days of the Employee ceasing to be employed by the Company.
• The Employee was not able to “directly or indirectly provide services, in any capacity, whether as an employee, consultant, independent contractor, owner, or otherwise, to any person or entity that provides products or services or is otherwise engaged in any business competitive with the business carried on by the Company or any of its subsidiaries or affiliates at the time of his termination (a ‘Competitive Business’) within North America”;
• The Employee was also not able to “be concerned with or interested in or lend money to, guarantee the debts or obligations of or permit his name to be used by any person or persons, firm, association, syndicate, company or corporation engaged in or concerned with or interested in any Competitive Business within North America,”
• Nothing restricted the Employee from holding less than 1% of the issued and outstanding shares of any publicly traded corporation.
• During the “up to 12 month period”, the Company would pay the Employee his base salary.

The Decision

The Ontario Superior Court of Justice found eight (yes 8) different problems with the non-competition clause and called it unenforceable. So let’s review the many ways in which this particular restrictive covenant was voided.

1. The definition of what is a “Competitive Business” was too broad.

• The court said that there was a potential that the employee was technically prohibited from even working in the field of providing gas cards and gift cards (which was the line of business of an affiliated company of the employer). The court said it was unreasonable for the employer to therefore try and stop the employee from working in areas that were completely unrelated to his work for the employer.

2. Preventing the employee from working for competitors outside the scope of the employee’s expertise was too broad

• Since the employer had some parts of its business that were unrelated to the employee’s work, prohibiting him for working in those areas went too far.

3. Holding shares in competitors was not shown to harm the employer

• The court said that there was no evidence showing why holding less than 1% of shares of a competitor was reasonable, or how holding more than 1% of such shares would hurt the employer.

4. Length of the term of the non-compete was ambiguous 

• The non-compete clause gave the employer the sole right to select the term of the non compete, up to a maximum of 12 month with up to 5 days notice to the employee. This was found to be impermissible because the length of the non-compete was ambiguous at the time of signing.

5. The maximum 12 month period was arbitrary and unreasonable

• The employer ended up invoked the non-complete clause for the maximum 12 months under its contract. A standard non-compete may be 12 months, because it sounds like a good amount of time, but employers tend to forget that they may have to prove why 12 months is appropriate. In this case, the employer could not convince the judge that 12 months was appropriate for the software industry.

6. The North American restriction was too broad

• This non-compete applied to all of North America, which, as the court pointed out, generally includes Mexico and the Caribbean. The employer could not convince the judge why it was reasonable to restrict the employee from those two countries, and so the clause was voided.

7. The reference to the “Employer’s Business” was ambiguous and unreasonable

• The definition of competitive business in the contract included any business carried on by the employer (or any of its subsidiaries or affiliates) at the end of the contract. Since the court would assess the reasonableness of the non-compete at the time the contract was signed, the court said it was impossible for the employee to know (when hired) about the “unlimited” number and types of other business his employer might carry on during his employment. For that reason, the clause was void.

8. The term “in any capacity” was too broad

• The court took some time to really dig into the employer for this part of the non-compete. The judge took some time to illustrate some colourful examples of how the employee could “breach” the non-compete under the “in any capacity” part of the clause. That term was so broad, the court gave these extreme and unreasonable examples of the employer could not prove why such a “breach” would be harmful to the employer:
  • Working as a janitor for the competitor;
  • Providing hardware (as opposed to software) support for the competitor, either as an employee or via his own business;
  • Developing his own software unrelated to the software at issue in the litigation, selling it to the competitor and providing support to the competitor in its use of it; or
  • Starting a band in Mexico and be hired by a competitor to play at a staff retreat in Cancun.

On this point alone, the court had no trouble finding that the non-compete was a clause that “unreasonably restricts (the employee’s) economic interests and goes beyond that reasonably necessary to protect (the employer’s) claimed proprietary interest”.

Conclusion

This case is a cautionary take for any drafter of a restrictive covenant. Being REASONABLE and CLEAR are the two most important factors in determining what the wording should be. In this case, the clause was so poorly drafted that even one of the eight different reasons above would have invalidated the clause.

As the court pointed out in this judgment, non-compete clauses are generally not upheld against departing employees – especially when a non-solicitation clause or a non-disclosure clause could do the same thing. But even then, the clause has to be properly drafted to avoid ambiguity and unreasonableness.

DMC helps dentists prepare contractor agreements, non-solicitation agreements, and non disclosure agreements — along with many other employment law services. Get in touch if your dental practice needs assistance.