High Threshold for Enforceability of Restrictive Covenants

**Written by Adele Zhang, Summer Student at Lee Workplace Law

Once an employment relationship has ended, an employee is generally free to move on to other jobs or work opportunities. However, employment contracts may include restrictive covenants that limit the employee's ability to engage in certain types of work for a limited time after leaving their job. These restrictive covenants are normally aimed at preventing the employee from competing with their former employer or from poaching their former employer's clients or employees.

If an employee breaches these restrictive covenants, the employer may try and seek an injunction to enforce these post-termination restrictions. An injunction is a court order that requires an employee to cease acting in violation of the restrictive covenant. Injunctive relief is only granted where other remedies, like damages, do not appropriately or sufficiently address the harm.

The issue of injunctive relief and the enforceability of restrictive covenants was recently considered by the Ontario Superior Court of Justice in Labrador Recycling Inc. v. Folino, 2021 ONSC 2195. In its decision, the court reaffirmed the high threshold for granting injunctive relief in the employment context.

Facts

In 2013, Mr. Folino began working as a salesperson for Labrador Recycling Inc., a brokerage in the aluminum scrap metal industry. His employment agreement contained a restrictive covenant which prohibited him from soliciting or accepting any of the employer's current or prospective customers, which was defined as "an individual or entity with which [Mr. Folino] personally had direct or indirect contact, or access to conduct confidential information about, during the last two years of [his employment]." This covenant was to last 1 year following the end of his employment.

In December 2020, Mr. Folino resigned and opened his own scrap aluminum company.

Labrador Recycling Inc. sought an injunction to restrain Mr. Folino from competing with them on three grounds: (i) breach of fiduciary duty, (ii) breach of restrictive covenant, and (iii) misuse of confidential information.

Analysis

Fiduciary Duty

There are three defining characteristics of a fiduciary employee: (i) their ability to exercise discretion or power in the company; (ii) unilateral power to affect the company's legal or practical interests; and (iii) whether the company is particularly vulnerable to the employee holding the power.

The court accepted that the Mr. Folino had significant responsibilities and was a key player in the company. However, the employer was not particularly dependent on him. In part, this was because the aluminum scrap metal industry is not characterized by customer loyalty, but rather about prices. Additionally, the employer was not vulnerable to the exercise of power by Mr. Folino upon his leave from the company. Therefore, the court determined that Mr. Folino was not a fiduciary.

Restrictive Covenant

As the courts recognize the importance of an employee being able to move on and find new employment following the end of an employment relationship, there is a high threshold for the enforceability of restrictive covenants. These clauses will only be enforced where the clause is reasonable in the circumstances, and protects the employer's legitimate proprietary interest.

In this case, the court held that the restrictive covenant in the employment agreement was unreasonable and therefore unenforceable. The primary reasons cited were that the 1-year temporal limit was too long for the aluminum scrap industry, that there was no geographic limit stipulated, the terms of the clause were unclear and ambiguous, and that the clause purposed to restrict the employee from accepting work from his personal contacts.

Misuse of Confidential Information

The court rejected the employer's allegation that Mr. Folino misused the company's confidential information. The court held that the contact information of the vendors and purchasers in the aluminum scrap market were not confidential to the employer. There was no evidence that any other confidential information had been misused by Mr. Folino or of any resulting harm.

Injunctive Relief Test

There is a three-part test to determine whether an injunctive relief is a suitable remedy. First, is there a serious question to be tried? Second, will the moving part suffer irreparably harm if the injunction is not granted? And third, does the balance of convenience favour granting the injunction?

In this case, the court determined that the employer will not suffer irreparable harm and that the balance of convenience weighs in favour of Mr. Folino. The injunction sought out would result in a serious impediment to Mr. Folino who depended wholly on the aluminum scrap industry for work. Moreover, the employer failed to prove any of the three grounds for injunctive relief.

Outcome

The court ruled in favour of Mr. Folino and refused to grant the injunction. The employer was ordered to pay $47,488.82 for costs incurred during the litigation.

Takeaways

Employees are prima facie entitled to compete with their employers following the end of employment. Although employers are permitted to include restrictive covenants in employment agreements that restrict that ability to compete, the threshold for enforceability is high. The restrictions must be no broader than necessary to protect the legitimate interests of the company.

With that in mind, employers are encouraged to seek legal assistance when preparing and revising employment agreements. Likewise, if employees have any questions about their contract, they should seek legal advice. Lee Workplace Law would be happy to answer any questions you may have.