The recent decision of the Court of Appeal for Ontario in
Veolia ES Industrial Services Inc v
Brulé1 deals with the interpretation and
enforceability of a non-compete clause in an employment agreement
and the scope of an employee's fiduciary duties to a former
employer. The parties entered into a three-year employment agreement on
January 1, 2004, which was subject to the employer's right to
terminate the employment for cause or without cause upon payment of
the compensation to which the employee was entitled until the end
of the term. The employee also had the right to terminate the
employment agreement by giving the employer 180 days notice. A non-competition covenant was included in the employment
agreement and provided that Brulé employee was restricted
from competing with the employer's core business for a period
which would be either: (1) two years following termination for
cause or as a result of the agreement's three-year term
expiring; or (2) two years commencing January 1, 2007 following
termination without cause or as a result of the employee's
resignation in accordance with the agreement. Brulé gave the employer notice of resignation on July 7,
2004, following which the employer asked him not come into work,
but continued to pay him until one or two weeks prior to the
expiration of the 180 day notice period. Upon leaving, the employee
asked a colleague to assemble a binder with information about
recent municipal tenders and bids put in by the company and others.
When he left the company, Brulé took this binder and a list
of the company's employees. Following his departure, Brulé started his own company in
the business of rehabilitating water mains, which was related but
not identical to the employer's business of rehabilitating
sewers. In the fall of 2005, Brulé's new company needed
work and decided to submit a bid on a public tender for sewer
rehabilitation. They succeeded and were awarded the tender over the
former employer Veolia who had submitted the next-lowest bid . The
employer sued for the gross profits claimed to have been lost as a
result of not being awarded the tender. At trial, the judge rendered the non-compete clause in the
employment agreement enforceable by severing the words
"commencing on January 1, 2007" in accordance with the
blue-pencil severance test articulated by the Supreme Court of
Canada in KRG Insurance Brokers (Western) Inc v
Shafron2. The trial judge noted that severing this
phrase produced the result that the parties intended, which was to
have a two-year non-competition covenant. The trial judge found that Brulé breached the
non-competition covenant by bidding on the tender for the sewer
work. Furthermore, he found that the employee breached his
fiduciary duties to Veolia by breaching the non-competition
covenant, by leaving the company with the binder of information
regarding prior bids and by failing to disclose to Veolia that his
company was submitting a bid in respect of the municipal tender for
sewer rehabilitation work. The Court of Appeal for Ontario overturned the trial judge's
decision. The court rejected the application of the blue-pencil
severance test to remove the words "commencing on January 1,
2007" from the non-competition covenant and concluded that,
without the deletion of the disputed words, the restrictive
covenant was unreasonable and unenforceable as the obligation
commenced two years after the employee ceased to be employed. Based on the Supreme Court of Canada's decision in
Shafron the Court of Appeal noted that blue-pencil
severance is only available in respect of trivial or technical
parts of a restrictive covenant that the parties would
unquestionably have agreed to sever without varying any other terms
of the contract or otherwise changing the bargain. The words
"commencing January 1, 2007" were not trivial as they
pertained to the duration of the restriction. Furthermore, there
was evidence that the parties would not have agreed to sever these
words without varying the terms of the contract or changing their
bargain. The Court referred to the drafting lawyer's memorandum which
explained to Brulé that upon termination without cause the
company would pay his salary until the end of the three-year term.
In light of this fact, the Court noted that it was logical for the
non-competition obligation to commence on January 1, 2007, being
the day after the term of the agreement expired. Removing this part
of the clause would have left Brulé free to compete during a
period in respect of which he may have been paid by Veolia. As a
result, the Court found it highly unlikely that the parties would
unquestionably have agreed to sever the words "commencing
January 1, 2007" without varying any other terms of the
contract. Interestingly, the Court did not distinguish between the two
sub-clauses of the non-competition provision which contained the
disputed words, "commencing January 1, 2007". The first
sub-clause applied in the event that the employee was terminated
without cause, while the second sub-clause applied if the employee
terminated the agreement. The Court could have removed the disputed
words only from the second sub-clause. The effect would have been
to establish that if the employee terminated the employment (as was
the case on the facts) the non-competition obligation commenced on
the effective date of his resignation. This would arguably have
been a reasonable interpretation the parties' intentions with
respect to the non-competition covenant. Having ruled that the non-competition covenant was
unenforceable, the Court went on to consider whether the employee
breached his fiduciary duties to the former employer. The Court
affirmed that certain fiduciary duties of an employee survive the
employment relationship, but ruled that after the employment ends,
a fiduciary is free to compete with his former employer, provided
that he does not do so unfairly. Unfair competition includes
soliciting the employer's customers or employees, taking
advantage of a business opportunity that was developed during the
employment, and using or disclosing the employer's confidential
information in competing. In this case, the Court found that Brulé did not breach
his fiduciary duties because he did not compete unfairly with his
former employer. With respect to the binder that he took when he
left Veolia, the Court found that the employee did not use the
information contained in the binder in making his bid for the
disputed tender. Mere possession of the information did not make
the competition unfair. Furthermore, the Court ruled that the
information in the binder was neither confidential nor sensitive as
municipal tenders and bids are publicly issued. Lastly, the Court
ruled that the employee did not breach his fiduciary duties by
failing to disclose to the employer that he was bidding on the
tender for sewer rehabilitation. A former fiduciary who is free to
compete is not required to tell his former employer that he is
about to do so. This decision reminds us of the importance of meticulous
drafting and careful deliberation of all the possible
interpretations of a prospective non-competition clause in an
employment agreement. As restrictive covenants are prima
facie unenforceable, the onus falls on the employer, being the
party seeking to enforce the restrictive covenant, to show that the
covenant is reasonable. A poorly drafted non-competition clause
will prejudice the employer's ability to demonstrate that the
covenant is reasonable and that it should be enforced. Although the doctrine of severance is potentially available to
resolve an ambiguous term in a restrictive covenant, the
Veolia decision confirms that the doctrine is only
available in rare cases where the portion being removed is trivial
and not central to the main purport of the restrictive covenant.
Anything pertaining to the duration or location of the
non-competition obligation is not likely to be trivial, as these
are essential elements of a non-competition covenant. Finally, this decision confirms that an employer can rely on the
continuing fiduciary duties of a former employee in the absence of
a non-competition clause. However, fiduciary duties only protect
employers against unfair competition by the employee, which
includes solicitation of the employer's customers and
employees, appropriation of business opportunities developed during
the employment relationship, and use or disclosure of the
employer's confidential information in competing. 1 2012 ONCA 173 ("Veolia"). 2 [2009] 1 SCR 157 ("Shafron"). The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted. © Copyright 2012 McMillan LLP
Footnotes
Canada: Employee Non-Competition Covenants: No Place For Blue Pencils
Last Updated: April 4 2012
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