H.L. Staebler Co., an insurance brokerage company in the Waterloo region, restructured in 2000. Two of its highly successful producers, Tim Allan and Jeff Kienapple, who sold and serviced commercial insurance, were extremely unhappy with the changes and with being overlooked for senior management roles.
On October 15, 2003, Allan, Kienapple and their respective assistants all resigned with no notice to Staebler. That same day, from the offices of Stevenson & Hunt's new Waterloo office, they contacted their clients to advise they were no longer with Staebler. Staebler began receiving letters of authority from clients directing the transfer of their business to Stevenson & Hunt before end of day. Staebler obtained an interlocutory injunction two weeks later. By that time 118 clients had already moved their business.
At trial Staebler sought damages, including punitive damages, for breach of fiduciary duty, breach of contract, conspiracy and inducing breach of contract.
Allan and Kienapple had signed employment contracts containing restrictive covenants provisions expressly stating that clients belong to the company, and that "[i]n the event of termination of your employment with the Company, you undertake that you will not, for a period of two consecutive years following said termination, conduct business with any clients/customers of H.L. Staebler Company Limited that were handled or serviced by you at the date of your termination."
The contract also provided that damages for a breach of the undertaking "shall be a sum equal to 1 1/2 times the commission income received by you or your subsequent employer on account of business conducted on behalf of persons or businesses that were clients/customers of H.L. Staebler."
Ontario Superior Court Justice Taylor upheld Staebler’s claims for breach of contract and he upheld the stipulated damages clause.
The trial judge first asked whether Staebler had a legitimate proprietary interest to protect, and concluded that it did. Having regard to the nature of the insurance industry, common industry practice and the fact that “Staebler's book of business, namely the clients, is an asset owned by Staebler, which it is entitled to protect,” the Court determined that the scope of the clause was not too broad.
Relevant to his decision was the fact that commercial producers have a close and personal relationship with their clients, having taken one or two years to gain familiarity with their clients' businesses. He found, therefore, that a simple non-solicitation clause would not be effective in protecting Staebler's proprietary interest because the "clients would be likely to follow Allan and Kienapple to their new employer without any solicitation." Moreover, Taylor noted, the Staebler covenant was "significantly less restrictive" than the one contained in the employment contracts entered into by the defendants with Stevenson & Hunt, a relevant consideration when determining industry practice and an employee's understanding of what is appropriate.
Looking at the question of the public interest, Justice Taylor rejected the argument that Staebler's restrictive covenant prevented these employees from earning a living in their chosen field. He noted that the clause did not stop them from acting as insurance brokers selling commercial insurance, from accepting employment with a competing brokerage, or from contacting other Staebler clients not serviced by them. The Court rejected as well the defendants' argument that the covenant was contrary to the public interest because it "interfere[d] with purchasers of insurance obtaining service and advice from the person most knowledgeable about their insurance needs."
The Court was not troubled by the two-year duration of the prohibition. Looking at the insurance brokerage business generally, these clauses run between 18 months and three years said the trial judge.
On the issue whether the damage clause in the contract was enforceable the judge noted that “a sum will be held to be a penalty if it is extravagant and unconscionable in comparison to the greatest loss that could conceivably be proved. It is not sufficient that the pre-estimate of damages is more than the actual damages for it to be held to be a penalty.”
Both sides called expert evidence on the question of damages and the trial judge reviewed it and assessed the actual damages sustained by Staebler from the breach. He concluded actual damages sustained by Staebler to be about $1.5 million. The stipulated damage clause providing for 1.5 times gross commissions earned by Stevenson & Hunt from former Staebler clients yielded a number of approximately $1.85 million. The trial judge found this was not extravagant or unconscionable and awarded the higher amount.
This case serves as a useful reminder that restrictive covenants narrowly drafted to protect legitimate proprietary interests are enforced by the Courts if they are reasonable in all the circumstances.
H. L. Staebler Company Limited v. Allan, 2007 CanLII 37692 (ON S.C.)