March 17, 2017 By: Jill Lewis
Print

This article originally appeared in The Lawyers Weekly on March 3, 2017, published by LexisNexis Canada Inc.

The case of Donaldson Travel Inc. v Murphy, 2016 ONCA 649 (“Donaldson Travel”) has been added to the long list of cautionary tales for employers who are drafting restrictive covenants in employment contracts. In Donaldson Travel, the Ontario Court of Appeal confirmed that an employee’s non-solicitation clause should be characterized as a non-competition clause due to three small words: “or accept business”.

Draft covenants with care

The case involved Mary Murphy, a travel agent for Donaldson Travel Inc. (“Donaldson”) who resigned from Donaldson and commenced employment as a travel agent with its competitor.

Donaldson began a claim against Ms. Murphy, relying on the following covenant in the employment agreement:

“Mary agrees that in the event of termination or resignation that she will not solicit or accept business from any corporation accounts or customers that are serviced by Uniglobe Donaldson Travel, directly, or indirectly.” [Emphasis added.]

The Ontario Superior Court found that this restrictive covenant extended beyond Ms. Murphy’s obligation not to solicit customers of Donaldson: it required her not to accept business, of any nature, from Donaldson’s customers generally – not just the customers she serviced.

Justice Broad found this covenant failed each branch of the Staebler test:

First, Donaldson’s proprietary interest, which was the development of a special relationship and loyalty between Ms. Murphy and Donaldson’s clients, was not sufficient enough to warrant such a restrictive clause.

Second, the covenant did not include any geographic or temporal restrictions, making the covenant too broad and unenforceable.

Third, the covenant attempted to not only restrict Ms. Murphy’s ability to solicit clients, but also accept business from any of Donaldson’s customers, whether she had contact with them during her term or not. This obligation was too restrictive and, therefore, invalid.

Donaldson failed to provide evidence of exceptional circumstances that could warrant such a covenant. Donaldson’s evidence included Barbara Donaldson’s affidavit, wherein she explained this was Ms. Murphy’s third contract, specifically because they wanted to remove the non-competition clause from her former contract. Donaldson also provided an employee policy, which stated that employees are only required to sign non-solicitation clauses. Despite this evidence of the parties’ intentions, Justice Broad held the non-solicitation clause was clearly drafted to restrict Ms. Murphy’s ability to work with Donaldson’s clients, making it unreasonable and invalid. Donaldson appealed the decision.

The Ontario Court of Appeal upheld the motion judge’s interpretation of the restrictive covenant, finding no basis to interfere with his decision. In particular, the ONCA further refused to sever the phrase “or accept business” from the clause, relying on the rule set out in Shafron v KRG Insurance Brokers (Western) Inc., 2009 SCC 6, which said that courts should resort to blue-pencil severance “sparingly”.

Donaldson Travel offers three helpful “take-aways” for lawyers drafting and reviewing restrictive covenants.

First, and most obvious, is the use of the phrase “or accept business” and the emphasis on carefully chosen language. Labelling a non-competition clause as a non-solicitation clause is unhelpful: a court will examine the real effect of the clause and decide whether it is a non-solicitation or non-competition clause. Since this clause was, in effect, a non-competition clause, the lack of geographical and temporal limitation made this clause unenforceable.

Second, is Justice Broad’s decision to invalidate the clause under the proprietary interest branch. Many employers feel the strong-developed relationship and loyalty between an employee and a client warrant sufficient protection through a non-solicitation and, sometimes, a non-competition clause. Justice Broad, however, took a narrow view on what type of proprietary interest warranted a restrictive covenant. The Ontario Court of Appeal did not offer any guidance on this point. Lawyers may want to take caution if they are relying on a similar relationship between staff and clients for the basis of their clients’ restrictive covenants.

The final takeaway is the inability to sever. Justice Broad focused on Donaldson’s inability to “notionally sever” or “read-down” the clause, but did not mention the “blue-pencil severance” rule. We know from Shafron that notional severance will never be appropriate in the case of restrictive covenants. However, blue-pencil severance is available if the judge can draw a line through the invalid portion without affecting the meaning of the overall clause. Donaldson may have provided the appropriate facts to apply this blue-pencil rule. Donaldson had strong evidence demonstrating the parties’ intention to only be bound by a non-solicitation clause: it had intentionally removed the non-competition clause from Ms. Murphy’s contract, and the employee policy stated that employees will only be bound by non-solicitation clauses. The phrase “or accept business from” could also arguably be removed without affecting the remaining clause. Neither the Superior Court nor the Appellant Court provided guidance on why the blue-pencil severance rule could not have been applied to this case.

So what does this mean for lawyers drafting employment contracts? In essence, careful attention must be paid to non-solicitation clauses. Lawyers need to ensure the language reflects the parties’ true intentions, while adequately protecting the business’s interests. And, above all else, lawyers need to keep these restrictive covenants reasonable.

For more questions, contact our Employment Law Group.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.