A non-solicitation clause is a contractual requirement that serves to protect an employer from a departing employee’s attempts to recruit its staff or solicit business from its customers, clients or suppliers. At their root, these clauses are designed to protect the legitimate business interests of a company or organization, and to avoid unexpected loss in the event that staff depart.
Generally speaking, to be enforceable a non-solicitation clause must be narrowly drafted, clear and reasonable in relation to the activity it seeks to restrict, having regard for the departing employee’s position, knowledge and responsibilities.
‘Courtesy calls’ cause close to $40 million in lost revenues
A recent decision of the Court of Appeal for Ontario, MD Physician Services Inc. v. Wisniewski, highlights the risk of breaching a non-solicitation clause, both as a departing employee, and as said employee’s new employer.
In Wisniewski, two employees (the “Employees”) left MD to join a competitor company, RBC Dominion Securities. Both Employees had been employed by MD pursuant to a non-solicitation agreement, that provided as follows:
Non-Solicitation – The Employee agrees that the Employee shall not solicit during the Employee’s employment with the Employer for the period ending two (2) years’ after the termination of his/her employment, regardless of how that termination should occur, within the geographical area within which s/he provided services for the Employer.
“Solicit” means: to solicit, or attempt to solicit, the business of any client, or prospective client, of the Employer who was serviced or solicited by the Employee during his/her employment with the Employer.
On their first day of work at RBC, the Employees wrote out from memory a list of MD’s clients whom they had serviced and set about phoning them. As a result of these efforts, a number of MD clients followed the Employees to RBC. In total, the Employees built a collective book of business at RBC, within around 18 months, having a total value of $43 million dollars. Of this total value, 38.8 million dollars came from clients of MD Financial whom they had previously serviced. Accordingly, MD brought a court claim seeking damages for this loss in revenue.
MD sued the Employees for breach of contract, as well as their new employer, RBC, which it asserted was vicariously liable for these breaches.
The Employees sought to defend against this action on the basis that the non-solicitation clause was ambiguous, vague and unreasonable. They further asserted that the non-solicitation agreements were obtained without consideration, and thus were void. At trial, the court rejected these arguments, found the Employees to be in breach of contract, and RBC to be vicariously liable as it had instructed the Employees to contact MD clients.
At the Court of Appeal, the Employees again asserted that the non-solicitation clause was ambiguous, in regard to the term “solicit”, the geographic scope, the applicability to prospective clients, and the temporal length of the restriction. The Court rejected these assertions, stating that:
The meaning of the word “solicit” is obvious. The calls made by the appellants to former clients were not – as the appellants suggest – courtesy calls. They were clearly made with a view to bringing the clients to RBC. The calls were made immediately after being hired by RBC, they were made personally, by telephone and followed a predetermined structure. The evidence supports the trial judge’s conclusion that the calls were to solicit business.
In so doing, the Court upheld the non-solicitation clause, noting that its two-year term was clear and reasonable, that the applicable scope of activities was unambiguous and the geographic scope was reasonable.
Lessons for Employers and Employees
Wisniewski provides useful guidance for employees and employers. It confirms that the courts will look to uphold restrictions placed on employees, in the form of a non-solicitation clause, where these restrictions are clear and reasonable. As such, if you are an employee working pursuant to a non-solicitation agreement, it is critical to understand the implications of this restriction prior to making any contact with colleagues, customers, clients or suppliers of your former employer.
There will be situations where non-solicitation agreements are unenforceable, however, this assessment should be made with legal advice from an employment lawyer prior to taking any steps which may place you in breach of contract. In addition, departing employees should be aware that, regardless of any contractual obligation which may apply, they may be subject to a fiduciary duty to avoid soliciting staff and/or former clients. Fiduciary duties exist separate and apart from contractual obligations and will generally arise where the employee has an ability to exercise discretion or power which, if exercised, would harm their employer.
As for employers, Wisniewski provides two useful lessons:
- It is advisable to include, as part of any offer of employment, a non-solicitation agreement in order to prevent solicitation of your clients and staff by a departing employee. While the clause upheld by the Court of Appeal in Wisniewski provides guidance as to how a clause can meet the requirements of clarity and reasonableness needed to be enforceable, this language should not be blindly reproduced. Non-solicitation clauses must be tailored to meet each specific situation, taking into consideration the nature of the industry, the employee in question and the scope of the organization’s operations.
- Vicarious liability is a real risk for organizations that take on new employees and benefit from their solicitation of prior clients, as was evidenced in this case by the finding against RBC.
As such, best practice for employers is to draft contractual language as part of any employment offer, that requires the incoming employee to expressly confirm that he/she is not subject to any restriction that would prevent him/her from performing the duties required in the new position, and that he/she has a positive obligation to bring to the prospective employer’s attention any such obligations. Employers may also want to go one step further and make clear that in the event that an employee misrepresents this fact, it may provide the basis for just cause dismissal.
Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or firstname.lastname@example.org