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OBLIGATIONS OF THE DEPARTING EMPLOYEE WHAT IS

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					     OBLIGATIONS OF THE DEPARTING EMPLOYEE: WHAT IS PERMISSIBLE
                            COMPETITION?

Introduction

It goes without saying that today’s marketplace is highly competitive in many different aspects.
Businesses compete for the most talented employees and for their share of the client pool in any
given industry or market. They also strive to maintain their competitive edge by protecting
information that may be unique to their product line, technical processes, or client preferences, to
name a few. Given the value placed on protecting and expanding a competitive advantage or fair
share of the available market, it is not surprising that litigation abounds over allegations that
former employees have violated one or more of the duties said to be owed to the employer after
the employee decides to leave and join a new company.

Some of those obligations are imposed contractually, while others exist at Common Law quite
independent of any contractual arrangements that have been entered into between the parties.
This paper will provide an introductory overview of the distinctions between these various
duties, including the interpretation and application of those duties by the courts, and point out
some of the pitfalls that have arisen through the improper or imprecise drafting of the contractual
obligations.

What are the Obligations of a Departing Employee?

          Contractual Duties

The duties that employers seek to impose on their employees in this area generally fall into one
or more of the following categories: confidentiality agreements, non-solicitation agreements and
non-competition agreements. Confidentiality agreements seek to protect information such as
trade secrets or information that is confidential to the company such as knowledge of business
methodologies or processes developed by the company, or client lists, including customer
preferences, spending habits, and business needs of the customer base.




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Disputes often arise in this area over the nature of the information sought to be protected: is it
truly confidential information that the employer is entitled to protect or is it general knowledge
of how this type of business operates? An employee is entitled to develop expertise in an area
that will form part of the individual’s overall knowledge base that he/she is entitled to use
elsewhere.

In order to enforce these types of clauses, the employer must be able to demonstrate that the
subject information is proprietary to it, namely that it is confidential and unique to that
organization and that it is not otherwise available in the public domain.

Non-solicitation clauses and non-competition clauses both seek to go further than confidentiality
clauses in that they seek to restrict the manner in which a departing employee may engage in
competition with the former employer. Non-solicitation agreement are, by their nature, less
restrictive than complete non-competition agreements, and as such, are generally easier to
enforce. Specifically, non-solicitation clauses seek to prevent the departing employee from
approaching the former employer’s clients for the purpose of soliciting their business. Non-
solicitation clauses may also be aimed at preventing the solicitation of the employer’s other
employees for the purpose of leaving that employer to join the new business with the departing
employee.

As indicated above, non-competition clauses are the most restrictive of the three types of
agreements discussed here. They seek, generally speaking, to prevent the departing employee
from establishing, participating in, or working for a competing business. The exact nature of the
restrictions against competition that may be put in place vary significantly from case to case.

In assessing the enforceability of any restrictive covenant found in a contract, courts are faced
with two competing principles. The first principle concerns the freedom of parties to enter into a
contract and set out the terms by which they are agreeing to be bound. The second principle is
based on the concept that any contract in restraint of trade is prima facie unenforceable as
contrary to the public interest. The Supreme Court of Canada in Elsley v. J.G. Collins Insurance




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Agencies Ltd., [1978] 2 S.C.R. 916, which remains the leading Canadian case on non-
competition clauses, discussed the issue as follows:

                     A covenant in restraint of trade is enforceable only if it is
                     reasonable between the parties and with reference to the public
                     interest. As with many of the cases which come before the Courts,
                     competing demands must be weighed. There is an important
                     public interest in discouraging restraints on trade, and maintaining
                     free and open competition unencumbered by the fetters of
                     restrictive covenants. On the other hand, the Courts have been
                     disinclined to restrict the rights contract particularly when that
                     right has been exercised by knowledgeable persons of equal
                     bargaining power. In assessing the opposing interests the word
                     one finds repeated throughout the cases is the word “reasonable”.
                     The test of reasonableness can be applied, however, only in the
                     peculiar circumstances of the particular case …

                     It is important, I think to resist the inclination to lift a restrictive
                     covenant out of an employment agreement and examine it in a
                     disembodied manner, as if it were some strange scientific specimen
                     under microscopic scrutiny. The validity, or otherwise, of a
                     restrictive covenant can be determined only upon the overall
                     assessment, of the clause, the agreement within which it is found,
                     and all of the surrounding circumstances.

                     (at p. 5)

The Court established a three part test to be utilized in determining the reasonableness of any
particular non-competition clause. It has been restated many times and requires an assessment of
whether:

1.        the employer has a proprietary interest that is entitled to protection;

2.        the time and spatial restrictions in the clause are too broad;

3.        the restrictions are reasonably required for the protection of the employer or whether they
          are broader than reasonably required.

Courts will scrutinize these clauses very carefully, being aware of the delicate balance between
the two competing principles. Consequently, drafters of such agreements are well advised to
draft any restrictive covenants as narrowly as possible to protect the legitimate proprietary


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interests of the employer and no more. As noted by the Ontario Court of Appeal in Lyons v.
Multari (2000), 50 O.R. (3d) 526:

                     Generally speaking, the courts will not enforce a non-competition
                     clause if a non-solicitation clause would adequately protect an
                     employer’s interests.

                     (at para. 33).

The Court went on to quote from the Elsley, supra, case to say:

                     … [I]n exceptional cases, the nature of the employment may
                     justify a covenant prohibiting an employee not only from soliciting
                     customers, but also from establishing his own business or working
                     for others so as to be likely to appropriate the employer’s trade
                     connection through his acquaintance with the employer’s
                     customers. This may indeed be the only effective covenant to
                     protect the proprietary interest of the employer. A simple non-
                     solicitation clause would not suffice.

                     (at para. 34)

The danger of over-reaching in the drafting of such clauses is evident in the recent B.C. Court of
Appeal decision in Valley First Financial Services Ltd. v. Trach, [2004] B.C.J. No. 1127. In that
case an insurance agent and two others left Valley First to set up a competing business. The
insurance agent’s contract contained restrictive covenants providing that upon termination of the
agreement:

                     (a) he will not either directly or indirectly, as a shareholder,
                     employer, employee, partner, proprietor, agent, director or in any
                     way whatsoever be involved with or associated with any general
                     insurance and financial services business within fifty (50) miles
                     from the City of Vernon for a period of two (2) years from the date
                     of such termination; and

                     (b) he will not solicit business from, contact or have any dealings
                     with any of the [Valley First] Clients, either directly or indirectly,
                     in any way relating to the Business or to the business of general
                     insurance and financial services, for a period of two (2) years from
                     the date of such termination.



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The former employee had provided insurance services to Valley First only in the area of group
benefits.      The trial judge concluded that the clauses were too broad and were, therefore,
unenforceable. On appeal, the Valley First did not take issue with the conclusion that the non-
competition clause was unenforceable, but did argue that the non-solicitation clause should have
been found to be enforceable on its own. The Appellate Court held:

                     The trial judge referred to the observation in Elsley, supra, that
                     non-solicitation clauses are more likely to satisfy the
                     reasonableness standard than non-competition clauses. However,
                     he observed that the non-solicitation covenant in clause 4.02(b)
                     prohibited Mr. Trach from soliciting, not just Valley First’s
                     customers in the group-benefits insurance department, but its
                     customers in the areas of general insurance and financial services.
                     I agree with his conclusion, in the passage I have reproduced in
                     para. 44 above, that the covenant was unreasonably broad. Had the
                     parties drafted a non-solicitation clause restricted to Valley First’s
                     customers in the group-benefits insurance department, the trial
                     judge would likely have found it to be reasonable. However, that
                     is not the clause that they agree to.

                     (at p. 8)

The uniqueness of the individual employer’s business interests requiring protection together with
the many varieties of contract language used to attempt to restrict the employee’s future ability to
compete, serve to make these cases highly fact specific. While there are general principles that
can be gleaned from the cases, it is difficult to establish any firm rule-based guidance given that
the application of the principles to any particular fact pattern can result in very different
conclusions.

One case which sets out some helpful parameters is the Winnipeg Livestock Sales Limited v.
Plewman (2000), 192 D.L.R. (4th) 525 (Man. C.A.). In that case, a restrictive covenant purported
to prohibit Plewman, a livestock auctioneer, from either soliciting business from, or providing
livestock auctioneering services to, anyone within Manitoba for a period of 18 months. The
Court ultimately determined that the agreement was unenforceable and used the following list of
factors in assessing the reasonableness of the restriction:



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1.        the degree of acquaintance with which the employee has with clients, and the likelihood
          that the employee could undermine the employer’s business if allowed to compete;

2.        the relationship between the nature of the business and customer loyalty issues;

3.        the degree to which clients or customers might identify the employee with the business;

4.        the length of service with the employer;

5.        the amount of personal service to clients;

6.        whether the employee dealt with clients exclusively or on a sustained or recurring basis;

7.        whether the knowledge about the client which the employee gained was of a confidential
          nature or involved an intimate knowledge of the client’s particular needs, preferences or
          idiosyncrasies;

8.        whether the nature of the employee’s work meant that the employee had influence over
          clients, in the sense that the clients relied upon the employee’s advice, or trusted the
          employee;

9.        if competition to buy the employee has already occurred, whether there is evidence the
          clients have switched their custom;

10.       the nature of the business with respect to whether personal knowledge of the client’s
          confidential matters is required;

11.       the nature of the business with respect to the strength of customer loyalty, how clients are
          “won” and kept, and whether the clientele is a recurring one; and

12.       the nature of the commercial or business community involved, and whether there are
          clients or customers yet to be exploited.

The analysis of these factors resulted in a conclusion that the interest the employer was
attempting to protect was really the individual’s professional skill and experience as an
auctioneer, something that was not proprietary to the employer.            While not exhaustive or
determinative, this list appears to provide a useful practical guide to use in assessing these
clauses.

          Severability




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In recognition of the fact that non-competition clauses are viewed strictly by the courts and are
often not upheld in the form in which they were drafted, it is not uncommon to see a provision
for severing any portions of the agreement found to be unenforceable. Severing the offensive
parts of the agreement may be possible, provided the severed portions are independent of one
another and can be severed without affecting the meaning to be attached to the portions of the
agreement that remain. However, severance is often not possible because the offending portions
are inextricably intertwined with the remaining portions that would otherwise be reasonable if
standing alone. Failure to draft the individual restrictions as standalone elements will often be
fatal to a severance argument.

Courts are reluctant to take this invitation to sever portions of the agreement on the basis that it is
not the court’s role to re-write the agreement for the parties: Canadian American Financial
Corp. v. King (1989), 36 B.C.L.R. (2d) 257 (C.A.). To do so is likely to result in an agreement
that was not within the parties’ reasonable expectation when they drafted and signed the
agreement.         It was submitted in that case that the Court ought to substitute a geographic
restriction of B.C. and Alberta, being the provinces in which the company actually did business,
in place of the original restriction of all of Canada that was in the signed agreement. This the
court declined to do. In analysing the issue, the Court noted the following conclusion from the
Law Reform Commission of British Columbia on Covenants in Restraint of Trade:

                     … Canadian courts have been willing to sever portions of
                     offending covenants by application of the “blue pencil” test. If it is
                     technically possible to delete certain words in a covenant and leave
                     a grammatical and economically feasible arrangement not in itself
                     unreasonable, and if an intent to adopt such restrictions could fairly
                     be imputed to the parties, then the courts have the power, by
                     deleting offensive words, to enforce the covenant to the extent that
                     it is reasonable.

                     (at page 8)

The Court concluded that the requested change would amount to a substitution of a new
covenant rather than the severance of an offending portion, and as such, it could not be done.




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Courts continue to be reluctant to employ any technique that would be viewed as changing the
nature of the bargain between the parties. This point is illustrated by the Supreme Court of
Canada recent decision in Transport North America Express Incorporated v. New Solutions
Financial Corporation, [2004] 1 S.C.R. 249, in which it was noted that “[t]he change effected by
the blue-pencil technique will often fundamentally alter the consideration associated with the
bargain and do violence to the intention of the parties” (at para. 28). As a result, the best advice
is to draft the provisions carefully at the outset to protect the true proprietary interest of the
employer without overreaching to attempt to gain more than is reasonable in the circumstances.

          Fresh Consideration

One issue that often arises is the appropriate timing for requiring an employee to enter into an
agreement containing non-competition, non-solicitation, or confidentiality provisions. Unless
the agreement is entered into at the time the person is about to commence employment, issues
can, and usually do, arise.                 The introduction of such an agreement after the person has
commenced employment will invariably result in a constructive dismissal as it constitutes a
fundamental change to the terms and conditions of employment.

This issue can generally be avoided in a few different ways.                 The employer can provide
reasonable notice of the change that is to be introduced, namely the requirement to sign the
agreement. Alternatively, fresh consideration for the new agreement can be provided. In some
cases, the fresh consideration may be comprised of the reasonable prospect of future
employment.

However, it must be clearly explained to the person that they are receiving a benefit, namely
continued employment for a reasonable period of time, in order for the consideration to be found
to be present. For example, in Watson v. Moore Corp. (1996), 134 D.L.R. (4th) 252 (B.C.C.A.),
the employer had failed to expressly state to the employee that the consideration being provided
was the employer’s forbearance from dismissing the employee. The Court found that there was
inadequate consideration.




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There have been cases in which the courts have found forbearance from termination to constitute
sufficient consideration where the employees understood that they would have their employment
terminated unless they signed. However, a cautious approach is recommended in this area as the
caselaw remains unsettled.

          Duties at Common Law

At Common Law, all employees have certain obligations to their existing and former employers.
The employment relationship between the employer and employee is governed by the law of
contract, whether that contract be written, verbal or a combination of the two. It is an implied
term of every employment agreement that the employee will provide faithful, honest and diligent
service to the employer and that the employee will not act in a manner that is likely to harm the
employer’s interests. Part of that obligation requires that the employee not divulge information
that is confidential to the employer. Confidential information in this context would include trade
secrets of the employer and confidential client information, such as client lists containing contact
information, customer preferences, etc.

Disagreements often arise over whether the information sought to be protected is truly
confidential information or whether the information amounts to general know-how in the
performance of the job which an employee is entitled to continue to utilize in the carrying out of
his/her trade or profession regardless of which employer the individual may be employed by.

At Common Law there is also a higher duty that applies to some, but not all employees. Higher
level employees, usually senior or executive level employees, also owe a fiduciary duty to their
employers when they depart. The distinction and significance of that distinction has been
discussed in many cases. The Court in W.J. Christie & Co. v. Greer (1981), 121 D.L.R. (3d) 472
described it as follows:

                     There is nothing to prevent an ordinary employee from terminating
                     his employment, and normally that employee is free to compete
                     with his former employer. The right to compete freely may be
                     constrained by contract. It would be improper, too, for an



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                     employee to purloin trade secrets or confidential information,
                     including customer lists.            But it is different for a
                     director/officer/key management person who occupies a fiduciary
                     position. Upon his resignation and departure, that person is
                     entitled to accept business from former clients, but direct
                     solicitation of that business is not permissible. Having accepted a
                     position of trust, the individual is not entitled to allow his own self-
                     interest to collide and conflict with fiduciary responsibilities. The
                     direct solicitation of former clients traverses the boundary of
                     acceptable conduct.

                     (at p. 477).

The distinction between a “mere” employee who owes no fiduciary obligation and a higher level
employee who does have a fiduciary duty towards his/her former employer can be difficult to
discern. It may be easy to state the principle, but much more difficult to apply factually, as noted
by the Court of Appeal in Atlantic Business Interiors Ltd. v. Hipson, [2005] N.S.J. No. 33
(N.S.C.A.) in quoting with approval from the trial judgment:

                     … The difficulty most often arises when the departing employee,
                     like Mr. Hipson, is somewhere along the continuum between an
                     upper level executive and a lower level employee. The courts have
                     stressed that it is the nature of the job function and responsibility
                     being performed, and not the job title, which will be determinative.

                     (at para. 45)

Courts have applied a reasonable expectation test to determine the scope of the fiduciary duty
applicable in any particular case. The test was described in the Supreme Court of Canada’s
decision in Hodgkinson v. Simms, [1994] 3 S.C.R. 377:

                     … Concepts such as the fiduciary duty, undue influence,
                     unconscionability, unjust enrichment, and even the duty of care are
                     all responsive to abuses of vulnerable people in transactions with
                     others. The existence of a fiduciary duty in a given case will
                     depend upon the reasonable expectations of the parties, and these
                     in turn depend on factors such as trust, confidence, complexity of
                     subject matter, and community or industry standards …




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                     In seeking to identify the various civil duties that flow from a
                     particular power-dependency relationship, it is simply wrong to
                     focus only on the degree to which a power or discretion to harm
                     another is somehow “unilateral”. In my view, this concept has
                     neither descriptive nor analytical relevance to many fact-based
                     fiduciary relationships.      Ipso facto, persons in a “power-
                     dependency relationship” are vulnerable to harm. Further, the
                     relative “degree of vulnerability”, if it can be put that way, does
                     not depend on some hypothetical ability to protect one’s self from
                     harm, but rather on the nature of the parties’ reasonable
                     expectations. Obviously, a party who expects the other party to a
                     relationship to act in the former’s best interests is more vulnerable
                     to an abuse of power than a party who should be expected to know
                     that he or she should take protective measures. J.C. Shepherd,
                     supra, puts the matter in the following way, at p. 102:

                               WHERE a weaker or reliant party trusts the stronger party not to
                               use his power and influence against the weaker party, and the
                               stronger party, if acting reasonably, would have known or ought to
                               have known of this reliance, we can say that the stronger party had
                               notice of the encumbrance, and therefore in using the power has
                               accepted the duty. [Emphasis in original]

                     …

                     In summary, the precise legal or equitable duties the law will
                     enforce in any given relationship are tailored to the legal and
                     practical incidents of a particular relationship. To repeat a phrase
                     used by Lord Scarman, “[t]there is no substitute in this branch of
                     the law for a meticulous examination of the facts”.

                     (at pp. 412-414)

An employee who is considered to be a “key employee” in the organization has been found to be
a fiduciary. Generally this finding will require the individual to be in a key position with the
ability to influence the business. While this employee’s relationships with clients will be a factor
in this assessment, it is likely not a sufficient factor in and of itself to result in a finding that a
fiduciary relationship exists. For example, in the Valley First, supra, case Mr. Trach was not
found to be a fiduciary despite having direct responsibility for approximately 95% of the group-
benefits department and the fact that his close relationship with the customers was viewed as



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critical to his role as head of the group-benefits department. Valley First argued on appeal that
he was the “face of the business” in an industry in which the client relationships are based on
trust and confidence and it is that person in whom the clients place their loyalty. Despite this
argument, the Court found no reason to overturn the trial judge’s assessment that Trach was not a
fiduciary and that while his “… work was important to the plaintiff, … that alone is insufficient
to establish a fiduciary relationship.” (at p. 11).

Conclusion

There are a number of duties that govern the conduct of a departing employee who intends to
compete in one manner or another with the former employer. These duties range from the
Common Law duties applicable to all, including the “mere employee”, such as the duty to
protect confidential information, to the fiduciary duties expected of a high level employee.
Contractual obligations restricting the individual’s ability to directly compete against the
employer in the marketplace or restricting the individual from soliciting the clients of the former
employer may also be utilized. The key point that arises from the jurisprudence in this area is
that the drafting of these restrictions is critical to their ultimate success. Drafters should assume
that the agreement will be challenged because this is a highly litigious area. Focus should
therefore be placed, at the outset, on properly defining the legitimate interest to be protected and
ensuring that the language is no broader than necessary to protect that interest.




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