Testing the Reasonableness of Non-Competition Clauses in Employment Agreements

Authored by Angela Folino

Case Comment:
IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301

In a recent unanimous decision, the British Columbia Court of Appeal affirmed a trial judge’s decision refusing to enforce a restrictive covenant in an employment agreement on the basis that the clause was overbroad and ambiguous.

In IRIS The Visual Group Western Canada Inc. v. Park , 2017 BCCA 301 [IRIS], the plaintiff/appellant (IRIS The Visual Group Western Canada Inc., “IRIS”) sought to enforce a restrictive covenant, commonly known as a non-competition clause, in an employment agreement with the defendant/respondent (Dr. Park) an optometrist. Dr. Park had resigned from IRIS and set up her own business approximately three and a half kilometres from the location of the IRIS optometry clinic where she had previously worked in Vernon, BC. Her former employer sought to prevent her from carrying on her new business on the basis that doing so violated the non-competition clause in the agreement that she had signed, which prohibited her from competing with IRIS within five kilometres of the IRIS clinic.

Background
Dr. Park had signed two Optometric Services Agreements with IRIS – one when she joined IRIS in 2007 (the “2007 OSA”) and one in 2010 (the “2010 OSA”), the latter of which was in effect when she resigned in 2016. Each of the agreements contained a non-competition clause. The non-competition clause in the 2007 OSA was simple and prohibited Dr. Park from practicing optometry within five kilometers of the IRIS clinic where she was employed for a period of three years following the termination of the 2007 OSA. The 2010 OSA also imposed a three-year restriction, but was far more onerous in scope with respect to the purported restrictions on her future employment. The non-competition clause in the 2010 OSA prohibited Dr. Park from competing,

…either directly or in partnership or conjunction with any person or persons, firm, association, syndicate, company or corporation, directly or indirectly carry on or be engaged in any part thereof or be employed by any such person or persons, company or corporation carrying on, engaged in, interested in or concerned with a business that competes with OpCo [an affiliated entity licensed to operate the Vernon location] or IRIS within 5km of the Location. For greater clarity, a “business that competes with OpCo or IRIS” is defined as any entity that dispenses performs [sic] any sort or [sic] prescription or non-prescription optical appliances including eye glasses or sunglasses… [Underlining added.]

The 2010 OSA also contained a non-disclosure and a non-solicitation clause, which sought to prevent the disclosure of IRIS’s customer list and the luring away of its employees, respectively. At trial, IRIS sought a declaration that the non-competition and the non-solicitation clauses were valid and enforceable and also sought an injunction preventing Dr. Park from soliciting IRIS customers and from competing with IRIS within the five kilometre restricted zone. The claim with respect to the non-solicitation clause related to Dr. Park’s advertising of her newly opened clinic. The trial judge found that this advertising did not violate the clause and IRIS did not appeal that finding. The trial judge also found that the non-competition clause was not enforceable, and IRIS appealed that part of the decision.

Non-Competition Clauses
The courts see non-competition clauses as a restraint of trade and generally find them to be unenforceable. The Supreme Court of Canada has held that a restraint of trade will only be enforceable if it is “reasonable between the parties and with reference to the public interest” (Elsley v. J.G. Collins Insurance Agencies, [1978] 2 S.C.R. 916 at 923-924). Thus, while it is in the public interest to discourage restraints on trade, the courts are inclined to honour the right to contract, especially when that right is exercised between parties of equal bargaining power. Courts distinguish non-competition clauses contained in employment agreements from non-competition clauses that are often found in agreements to sell businesses. In the latter case, the buyer pays the seller for the company’s assets, which includes the company’s goodwill. It is thus reasonable for the purchaser to expect that the person selling the business will not compete with the purchaser so as to take away the company’s customers and diminish its goodwill and so those types of non-competition clauses are typically found to be reasonable and enforceable.

On the other hand, in employment agreements the bargaining power is not equal since employees are more vulnerable than employers. Employees do not generally have the power to negotiate employment agreements and are often in a position where the non-competition agreement is imposed on them by the employer. For that reason, the courts consider non-competition clauses in employment agreements with “more rigorous scrutiny” [IRIS, para. 22].

Was the Non-Competition Clause Enforceable?
The court was asked to consider whether the clause itself was enforceable. In doing so, the answers to three questions were determinative (IRIS, para. 25): (1) Does the claimant have a proprietary interest worthy of protection? (The court found that IRIS’s existing trade connections were legitimate interests worthy of protection.) (2) If so, can that proprietary interest be sufficiently protected by other less restrictive measures than a non-competition clause? (Non-competition clauses are not generally enforced when a non-solicitation clause would provide the employer with adequate protection.) (3) If the answer to (2) is no, is the non-competition clause in the agreement reasonable by reference to the prohibited activity, the geographical area of the prohibition and the duration of the prohibition? (In order to be upheld, the clause must be “no broader in terms of spatial, temporal and activity restrictions than is necessary to protect the interest of the claimant”. A restriction that goes beyond what is necessary to protect the claimant’s legitimate interests is unreasonable and will not be enforced.) (IRIS, paras. 33 and 36.)

The court noted that the 2010 OSA contained a non-solicitation clause and a clause requiring a departing optometrist to transfer all patient records to IRIS. Since the trial judge did not give much consideration to the issue of whether these clauses would have provided sufficient protection to IRIS given the breadth of the non-competition clause, the Court of Appeal determined that it did not need to make a determination on it and instead focused on whether the clause was reasonable.

On the matter of the clause itself, the court found that it failed the reasonableness test because it was ambiguous. In particular, it was not possible to determine how someone could be competing “in conjunction with” someone else and to determine whether someone is “concerned with” a business in competition with IRIS. As well, the clause failed the test because it went “well beyond what is necessary to protect IRIS’s interests” (IRIS, paras. 63 – 65). On the other hand, the restrictions in the clause would have the effect of preventing Dr. Park from performing a “wide range of work, including work that had nothing to do with the practice of optometry”. Accordingly, since it was overly restrictive, the clause was found not to be enforceable.

It should be noted that in this case, IRIS argued that Dr. Park was a contractor, not an employee and that as such the degree of scrutiny should be lower with respect to determining the enforceability of the non-competition clause. The court found that the 2010 OSA set Dr. Park’s minimum working hours, required that IRIS approve her work schedule, set the number of vacation days Dr. Park was entitled to, the fees that Dr. Park was to charge, etc. As such, the 2010 OSA was more in line with an employment agreement than it was with that of an independent contractor. In any event, the court followed the Manitoba Court of Appeal’s decision in Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 , which held that the more stringent “reasonability test” applies to both independent contractor and employment relationships (see IRIS, para. 47).

Conclusion
The key takeaway is that although an employer may have legitimate business interests to protect, the courts are very reluctant to enforce non-competition clauses. The employee’s ability to obtain work in a specific industry or profession using their specialized skills, knowledge and experience, will generally be protected. If an employer’s interests can be adequately protected with a less onerous clause such as a non-solicitation clause and other clauses that provide for the return of sensitive protected information, for example, the court will decline to enforce a non-competition clause. However, a non-competition clause may be appropriate and enforceable if these other measures are not sufficient, provided that the non-competition clause is reasonable and results in the protection of an employer’s legitimate interests without a corresponding restraint of trade.

 

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