Fair Competition 

Legal Notes

Fair Competition

Can an employer expect a non-competition clause signed years after hiring to be binding?

FROM: MAR-APR 2003 ISSUE | BY RICHARD W. POUND

Can an employer impose a non-competition clause on one of its existing employees out of the blue? The Ontario Superior Court of Justice dealt with this question in Kohler Canada Co. vs. Porter [2002 26 BLR (3d) 24]. Porter had worked for Kohler for approximately 13.5 years, until he resigned and took a better paying job with an alleged competitor of Kohler's. Kohler sued Porter for breach of contract and sought an injunction, which would prevent Porter from working for his new employer until the resolution of the lawsuit.

Over the years that Porter worked for Kohler, he had been promoted a few times until, in 1999, he reached the position of sales manager for Ontario and Western Canada. Until 2001, Porter had never signed an employment agreement with Kohler; however, at some point during that year, Kohler asked Porter to sign one containing a non-competition clause. The non-competition clause provided that Porter could not work for a competitor anywhere in North America for one year after the end of his employment with Kohler. Porter signed the agreement despite the fact that Kohler did not provide an explanation and he did not obtain legal advice.

The Supreme Court of Canada established the usual test for entitlement to an interlocutory injunction in RJR MacDonald Inc. vs. Canada [1994 1 SCR 311 (Attorney General)]. The test asks three questions: Is there a serious issue to be tried? Will the applicants suffer irreparable harm if the injunction is not granted? And which party will suffer the greatest harm from granting or refusing the injunction? In cases involving non-competition clauses in employment contracts, Justice Molloy pointed out that a number of decisions since the RJR MacDonald case relied on a line of authority that preceded it, indicating that the first part of the test should instead be whether or not there is, on the face of it, a strong case. The stricter standard would be appropriate in these situations since the general rule is that non-competition clauses in employment contracts are void and will only be enforced in exceptional cases where a non-solicitation clause would be insufficient and where established tests of reasonableness are met (for example the reasonableness of the clause's geographic and temporal scope).

Justice Molloy concluded that granting an injunction in this case was not warranted. The non-competition clause expired in one year, and more than a year would have passed before the breach of contract suit was finally decided. Granting the injunction would have devastated Porter since it would have prevented him from working.

Enforceable Agreement?

Kohler had to establish a strong case that the employment agreement was binding and enforceable, that the non-competition clause was valid and enforceable and that Porter's new job was in breach of the non-competition clause.

On the first issue, the employment agreement would be binding and enforceable if there was consideration for it, i.e., if each party to the agreement mutually benefited. The law of contract provides that a contract is valid only to the extent that there is consideration flowing between the parties. Kohler argued that the consideration, according to the employment agreement, was Porter's continued employment and salary.

Justice Molloy looked at two relevant decisions that concluded continued employment was sufficient consideration and one that concluded it wasn't. In one of the cases, the court concluded that additional consideration existed since, according to the terms of the existing employment contract, the employer could terminate the employee on short notice and intended to do so if the employee did not sign a non-competition agreement. Additional consideration in this case was the employer's forbearance from exercising its right to terminate on short notice.

In the case in which the employer was unsuccessful, the employee had been given a written offer of employment, the terms of which did not indicate a notice period for termination; therefore, the employee was entitled to a reasonable notice period. On his first day of work, the employee was asked to sign an employment agreement that contained a termination clause providing for a maximum three-month notice period, which may not in all circumstances be considered reasonable. The employee was eventually terminated without notice. The Ontario Court of Appeal decided that the new employment agreement was not enforceable since there was no new or additional consideration to support the variation from the existing employment agreement. The terms of the employee's employment had already been fully set out in the written offer of employment.

The most recent of the cases Justice Molloy considered, which found for the employer, included the statement that simply threatening to fire an employee if the employee refuses to sign a non-competition agreement or a new employment agreement will not create a valid agreement. There must be something more, for instance, a promise to refrain from firing the employee for a reasonable period.

In the Kohler case, there was no evidence of this. Porter did not believe that he would be fired if he did not sign the agreement, nor did Kohler threaten to do so. In addition, based on Porter's period of employment, Kohler would have been required to give him significant notice, probably about 12 months. By contrast, in the two cases considered by Justice Molloy where the employer was successful, short notice periods were set out in the original agreements and the employer intended to fire the employee if the modified agreement was not accepted. Because Kohler did not offer anything more to Porter when he accepted the non-competition clause, Kohler failed to establish a strong case.

Justice Molloy considered the non-competition clause to be invalid based on its geographic scope. It extended to all of North America, while Porter had contact only with customers in Ontario and Western Canada. A non-solicitation clause, prohibition against the use of confidential information and the poaching of Kohler employees, would have been sufficient to protect Kohler's business interests. While Porter may have had a good relationship with Kohler customers, there was no evidence that they would choose their suppliers based on their relationship with the sales manager.

The lesson to be learned from this case is that employers should get it right the first time around. An employer can, within limits, include a non-competition clause in an employment agreement when the employee is initially hired. If terms adverse to the employee are subsequently added, employers should ensure that there are concessions on their part as well. Otherwise, they will not get much support from the courts when the employee chooses not to respect the new employment conditions.

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Richard W. Pound, QC, is a partner with Stikeman, Elliott, Barristers & Solicitors, in Montreal.