When senior employees leave their jobs, employers are often concerned that they might establish a competitive venture or disclose confidential business information.
Some businesses attempt to safeguard against these risks by requiring that key employees sign non-compete and non-solicit agreements (i.e. “restrictive covenants”). However, restrictive covenants, especially non-competes, are extremely difficult to draft and even more difficult to enforce.
The recent Labrador Recycling Inc. vs. Folino 2021 decision illustrates how important it is to draft post-employment restrictions narrowly, conservatively and in a targeted manner. In that decision, the Ontario Superior Court denied Labrador’s motion for an urgent injunction to stop its former employee from competing against it, in part because of weaknesses in the restrictive covenant the company was trying to enforce.
Labrador Recycling was an aluminum scrap broker. Fabio Folino worked for Labrador as a salesperson for eight years. Folino signed an employment contract that stated he was prohibited from soliciting and accepting business from any of Labrador’s current or prospective customers that he personally had direct or indirect contact with, or access to confidential information about, during the last two years of his employment.
Folino resigned and started his own competing business. Labrador applied for an urgent injunction to prevent Folino from competing with it. Labrador claimed Folino owed the company a fiduciary duty (which would have meant he had additional loyalty obligations to Labrador) and that he was bound by a contractual restrictive covenant.
Folino was not a director of the company, but the court accepted that he had significant responsibilities and was a “key player” who was paid considerably more than Labrador’s other employees. However, those factors alone were not enough to make him a fiduciary, so any post-employment restrictions had to be set out in his contract.
With respect to the restrictive covenant, the court held that it was unreasonable for the following reasons:
•The one-year time limit on the non-solicit was too long given the volatile nature of the aluminum scrap industry;
•No geographic limit was set out in the clause;
•The terms of the clause were unclear and ambiguous;
•Folino was prohibited from accepting work from “anyone” with whom he personally had direct contact in the last two years of his employment, which was too broad; and
•The clause purported to restrict Folino from soliciting or accepting work from individuals with whom he had indirect contact over the past two years but it was not clear what “indirect contact” meant.
The court also held that the identity of customers, vendors and purchasers in the aluminum scrap market was widely available and, as a result, there was no misuse of confidential information.
Overall, Labrador did not meet the threshold required for an injunction, and its motion was dismissed. While the result of this motion would not preclude Labrador from running a full trial on these issues, by the time the parties reach trial, the damage to the Labrador’s business would likely already be done.
When it comes to post-employment restrictions, there is no “one-size-fits-all” template that will work for all businesses. Careful, narrow and targeted drafting is key. A clause that overreaches is not worth the paper it is written on.
Employers need to focus on crafting restrictions that take into account the nature of the industry, the specific nature of the work performed by the employee and the specific interests the company is legitimately trying to protect.
Employers should also consider:
•Providing working notice of termination and having post-employment covenants begin on the employee’s last day of work – not when notice is given. Employers can maximize their protection when working notice is given.
•Closely monitoring and actively managing customer relationships that are at risk.
•Using cease and desist letters that can be effective at slowing down competitive activities.
•Avoiding a non-competition clause where a non-solicitation clause is sufficient.
•Seeking legal advice – this is a complex and technical area of law that requires precise drafting.
While every effort has been made to ensure accuracy in this article, you are urged to seek specific advice on matters of concern and not to rely solely on what is contained herein. The article is for general information purposes only and does not constitute legal advice. •
Jennifer Russell is a partner at Roper Greyell, where she specializes in employment and labour law. Nimrit Sian is a Roper Greyell associate specializing in contractual disputes and workplace policy development.
