eCaseNote 2011 No. 02

Court Strikes Down Post‐Employment Competition Restrictions in Employment Contract

Mason v. Chem‐Trend Limited Partnership, 2011 ONCA 344

Mason was terminated, allegedly for cause, after 17 years of employment with Chem‐Trend. He had worked as a technical salesperson over the years and had acquired knowledge about Chem‐Trend, its products and customers within a specific sales territory. As many of Chem‐Trend’s clients were multi‐ national corporations, that knowledge extended beyond Mason’s geographical territory. Mason’s employment contract precluded him from directly or indirectly, for a period of one year, for his own account or as an employee or agent of any business entity:  

“… to engage in any business or activity in competition with the Company by providing services or products to, or soliciting business from, any business entity which was a customer of the Company during the period in which I was an employee of the Company.”

In order to determine whether and to what extent Mason was free to compete with his former employer, he brought an application asking the Court to declare the restrictive covenant in his employment contract unenforceable. Mason was unsuccessful at the trial level and appealed. The Appeal Court reversed the decision of the trial judge, found that the restrictive covenant was unreasonable and therefore unenforceable, and struck it down in its entirety.   

The Appeal Court determined the enforceability of the restrictive covenant having regard to a number of factors. Firstly, it considered whether the restrictive covenant contained any ambiguity. The Court focused on the meaning of the clause, determined that the plain words were clear and that, at the time of signing, Mason understood what was meant by the clause.

Secondly, it considered the reasonableness of the restrictive covenant. In determining this issue, the Court recognized that Chem‐Trend had trade secrets, confidential information and trade contacts that were entitled to protection. However, it found that, when the agreement was examined as a whole, there were other clauses that protected Chem‐Trend in that regard. In particular, there was a separate clause dealing with the protection of trade secrets and confidential information, which it found provided significant protection for Chem‐Trend.  

The Court also stated that the prohibition on Mason dealing with Chem‐Trend customers was not consistent with a one year restriction on competition. The Court felt that, if the rationale behind the one year was that, after a year, the information would no longer be current, the clause was even less justified because after 17 years of employment the customer information would likely be very stale. Mason was not the president or chief financial officer and, as such, the Court felt that there was little justification for a broader prohibition on competition.

Finally, the Court stated that it was not possible for Mason to know with which potential customers he was prohibited from doing business because the restriction was not limited to Mason’s clients but to all clients of Chem‐Trend.  

Taking all this into consideration, and notwithstanding that it found the clause to be unambiguous when Mason signed the employment contract, the Court nevertheless decided that the restrictive covenant was not only ambiguous in its practical implementation, but it effectively prohibited Mason from competing with Chem‐Trend for one year, which the Court of Appeal felt was overly broad as well as unworkable in practice.

After conducting the balancing process between the rights of the Chem‐Trend to protect its trade secrets and customer information, and the public interest in free and open competition, in the content of the agreement as a whole and the role of Mason as salesmen the Appeal Court struck down the restrictive covenant. The Court refused to “read down” the clause to make it enforceable.

                Employers should note from this decision that it is important for post‐employment competition restrictions in employment contracts to contain no ambiguity, using clear words with plain meanings so that an employee can understand what is meant by the covenant.  The covenant must also be reasonably restricted to those customers that would likely be in contact with the employee and extend only for a reasonable period of time.

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