THE EMPLOYERS' EDGE
Court of Appeal Overturns Lower Court Decision in Mason v. Chem-Trend Limited Partnership – A Step Back For Enforceable Restrictive Covenants
In The Employers’ Edge Bulletin December 2010, we provided a summary of the Ontario Superior Court decision in Mason v. Chem-Trend Limited Partnership which upheld as enforceable a twelve month, worldwide restrictive covenant preventing the former employee Mason from providing competitive services to any customers of Chem-Trend. In a unanimous decision released today, the Court of Appeal has overturned the lower court’s ruling and determined that the restrictive covenant in this case was unenforceable.
Mason, a technical sales representative, signed a restrictive covenant at the time of his hire in which he agreed, for a period of one year following his termination, not to engage in competitive business activities where he would be required to solicit business from any of Chem-Trend’s customers. After providing 17 years of service with the Company, he was dismissed from his employment and admitted to actively soliciting customers he dealt with during his employment on behalf of competitors of Chem-Trend. Following his dismissal, he brought an action for wrongful dismissal. Chem-Trend, a company with world- wide operations and customers, counterclaimed seeking damages for the breach of the restrictive covenant. Mason then brought an application seeking a declaration that the restrictive covenant in question was unenforceable.
The lower court found that the covenant’s extensive geographic scope was warranted given the nature of Chem-Trend’s business, and the fact that Mason worked in the United States and Canada and within various regions throughout his career. With respect to the covenant’s broad restrictions on Mason’s activities, the court concluded this was justified in light of the global nature of the business and Mason’s significant access to information about Chem-Trend’s products, operations, customers and pricing that could be used against Chem-Trend and be detrimental to its business. Finally, the court upheld the terms of the restrictive covenant on the basis that the duration of the covenant was for a relatively short duration, being for a period of one year.
In reversing the lower court’s decision, the Court of Appeal appears to have been most troubled by the fact that Mason would be prevented from not only dealing with customers that he worked with over the years but rather all past and current customers, some of which he would not be readily able to identify. Notwithstanding that Chem-Trend is a global company with global clients and it was not disputed in the evidence that Mason had access to sensitive sales information and knowledge of customers beyond the clients and product divisions he serviced, the Court of Appeal determined that a complete prohibition on competing with Chem-Trend was an unreasonable restraint of trade. While it is certainly debatable whether the covenant in question did, in fact, act as a complete prohibition on competing as determined by the Court of Appeal, the decision is unfortunately in keeping with the Court of Appeal’s recent line of case law striking down restrictive covenants at the expense of protecting an employer’s trade connections and customer relationships.
The Court of Appeal’s decision reinforces the importance of drafting restrictive covenants that limit, as much as possible in the circumstances, the degree to which an employee is prevented from competing with a former employer and soliciting its customers. One can speculate whether, given the facts of this case, the Court of Appeal would have struck down the covenant if it had only restricted Mason from dealing with customers that he had directly serviced during his employment. While this may be cold comfort to Chem-Trend, who negotiated the restrictive covenant in good faith almost two decades ago, employers should be reviewing their restrictive covenants to ensure that they meet the very stringent test set out by the Court of Appeal.
Given that it is likely that this litigation will not end at the Court of Appeal, we will keep you posted on any further developments in this case.
Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.