By Bruce Grist
Conventional wisdom suggests that because a nonsolicitation clause is more likely than a noncompete clause to be enforced by a Canadian court, why bother including a noncompete clause in an employment agreement? The British Columbia Court of Appeal’s decision in Edward Jones v. Voldeng suggests that there is still value in including a noncompete clause. Why? It may be easier to demonstrate irreparable harm, one of the requirements to obtain an injunction, when a former employee has breached a noncompete clause.
In this case, the B.C. Court of Appeal considered whether a court should grant an injunction to enforce a nonsolicitation clause. Edward Jones was the former employer of departing employee Randy Voldeng. RBC Dominion Securities Inc. was his new employer. Voldeng had an employment contract with Edward Jones that prohibited him from soliciting Edward Jones’ customers for six months after leaving the company.
Prior to leaving Edward Jones, Voldeng managed accounts totaling approximately $46 million. Within a couple of weeks of leaving, approximately $20 million of those accounts had transferred from Edward Jones to Voldeng at RBC.
Test for an injunction
To obtain an injunction, a party must show:
1. There is a serious question to be tried;
2. The applicant (former employer) will suffer irreparable harm if the injunction isn’t granted; and
3. The balance of convenience favors granting the injunction.
What’s irreparable harm?
The Edward Jones case deals with the issue of irreparable harm. If the damages can be calculated so that a specific amount can be awarded for the loss of the clients, there is no irreparable harm and an injunction won’t be granted.
Generally, there are two types of irreparable harm. The first is harm that can’t be quantified in monetary terms, such as permanent market loss or irrevocable damage to business reputation. The second is harm that can’t be compensated by a damages award because it’s unlikely that damages can be collected from the other party.
No irreparable harm here
The Court of Appeal said that the value of the portfolio of a departing employee is generally known, as well as the money made by the brokerage firm with respect to managing the portfolio. In effect, Edward Jones could show that the value of the Edward Jones clients who had transferred to RBC with Voldeng was $20.2 million. Since Edward Jones could show the actual loss it would experience, the court found there was no irreparable harm. As a result, it wouldn’t order an injunction to prevent the clients from being solicited by Voldeng and his new employer.
Irreparable harm more likely with noncompete clause
The court went on to compare the loss suffered by Edward Jones with respect to the potential breach of a nonsolicitation clause with the loss suffered by a potential breach of a noncompete clause. A noncompete clause prevents a departing employee from competing with his/her former employer.
The court stated that in a noncompetition situation, the former employer won’t necessarily be able to establish the loss resulting from the prohibited competition. Since the employer may not be able to determine what its potential loss would be, the former employer is more likely to be able to establish irreparable harm.
Impact on employers
The impact of the Edward Jones v. Voldeng decision is that Canadian employers have to decide how to properly draft restrictive covenants according to the nature of the business involved and the potential damage to the employer. Noncompete clauses will be more enforceable with respect to the issue of proof of irreparable harm in order to obtain an injunction. Noncompete clauses, however, are more likely to be struck down as being contrary to public policy, vague, or overly broad. There’s the irony.
The moral of the story is that employers should be very aware of the potential risks of employees with customer contacts leaving them and taking the business with them. A nonsolicitation clause may give rise to an award of damages suffered by the former employer, but it may not prevent the loss of the customers.
Attorneys with Fasken Martineau, the authors of Northern Exposure – Employment Law for US Companies with Operations in Canada, invite you to a webcast on Thursday, February 21, 2013, 12:30 p.m.-2:30 p.m. EST. Members of the Canadian law firm will speak on the following topics:
- Workplace Privacy in the Aftermath of the Cole Decision (Dominique Monet, Montréal)
- Accommodating Mental Disabilities and Mood Disorders (Katherine M. Pollock, Toronto)
- Culpable, Non-Culpable and Hybrid Analysis – The Evolving Approach as to the Impact of Disability on Discipline (Lorene A. Novakowski, Vancouver)
Log-in instructions will be sent by e-mail a few days before the seminar. To register, click here.
For American participants: Upon request, Fasken Martineau will file necessary applications to have this seminar recognized by the American Bar Association.