A Non-Competition Clause Disguised as a Non-Solicitation Clause

In Donaldson Travel Inc. v. Murphy, the Ontario Court of Appeal found that a clause that appeared to be a non-solicitation clause was, in practice, a non-competition clause.

The clause at issue provided as follows:

The [personal respondent] agrees that in the event of termination or resignation that she will not solicit or accept business from any corporate accounts or customers that are serviced by [the appellant], directly, or indirectly.

Murphy was employed by Donaldson as a travel agent for a period of approximately 8 years. She resigned from her employment and began to work for a competing firm.  Donaldson commenced an action against Murphy and her new employer which claimed that:

  1. Murphy had actively solicited customers of Donaldson;
  2. the new employer knew or ought to have known that Murphy’s solicitation was a breach of her contractual obligation to Donaldson and a misappropriation of its confidential information;
  3. the new employer’s inducement and participation in Murphy’s breaches constituted a wrongful interference with contractual relations; and
  4. the new employer had acquired the business of four of Donaldson’s clients as a result of these breaches.

The new employer and Murphy brought motions for summary judgment dismissing the action against them. Both actions were dismissed by the motion judge.

On appeal, the Court of Appeal upheld the motion judge’s finding that the use of “accept business” in the restrictive covenant transformed the non-solicitation clause into a non-competition clause which was an unreasonable restraint against Murphy. Further, as the clause did not contain either a geographical or a temporal limit on the obligations imposed on Murphy, the Court of Appeal found no basis on which to interfere with the motion judge’s conclusion that the clause was unreasonable and therefore unenforceable.

As for the misappropriation of confidential information issue, the Court of Appeal concluded that the employer’s evidence failed to demonstrate that the departed employee shared information that had a “quality of confidence” with her new employer. As a result, the Court ruled that there was also no evidentiary basis to conclude that the new employer had induced a breach of contract or the disclosure.

Restrictive covenants are an essential tool for employers who have business interests to protect. As demonstrated over the past two decades, courts will closely scrutinize these restraints of trade to ensure that they balance the rights of the employer to protect its proprietary interests and the employee’s ability to make a living. The use of template or boilerplate restrictive covenants will often result in the employer losing all protection against departing employees. Restrictive covenants must be drafted on a case-by-case basis to maximize the chances of successfully protecting an employer’s proprietary interests.