Non-Solicitation Clauses – Update for Employers

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In the recent decision of the Ontario Court of Appeal, MD Physician Services Inc. v. Wisniewski, the Court upheld the decision of the lower court on the enforceability of the non-solicitation clause.

The case involved two employees who were hired by MD Management Ltd. (“MDM”), a wholly owned subsidiary of MD Physician Services Inc., to provide financial services to their clients, who are primarily physicians. They each signed employment contracts including a non-solicitation clause, which provided as follows:

Non-Solicitation. The Employee agrees that the Employee shall not solicit during the Employee’s employment with the Employer and for the period ending two (2) years after the termination of his/her employment, regardless of how that termination should occur, within the geographic area within which s/he provided services to the Employer.

 

“Solicit” means: to solicit, or attempt to solicit, the business of any client, or prospective client, of the Employer who was serviced or solicited by the Employee during his/her employment with the Employee.

 

The employees left the employer and immediately commenced employment with a competitor firm, RBC Dominion Securities Inc. (“RBC”). On their first day of work with RBC, the employees wrote out from memory a list of their former employer’s clients who they had serviced and began phoning them. Many MDM clients followed them to RBC. MDM commenced an action against the employees claiming that they breached the terms of the non-solicitation clause.

The lower court reviewed the basic principles related to the enforceability of a non-solicitation clause in an employment contract, which can be summarized as follows:

  • There must be a proprietary interest entitled to protection;
  • The temporal and geographical restrictions cannot be too broad;
  • The clause must be limited to solicitation of clients (as opposed to a more general prohibition against all competition); and
  • The clause cannot be ambiguous.

The lower court determined that MDM had a legitimate proprietary interest in the respective client lists of the two departed employees. An employer’s customer lists are considered confidential information that an employer is entitled to protect by way of a non-solicitation clause.

The lower court also found that the temporal length (2 years) and the geographic scope (wherever the employee serviced clients) was not overly broad. The court commented that while the geographic location scope could technically be enormous given the language of the clause, the definition of “solicit” included the words “who was serviced” which limited its scope. It was clear to the employees that the restriction only applied to clients they had previously dealt with. The lower court concluded that the employees knew, or should have known, that their actions constituted a breach of the non-solicitation clause.

The employees argued that the phone calls to former clients were simply intended to provide information to clients who may have been concerned about their investments, and that the phone calls did not amount to “solicitation”. The court rejected this argument, stating that the contact with former clients had nothing to do with any perceived obligation to advise the clients that they had left their employment, or to reassure clients regarding their investments at MDM.  The contact had everything to do with an attempt to retain the business of these clients and was clearly solicitation in breach of the non-solicitation clause to which the employees were bound.

The Court of Appeal agreed with the lower court on all issues and confirmed the enforceability of the non-solicitation clause.

The take-away for employers is that a properly drafted non-solicitation clause can be enforceable and can protect your business when an employee decides to leave and join a competitor.  A standard clause is a useful starting point, but each case is unique and it is important to understand that a non-solicitation clause must be drafted in a manner that is only as broad as necessary to protect your business.