In Labrador Recycling Inc. v. Folino, 2021 ONSC 2195 (Labrador Recycling), Ontario’s Superior Court denied an employer’s motion for an urgent injunction to restrain its former employee from competing with it contrary to the employee’s purported fiduciary duty and his contractual obligations set out in the employment agreement’s restrictive covenant.      

Background

The employee worked as a salesperson for the employer, a scrap aluminum broker, for eight years until he resigned.  When the employee started his own business in competition with the employer, the employer brought a motion seeking urgent injunctive relief to restrain the employee from competing with it, contrary to what it argued was the employee’s fiduciary duty and contractual obligations.  With regard to the latter, the employer relied on a restrictive covenant in the employee’s employment agreement, which purported to prohibit the employee from soliciting and accepting business from any of the employer’s “current or prospective customers,” which were defined as, “an individual or entity with which [the employee] personally had direct or indirect contact, or access to conduct confidential information about, during the last two years of [his employment].”    

Decision

The court noted that to obtain injunctive relief, the employer would be required to satisfy the three-part test established by the Supreme Court of Canada (SCC) in RJR MacDonald Inc. v. Canada (Attorney-General), 1994 CanLII 117, 1994 SCC 117, [1994] 1 S.C.R. 311:  (a) Is there a serious issue to be tried; (b) Will the moving party suffer irreparable harm if the injunction is not granted; and (c) Does the balance of convenience favour granting the injunction?  The court stated also that the employer was required to establish a strong prima facie case because it was seeking an interlocutory injunction that would impede the employee’s ability to earn a livelihood.  It determined that the employer failed to do so.

Breach of Fiduciary Duty

The court noted that a fiduciary employee is not permitted to exploit advantages they obtained from their position with their former employer to compete with them, i.e., they must not solicit their former employer’s employees to leave their employment and join their new business, or solicit business from their former employer's customers. 

In Labrador Recycling, the court concluded that the employee was not a fiduciary employee, which it emphasized must possess the following defining characteristics: 

1. the fiduciary can exercise some discretion or power;
2. the fiduciary can unilaterally exercise that power or discretion to affect the beneficiary’s legal or practical interests;
3. the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

Although the court was willing to accept that the employee had significant responsibilities and the scope to exercise some discretion or power, it concluded that, for the following reasons, the employer failed to make a strong prima facie case that it was “peculiarly vulnerable to or at the mercy of” the employee:

…the evidence suggests that relationships between Labrador and purchasers or vendors of aluminum scrap were not the determining factor in closing deals. In the aluminum scrap industry, deals come together quickly based primarily on price. Because price is the determining factor, purchasers and vendors of aluminum are incentivized to seek out multiple contacts to increase their chances of reaching the best deal possible. Customer loyalty is not a feature of the industry. [The Defendant’s] relationships with vendors and purchasers in the aluminum scrap industry (some of which predated [his] employment with Labrador) did not drive the plaintiff’s ability to close deals: it was all about price. On [Defendant’s] departure, the plaintiff retained all its contacts, and thus its ability to compete. (para. 19) [Emphasis added]

Breach of Contractual Obligations

The court characterized the contractual provision as a restrictive covenant and observed:

Notably, the definition of customer or potential customer of the company includes no relationship between the customer or potential customer and the plaintiff. For example, it does not say that a customer or potential customer is someone with whom [the Defendant] had contact in connection with his employment duties. The only limitation on who is customer or potential customer when it comes to someone with whom [Defendant] had contact is that the contact take place within the last two years of his employment. As drafted, his drycleaner would qualify. (para. 24)

The court decided that the employer failed to establish a strong prima facie case that the clause was reasonable for the following reasons:

• A one-year temporal limit was unreasonably long; the point of a restrictive covenant is to allow the employer to solidify its relationships with customers after the employee’s departure.  Due to the nature of the aluminum scrap industry, the employer would have frequent contact with vendors and purchasers and would not require a year to solidify its relationships.

• The clause did not set a geographic limit, which was unreasonable because the definition of “current or prospective customers” was not defined and identifiable but broad and imprecise.

• The terms of the clause were not clear and unambiguous because: (a) it restricted the employee from accepting work from a person he may have never had contact with but in respect of whom he had access to confidential information; and (b) it restricted him from accepting work from anyone he had direct contact with in the last two years of his employment, which would include personal contacts who may have never had anything to do with the employer.

Misuse of Confidential Information

The employer argued it had a prima facie case based on contractual provisions that prevented the misuse of the confidential information. The court concluded that there was no evidence that any of the employer’s confidential information had been misused by the employee, or of any resulting harm and the employer’s allegations were “mere speculation.” (para. 43)

Balance of Convenience

The court decided that the balance of convenience favoured the employee.  The employer failed to prove harm or the likelihood of harm.  Furthermore, the order for injunctive relief sought by the employer would be “a serious impediment” to the employee’s ability to earn a living in the aluminum scrap industry, in which he spent virtually his entire working life.  

Bottom Line for Employers

Restrictive covenants

During their employment, some employees may acquire valuable information about their employer’s business.  Among other things, employees in sales positions may develop strong relationships with their employers’ clients. In an effort to minimize the possibility that their employees might use or disclose information acquired during their employment for their own benefit, or to the employer’s detriment, many employers place restrictive covenants in their employees’ contracts; however, many restrictive covenants are drafted in a manner that renders them unenforceable.  Labrador Recycling reminds employers that a restrictive covenant will be unenforceable if it: (i) is unreasonably long, i.e., is of a duration that is longer than the employer would require to solidify its relationships with customers after the employee’s departure; (ii) fails to set a geographic limit; (iii) contains terms that are unclear and ambiguous and (iv) is overly broad and over-inclusive, including with respect to the definition of customers or potential customers.  Employers are strongly encouraged to seek the guidance of experienced employment counsel when drafting restrictive covenants that purport to restrict an employee from competing with them or soliciting its clients after leaving their employment.  The court will only protect the legitimate proprietary interests of the employer; any attempt to restrict the activities of the employee beyond what is necessary may be considered unreasonable, and therefore unenforceable.  A Canadian court will not re-write a restrictive covenant for the parties.

Fiduciary employees

Labrador Recycling also reminds employers that an employee will not be considered a fiduciary employee unless:  (i) it is within their scope of authority to exercise some discretion or power; (ii) they can unilaterally exercise that power or discretion to affect the beneficiary’s legal or practical interests; and (iii) the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.  Such a designation is normally reserved for senior-level employees with significant responsibility and decision-making powers.