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By Henry Dinsdale and Jeff Goodman Restrictive covenants Multiple jurisdictions create challenges tural similarities with, and close geo- graphic location to, their own. While there are similarities, there M are extraordinary differences as well, including rules respecting the enforce- ment of restrictive covenants. Generally, restrictive covenants in Canada are less enforceable than in many U.S. states. At a practical level the range of rem- edies available to moving parties are nar- rower as well. A number of important recent Canadian court decisions have further widened the gap and made it more difficult for Canadian employers to enforce restrictive covenants. In the U.S., the enforceability of non-competition, non-solicitation, and confidentiality covenants varies from jurisdiction to jurisdiction. While some states explicitly prohibit the use of restrictive covenants in employment contracts, many others will enforce them if drafted appropriately. In most of the common-law Canadian provinces, and in particular in Ontario, non-competition clauses are only enforce- able in very limited circumstances and only when the covenant is absolutely nec- essary to protect the former employer's legitimate proprietary interests and is reasonable in its scope and unambiguous in its terms. The courts consider the geographic and temporal scope of the limitation in order to be reasonable. Canadian courts have consistently held that non-compe- tition covenants will not be appropriate where a non-solicitation covenant would suffice to protect the employer's interests. any U.S. businesses doing or seeking to do business in Canada are initially attracted to the country due to its cul- Non-solicitation and confidential- ity covenants generally tend to be more enforceable than non-competition cov- enants. Many state courts will rewrite or read down overly broad covenants to render them enforceable in the U.S. In contrast, Canadian courts have traditionally been hesitant to rewrite or modify, "blue pen- cil," a covenant. In Shafron v. KRG Insurance Brokers (Western) Inc., the Supreme Court of Canada took this concept one step fur- ther and held it is always inappropriate to apply the doctrine of notional sever- ance, reading down a contractual term to make it enforceable. The Supreme Court's decision in Shafron is public- policy driven. The court reasoned that allowing "blue pencilling" or notional severance would simply encourage employers to draft overly broad restrictive covenants, with the only sanction being the court will enforce what could have been val- idly agreed to by the parties. This decision requires parties to draft reasonably or risk the contract being unenforceable. The only lan- guage that will ever be removed using "blue-pencil" severance, the court held, is trivial and severable language unconnected to the purpose of the contract. In effect, the court will not allow "blue-pencilling" or descending scope clauses. Covenants seeking to restrain employees from carrying on business with the clients and customers of the employer will only rarely be enforce- able. In H.L. Staebler Company Ltd v. Allan an employee was alleged to have breached a covenant that provided he would not "conduct business with any clients or customers" for two years. The trial court characterized the covenant as a hybrid clause, restraining both competition and solicitation, and found that it was enforceable. The appeal court disagreed, finding the covenant was a non-competition clause because it restricted the employee from conducting business with former clients. The appeal court held the clause must meet the more restrictive test applicable to non-competition covenant and the clause was unreasonable and unenforceable because it had no geo- graphic limit. Many Canadian employers currently have similar covenants in employment contracts with their employees. These covenants may no longer be enforceable in light of the decisions. The employer must renegotiate with employees and provide sufficient con- sideration for the contractual change in order to replace these unenforceable covenants. An improperly drafted restrictive covenant may endanger the vital busi- ness interests they are designed to pro- tect. Employers should avoid broadly drafted covenants in preference to cov- enants with reasonable geographic and temporal limits in order to ensure these interests are protected. Employers should ensure non-com- petition and non-solicitation covenants are included separately in contracts to enhance severability, and non-competi- tion covenants should be limited to key employees. Where employers use choice of law or exclusive jurisdiction clauses, employers should draft the clause to allow the employer to "follow" a breach to other provinces or foreign jurisdictions in order to be able to move for injunctive relief. IH Henry Dinsdale and Jeff Goodman are labour and employment law partners with Heenan Blaikie LLP in Toronto. INHOUSE DECEMBER 2009/JANUARY 2010 • 9