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  January 23, 2015

Non-Competition Clauses in Employment Agreements

In 2014, the British Columbia Court of Appeal made it more difficult for employees who want to compete against their former employers. by ruling that an employer may require an employee to pay a substantial sum to an employer should the employee leave their employ to compete against them.

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The employee obtained a job with a veterinary clinic located in Creston, British Columbia, and signed an employment agreement with the clinic that contained a non-competition clause. The clause was not a “traditional” clause restricting her from working for a competitor; rather, it provided that if the employee left the clinic to “set up a veterinary practice” in Creston or within a twenty-five mile radius of the clinic, she would have to pay the clinic.

The potential financial payment to the employer varied depending on when the employee chose to compete: $150,000 if the competing practice was opened within a year of the termination of the employment contract, $120,000 if opened within two years and $90,000 if opened within three years. These amounts were estimates of the clinic’s losses should the employee depart.

After 14 months’ employment, the employee decided to leave the clinic to establish her own mobile veterinary practice in the Creston area, and brought a court application seeking a declaration that the non-competition clause was unenforceable.

The British Columbia Supreme Court declared the clause to be unreasonable and unenforceable due to ambiguity and the penalty it imposed. On appeal, the Court of Appeal disagreed and upheld the enforceability of the payment clause.

The Court of Appeal held that while the clause was not a conventional non-competition clause (it contained no prohibition against the employee competing), the payment provision compromised the employee’s opportunity to compete with the employer, rendering the clause a restraint of trade. The court then concluded that the payment could not be characterized as a penalty, but was “reasonable compensation” for the costs incurred by the clinic in training the employee. The payment was neither unconscionable nor extravagant.

A majority of the court (in a 2–1 decision) then concluded that the phrase “set up a veterinary practice” was not ambiguous and, on that basis, if the employee wished to establish a clinic within the three-year period following termination of her employment, the payment had to be made.

This decision was significant in that, previously, British Columbia courts were generally reluctant to enforce a non-competition clause if a less restrictive provision can be drafted. The clause at issue was not a conventional non-competition clause because it contained no prohibition against the employee competing. The Court of Appeal recognized the ability of an employer to effectively “buy” a period of non-competition by requiring an employee to make a substantial financial payment should they wish to compete within a prescribed geographic area.

A reprint courtesy of: Mathews Dinsdale & Clark LLP. The information provided in this article is necessarily of a general nature and must not be regarded as legal advice. For more information about Mathews Dinsdale & Clark LLP, please visit mathewsdinsdale.com.

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