Employee Non-Competition Covenants: No Place For Blue Pencils

Article by George Waggott and Daliana Coban, Student-at-Law The recent decision of the Court of Appeal for Ontario in Veolia ES Industrial Services Inc v Brulé1 deals with the interpretation and enforceability of a non-compete clause in an employment agreement and the scope of an employee's fiduciary duties to a former employer.

The parties entered into a three-year employment agreement on January 1, 2004, which was subject to the employer's right to terminate the employment for cause or without cause upon payment of the compensation to which the employee was entitled until the end of the term. The employee also had the right to terminate the employment agreement by giving the employer 180 days notice.

A non-competition covenant was included in the employment agreement and provided that Brulé employee was restricted from competing with the employer's core business for a period which would be either: (1) two years following termination for cause or as a result of the agreement's three-year term expiring; or (2) two years commencing January 1, 2007 following termination without cause or as a result of the employee's resignation in accordance with the agreement.

Brulé gave the employer notice of resignation on July 7, 2004, following which the employer asked him not come into work, but continued to pay him until one or two weeks prior to the expiration of the 180 day notice period. Upon leaving, the employee asked a colleague to assemble a binder with information about recent municipal tenders and bids put in by the company and others. When he left the company, Brulé took this binder and a list of the company's employees.

Following his departure, Brulé started his own company in the business of rehabilitating water mains, which was related but not identical to the employer's business of rehabilitating sewers. In the fall of 2005, Brulé's new company needed work and decided to submit a bid on a public tender for sewer rehabilitation. They succeeded and were awarded the tender over the former employer Veolia who had submitted the next-lowest bid . The employer sued for the gross profits claimed to have been lost as a result of not being awarded the tender.

At trial, the judge rendered the non-compete clause in the employment agreement enforceable by severing the words "commencing on January 1, 2007" in accordance with the blue-pencil severance test articulated by the Supreme Court of Canada in KRG Insurance Brokers (Western) Inc v Shafron2. The...