The (Un)Enforceability of Non-Competition Agreements
Many employment agreements contain non-competition clauses that seek to prevent an employee from later working for a competitor. Employers who rely on these clauses should exercise caution before seeking to enforce them at court.
Non-competition clauses in the traditional employment relationship are presumptively unenforceable and, when compared with other contractual terms, subject to heightened scrutiny. Courts do not like to enforce agreements prohibiting an employee from working for a competitor after the employment relationship ends (and, thus, potentially cutting off an employee’s only source of income) unless there is a very good reason to do so.
In determining whether a non-competition clause is enforceable, the court will consider the following:
- the interest the company seeks to protect;
- whether less restrictive modes of protection (such as a non-solicitation clause) is available; and
- the scope of the non-competition clause.
If a non-solicitation clause is insufficient to protect the interest of the company and a non-competition clause is necessary, the final step is to examine the scope of the non-competition clause to determine whether it is no broader in terms of geographic, temporal and activity restrictions than is necessary to protect the interest of the company.
As recently articulated by our Court of Appeal in IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301, the heightened scrutiny test cited will also apply to independent contractors in certain situations.
IRIS is an eye care services provider. Dr. Park is an optometrist who provided services to IRIS as an independent contractor. The parties entered into a services agreement that included a non competition clause prohibiting Dr. Park from competing “either directly or in partnership or in conjunction with” any entity “carrying on, engaged in, interested in or concerned with a business that competes … with IRIS within 5 km of” the place that Dr. Park provided services to IRIS. Dr. Park left IRIS a few years after agreeing to the non-competition clause. She set up her own optometry practice 3.5 kilometres from where she provided services to IRIS. Unsurprisingly, IRIS commenced an action at court seeking to uphold the non-competition agreement.
The Court of Appeal declined to enforce the non-competition agreement. It held that the power imbalance between Dr. Park and IRIS was similar to that of an employer and employee, notwithstanding that Dr. Park was an independent contractor. As such, the non-competition clause was subject to heightened scrutiny. With respect to the clause itself, the Court held that the clause was ambiguous and beyond what was necessary to protect IRIS’ business interests. Regarding ambiguity, the Court could not determine what it means to compete “in conjunction with” another person or how a person could determine whether an individual is “concerned with” a business that competes with IRIS. With regard to protecting IRIS’ interests, the Court noted that IRIS does more than just offer optometrist services. It also sells non-prescription glasses and sunglasses. Restricting Dr. Park – an optometrist – from engaging in work that has nothing to do with optometry (i.e., the sale of glasses) was not necessary to protect IRIS’ interests.
The decision in IRIS The Visual Group Western Canada Inc. v. Park is a good reminder that non-competition clauses should be individually tailored and no more broad than necessary to protect a company’s interests. Employers are wise to use plain language so that employees (and courts) understand the extent of the restriction. That said, even the most carefully crafted agreement will face enforceability hurdles given that non-competition agreements are presumptively unenforceable.