In Renfrew Insurance Ltd. v. Cortese, the Alberta Court of Appeal upheld an interlocutory injunction that prevented two insurance agents from soliciting customers and employees from their former employer.
Enforceability of Non-Competition Agreements
Enforceability of Non-Competition Agreements
In cases in which an employer asks the court to stop a former employee from competing, the key issue is usually the legal validity of the non-compete clause in the employment contract. Since a non-compete clause restrains trade and can prevent the former employee from earning a living, courts often declare them unenforceable on public policy grounds.
The law does recognize that there are circumstances, however, in which a non-competition agreement is needed to protect the employer's interests, such as when the employee has gained access to trade secrets and developed relationships with long-term customers in the course of employment. Seeking to strike a balance between the interests of the employee and the employer, the courts scrutinize non-competition clauses carefully, upholding them only when they are reasonably necessary to protect the employer's legitimate business interests.
The law does recognize that there are circumstances, however, in which a non-competition agreement is needed to protect the employer's interests, such as when the employee has gained access to trade secrets and developed relationships with long-term customers in the course of employment. Seeking to strike a balance between the interests of the employee and the employer, the courts scrutinize non-competition clauses carefully, upholding them only when they are reasonably necessary to protect the employer's legitimate business interests.
This analysis normally focusses on the geographic and temporal scope of the non-compete. If the clause would prevent the employee from working in areas where he was not engaged by the employer, or seeks to keep the employee out of the market for a lengthy period of time, it can be struck down.
In the Renfrew Insurance case, insurance agents Cortese and Reed each signed a Unanimous Shareholder Agreement (the "USA") in order to become part owners in the broker, Renfrew. The USA contained a restrictive covenant that prevented them from competing in the insurance business within 60 km of Renfrew's Calgary office for 6 months after the termination of employment. The covenant also stated that they would not solicit any of Renfrew's customers or employees for 18 months.
In January of 2014, both agents took jobs with one of Renfrew's competitors, BFL Insurance Services ("BFL"). They immediately started to work out of BFL's Calgary office, claiming however that they were servicing customers in Edmonton, Canmore, and elsewhere in Alberta and not within the 60 km radius prohibited by the covenant. Two Renfrew customer service representatives who had previously worked with Cortes and Reed joined BFL. Furthermore, at least two former Renfrew clients switched to BFL, although these clients were being served by another BFL agent and not by Cortese or Reed.
Test for Injunctive Relief
In order to obtain a pre-trial injunction enforcing a non-compete clause, the employer has to pass a three part test:
1. Is there a strong case that the clause is legally valid, and that the employee is in breach?
2. Will the employer suffer "irreparable harm", meaning losses that can't be adequately compensated by an award of monetary damages, if the employee is allowed to compete until trial?
3. Does the balance of convenience between the employee and the employer favour the injunction?
The judge who heard the original application concluded that the covenant against competition was reasonable in scope. In reaching this conclusion, he took note of the fact that the clause appeared in a shareholders' agreement rather than in an employment contract, so the contract was more like a commercial transaction between partners in a business than a conventional employer-employee relationship. He also concluded that the agents were not pressured to sign the USA, that signing was not a condition for their continued employment, and that they had independent legal advice.
The application judge held that the restriction on soliciting Renfrew customers was reasonable, having regard to the importance of the "book of business" in an insurance brokerage business. It was also significant that the two agents had built their "niche" in the business with Renfrew's assistance.
Given that two other Renfrew employees had left to join BFL, and that two customers had switched brokers, the application judge was prepared to infer that the agents were in breach and that the threat to the Renfrew business was serious enough to constitute irreparable harm.
The restrictive covenants in this case specified that damages would not be an adequate remedy, and this was another factor that favoured the injunction.
Standard of Review on Appeal
In granting or denying an interlocutory injunction, the application judge is exercising judicial discretion. An appellate court will defer to the judge below unless he decided the case arbitrarily or applied wrong legal principles. The interpretation of restrictive covenants is a question of law, reviewable on a standard of correctness, but where factual findings are needed in order to apply the clause, the findings of the judge should be upheld in the absence of palpable and overriding error.
In other words, in this kind of case, the Court of Appeal will uphold the decision of the application judge unless it is clearly wrong. The Appellate Court felt that intervention was not justified, and dismissed the employees' appeal.
Renfrew Insurance Ltd. v. Cortese, 2014 ABCA 203
In the Renfrew Insurance case, insurance agents Cortese and Reed each signed a Unanimous Shareholder Agreement (the "USA") in order to become part owners in the broker, Renfrew. The USA contained a restrictive covenant that prevented them from competing in the insurance business within 60 km of Renfrew's Calgary office for 6 months after the termination of employment. The covenant also stated that they would not solicit any of Renfrew's customers or employees for 18 months.
In January of 2014, both agents took jobs with one of Renfrew's competitors, BFL Insurance Services ("BFL"). They immediately started to work out of BFL's Calgary office, claiming however that they were servicing customers in Edmonton, Canmore, and elsewhere in Alberta and not within the 60 km radius prohibited by the covenant. Two Renfrew customer service representatives who had previously worked with Cortes and Reed joined BFL. Furthermore, at least two former Renfrew clients switched to BFL, although these clients were being served by another BFL agent and not by Cortese or Reed.
Test for Injunctive Relief
In order to obtain a pre-trial injunction enforcing a non-compete clause, the employer has to pass a three part test:
1. Is there a strong case that the clause is legally valid, and that the employee is in breach?
2. Will the employer suffer "irreparable harm", meaning losses that can't be adequately compensated by an award of monetary damages, if the employee is allowed to compete until trial?
3. Does the balance of convenience between the employee and the employer favour the injunction?
The judge who heard the original application concluded that the covenant against competition was reasonable in scope. In reaching this conclusion, he took note of the fact that the clause appeared in a shareholders' agreement rather than in an employment contract, so the contract was more like a commercial transaction between partners in a business than a conventional employer-employee relationship. He also concluded that the agents were not pressured to sign the USA, that signing was not a condition for their continued employment, and that they had independent legal advice.
The application judge held that the restriction on soliciting Renfrew customers was reasonable, having regard to the importance of the "book of business" in an insurance brokerage business. It was also significant that the two agents had built their "niche" in the business with Renfrew's assistance.
Given that two other Renfrew employees had left to join BFL, and that two customers had switched brokers, the application judge was prepared to infer that the agents were in breach and that the threat to the Renfrew business was serious enough to constitute irreparable harm.
The restrictive covenants in this case specified that damages would not be an adequate remedy, and this was another factor that favoured the injunction.
Standard of Review on Appeal
In granting or denying an interlocutory injunction, the application judge is exercising judicial discretion. An appellate court will defer to the judge below unless he decided the case arbitrarily or applied wrong legal principles. The interpretation of restrictive covenants is a question of law, reviewable on a standard of correctness, but where factual findings are needed in order to apply the clause, the findings of the judge should be upheld in the absence of palpable and overriding error.
In other words, in this kind of case, the Court of Appeal will uphold the decision of the application judge unless it is clearly wrong. The Appellate Court felt that intervention was not justified, and dismissed the employees' appeal.
Renfrew Insurance Ltd. v. Cortese, 2014 ABCA 203
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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.
