June 24, 2014

Permissive Non-Competition Clauses in Employment Contracts – Case Law Update

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The British Columbia Court of Appeal addressed a permissive non-competition clause in an employment contract in its recent decision of Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (March 12, 2014).  The clause required a payment of money to the employer if the employee chose to compete.

In that case, a new graduate from a veterinarian college was given a contract of employment by Creston Veterinary Clinic Ltd. (the “Clinic”) for a term of three years.  The contract included a non-competition clause that stated that in exchange for the Clinic’s investment in Dr. Rhebergen’s training and the transfer of goodwill by the Clinic, she would have to pay a specified amount to the clinic if she were to set up a veterinary practice in Creston within three years of the contract’s termination.  The amount would be in accordance with the following:

If her practice is set up within one (1) year termination of this contract - $150,000.00;

If her practice is set up within two (2) years termination of this contract - $120,000.00;

If her practice is set up within three (3) years termination of this contract - $90,000.00.

Differences arose between Dr. Rhebergen and the Clinic just 14 months into the contract term and the employment relationship ended.  Dr. Rhebergen sought to have the “non-competition” clause declared unenforceable by the Supreme Court of British Columbia, because she wished to set up a mobile dairy veterinary practice in Creston and vicinity. 

 

The trial judge held that the non-competition clause was a restraint of trade and that it was unreasonable, and therefore unenforceable.  The Clinic appealed, claiming that the judge erred in determining the clause was a restraint of trade and alternatively, if the judge had been correct in finding that the clause was a restraint of trade, that the judge erred in finding the restraint was unreasonable and unenforceable.

Restraint of Trade

Despite the absence of an absolute prohibition against competing, the British Columbia Court of Appeal held that the non-competition clause in this case was a restraint of trade because the required payment restricted Dr. Rhebergen’s ability to compete with the Clinic. 

Reasonableness

The trial judge had considered the criteria for assessing the reasonableness of a restraint of trade clause as summarized in Aurum Ceramic Dental Laboratories Ltd. V. Hwang (1998), 77 A.C.W.S. (3d) 161(BCSC) (“Aurum”):

 

[11] For a “post-employment” restraint to be enforced, the Courts have required the parties seeking to uphold the restraint to prove that the restraint has the following characteristics:

 

(a)        it protects a legitimate proprietary interest of the employer;

(b)        the restraint is reasonable between the parties in terms of:

(i) temporal length;

(ii) spatial area covered;

(iii) nature of activities prohibited; and

(iv) overall fairness;

(c)       the terms of the restraint are clear, certain and not vague; and

(d)     the restraint is reasonable in terms of the public interest with the onus  on the party seeking to strike out the restraint.

 

The trial judge determined that the clause in this instance was an unreasonable restraint of trade because it imposed a penalty.  A “penalty” was defined asa sum that is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to be in consequence of a breach,” and as such, it affected the clause’s overall fairness.  The trial judge also found that the phrase “sets up a veterinary practice” as contained in the non-competition clause was ambiguous.

The British Columbia Court of Appeal held that although the requisite amount owing under the clause may be considered as an element of the clause’s fairness, the specified amounts in this instance were not extravagant or unconscionable in comparison with the costs to the clinic for unrecoverable mentoring, training and equipment, Dr. Rhebergen’s salary and the impact of the competition on the clinic’s goodwill and volume of business.

The majority of the British Columbia Court of Appeal held that the phrase was not ambiguous. 

The Appeal was allowed and Dr. Rhebergen was not permitted to set up a practice within the restricted area and timeframe outlined in the contract without making the contractual payment to the clinic.

This case is an example of a non-competition clause, which mandates a specific payment in circumstances where the employee chooses to compete, being enforceable if the clause is consistent with the Aurum characteristics and the amount is not extravagant or unconscionable.

You can find a full version of Rhebergen v. Creston Veterinary Clinic Ltd. at the following link:
Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97 (CanLII)

For more information, please contact Terri Higdon at coxandpalmer.com.


Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.