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The unintended consequence of an enforceable non-competition agreement … A Longer reasonable notice period

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Employers often wish to restrict the competitive activities of an employee who is no longer in their service. However, the Ontario Superior Court case of Dimmer v. MMV Financial Inc. (2012 ONSC 7257) informs employers that where they seek to restrict an employee from engaging in competitive activity post-termination, the reasonable notice period awarded may be reflective of that restricted period.

In this case, Gregory Dimmer held an executive position with another company in 2006 when he was approached by a corporate search form for MMV Financial Inc. (MMV).  Mr. Dimmer was hired in the position of Senior Vice President and held that position until his termination date, March 15, 2010.   Mr. Dimmer was a high income earner and ultimately became an owner of a small share of MMV.  He was fifty years old at the time of his termination and was subject to a non-competition provision during the 12 months following his release.

The non-competition agreement that Mr. Dimmer was required to sign was specific in mandating that for a period of one year following his termination of employment, regardless of the reason for the termination, he could not compete directly or indirectly in marketing or selling a product or service that was competitive to those offered by MMV.  While there was an indication in the evidence at trial that one company owner questioned, in an off handed manner, the enforceability of the non-competition covenant, the court found the non-competition provision to be enforceable. The court also stated:  “Mr. Dimmer believed that he was bound to honour the non-competition agreement and he did.”

In assessing the reasonable notice period in this case, the court made reference to the factors outlined in Bardal v. Globe and Mail Ltd. [1960] O.J. No. 149, those being: “the reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant”.

In applying the above criteria to this case, the court stated:

MMV required Mr. Dimmer to agree to be bound by a non-competition agreement as a term of his employment and it insisted that he abide by the agreement for one year following his dismissal.  Mr. Dimmer complied.  In my view, this agreement effectively eliminated any opportunity to obtain similar employment during that year and it seriously impeded his ability to obtain employment at all, even in fields beyond the reach of the non-competition agreement.  This too is a factor weighing in favour of a longer notice period.

Ultimately, the court awarded Mr. Dimmer a 12-month reasonable notice period.  The non-competition covenant was, of course, not the only factor considered, but I find it very interesting that it was one of them.   I also find it interesting that such reasonable notice period coincided with the duration of the non-competition covenant.

Tips for avoiding this unintended effect of a non-competition covenant:

a)      Eliminate the use of non-competition covenants and simply have a well drafted non-solicitation covenant which would not impede the employee’s ability to obtain replacement employment but would protect the employer’s relationships with customers, potential customers, suppliers and employees  by prohibiting solicitation during a clearly defined restricted period;

b)      If employers feel compelled to have a non-competition agreement, they can avoid the assessment of a “reasonable” notice period upon termination by inserting a termination clause in the employment agreement.  So long as such clause does not provide for an entitlement which is less than the provincial statutory minimums, the termination clause will be upheld;

Also, if a non-competition agreement is a must, employers can decrease the period of the non-competition covenant so as to restrict the employee for only that period which is critical to protecting the business needs of the company.  If there is no termination clause in the employment agreement, at least the non-compete period is shorter and would have less impact on the reasonable notice period assessment.  However, a better practice would be to couple the short non-compete period with an effective termination clause per tip (b) above.

Patrizia Piccolo