Conventional wisdom suggests that because a non-solicitation clause is more likely to be enforced by a court than a non-competition clause, why bother including a non-competition clause in an employment agreement. The B.C. Court of Appeal's decision in Edward Jones v. Voldeng (PDF) suggests that there is still value in including a non-competition clause. Why? It may be easier to demonstrate irreparable harm, one of the requirements to obtain an injunction, when a former employee has breached a non-competition clause.
Facts
In this case, the B.C. Court of Appeal considered whether a court should grant an injunction in order to enforce a non-solicitation clause. Edward Jones was the former employer of the departing employee (Voldeng). Voldeng had left Edward Jones and had gone to work for another employer. Voldeng had an employment contract with Edward Jones that prohibited him from soliciting the customers of Edward Jones for a period of six months after he left Edward Jones.
Prior to leaving Edward Jones, Voldeng managed accounts for Edward Jones totalling approximately $46 million. Within a couple of weeks of leaving, approximately $20 million of those accounts had transferred from Edward Jones to the new employer with Voldeng.
Test for an Injunction
In order to obtain an injunction, a party seeking an injunction must show:
- There is a serious question to be tried;
- The applicant (former employer) will suffer irreparable harm if the injunction is not granted; and
- The balance of convenience favours granting the injunction.
What's Irreparable Harm?
The Edward Jones case deals with the issue of irreparable harm. If the damages can be calculated such that a specific amount can be awarded for the loss of the clients, there is no irreparable harm and an injunction will not be granted.
Generally, there are two types of irreparable harm. The first is harm that cannot be quantified in monetary terms, such as permanent market loss or irrevocable damage to business reputation. The second is harm that cannot be compensated for by an award of damages because it is unlikely that damages can be collected from the defendant.
No Irreparable Harm Here
The Court of Appeal said that the value of the portfolio of a departing employee is generally known, as well as the money made by the brokerage firm with respect to managing the portfolio. In effect, Edward Jones could show that the value of the Edward Jones' clients which had transferred to the new employer with Voldeng was $20.2 million. Since Edward Jones could show the actual loss it would experience, the Court found that there was no irreparable harm. As such, although it said that there was a strong prima facie case that Voldeng improperly solicited his clients, it would not order an injunction to prevent the clients from being solicited by Voldeng and his new employer.
Irreparable Harm more Likely with Non-Competition Clause
The Court went on to compare the loss suffered by Edward Jones with respect to the potential breach of a non-solicitation clause with the loss suffered by a potential breach of a non-competition clause. A non-competition clause prevents a departing employee from competing with his/her former employer.
The Court stated that in a non-competition situation, the former employer will not necessarily be able to establish the loss due to the prohibited competition. Since the employer may not be able to determine what its potential loss would be, the former employer is more likely to be able to establish irreparable harm, provided the former employer meets the other tests for an injunction based on a non-competition covenant.
The Impact on Employers
The impact of the Edward Jones v. Voldeng decision is that employers have to decide how to properly draft restrictive covenants according to the nature of the business involved, and the potential damage to the employer. Non-competition clauses will be more enforceable with respect to the issue of proof of irreparable harm in order to obtain an injunction. However, non-competition clauses are more likely to be struck down as being contrary to public policy, vague or overly broad. There's the irony.
The moral of the story is that employers should be very aware of the potential risks of employees who are their customer contacts leaving them and taking the business with them. A non-solicitation clause may give rise to an award of damages suffered by the former employer, but it may not prevent the loss of the customers. The Court made reference to the fact that it was not approving the conduct of Voldeng. Whether there was a breach of Voldeng's employment obligations was left to be determined at trial.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.