The Supreme Court of Canada released its decision this past Friday in Shafron. In that case, the employee’s employment contract had a restrictive covenant which prevented him from working for any competitor for three years anywhere within “the Metropolitan City of Vancouver” after he left his employment with the employer. There was no such thing and, as such, the geographic scope of the restrictive covenant was unreasonable – or so concluded the trial judge after the employer attempted to enforce the covenant since the employee went to work for a competitor. The British Columbia Court of Appeal, however, used the concept of “notional severance” and “read down” the phrase to mean what most people consider to be metropolitan Vancouver, that is: the City of Vancouver, the UBC endowment lands, Richmond and Burnaby. Of course, the ex-employee went to work in Richmond, B.C., so if the B.C. Court of Appeal was correct, then he was caught by the restrictive covenant. The Supreme Court, however, disagreed with the B.C. Court of Appeal.
Notional severance permits a court to “read down” a provision so that it will not be found unlawful. Generally speaking, restrictive covenants in employment contracts are found to be unlawful unless they are reasonable as to time and geographic scope. Thus, a restriction from working “ever again, anywhere in the world” for a competitor will be struck down by a court in a nanosecond. Similarly, a restriction from working “anywhere in Canada” would be struck down. What if it is only a province? Maybe. A city? Possibly. The problem for the Court in this case, though, was that in order to determine what is considered clearly lawful, there has to be a “bright line”. This concept of notional severance arose in one of the cases I have previously commented on – Transport North American Express v. New Solutions Financial. In that case, the issue was whether an interest provision could be “read down” to be legal. The Criminal Code clearly says that 60% is the maximum annual interest rate permitted by law and any amount over that is unlawful. As such, there is a “bright line” – 60% – so the provision could be read down to an interest rate of no more than 60%. However, what is a “reasonable” restrictive covenant has no such bright line – not only would right thinking members of the public disagree, but so would judges. As such, there cannot be notional severance.
Similarly, the Court held that other concepts such as “blue pencil severance” or rectification could not be used to help the employer. In the end, therefore, the Court overturned the B.C. Court of Appeal’s decision and restored the trial judge’s decision.
There are two points that I wish to bring to your attention. The first is that this case represents yet another example of how the Court have shown a consistent displeasure with restrictive covenants in employment contracts. So does that mean that you should thrown them out of your contracts? No. It is always possible that the courts could eventually start to shift their view the other way. And it is always possible that the restrictive covenant might be found to be reasonable and, thus, enforceable. I would keep them in, but don’t bet the farm that it will be sufficient. Instead, what you should ensure is that the employment contract also has a non-solicitation clause. The courts are presently more willing to enforce non-solicitation clauses than they will enforce restrictive covenants. Make sure you have both in your employment contracts.
The second point is to mention that the Court took great pains to stress that the courts should take different views of restrictive covenants in employment contracts and in sale of business contracts. The former is generally seen with displeasure by the courts whereas the latter is permissible. As Justice Rothstein notes: “The sale of a business often involves a payment to the vendor for goodwill. In consideration of the goodwill payment, the custom of the business being sold is intended to remain and reside with the purchaser.” And then, quoting a prior case: “A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser, that he, the vendor, would not later enter into competition.” There has been a lot of talk recently about how the courts are reluctant to enforce restrictive covenants – and that is true … in the employment law context. I want to ensure that you are not confused and think that if you sell your business today with the possibility that you might go back into that line of business a little while later if you don’t like what you went to do after you sold the business, that you will not be prevented from competing with the “old business” – because you will.