Boilerplate Non-Competition Clauses Are No Protection At All
Previously printed in the LexisNexis Labour Notes Newsletter.
The B.C. Court of Appeal recently clarified the analytical framework regarding the enforceability of non-competition clauses in the employment context. In IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301, the Court questioned the use of boilerplate language and reminded employers that restrictive covenants must be drafted with care.
Dr. Park is an optometrist who entered into a contract to work for IRIS at its location in Vernon, British Columbia. The agreement, which characterized Dr. Park as an independent contractor, included a non-competition clause restricting her from engaging in a wide range of activities for a period of 3 years after her departure within 5 kilometers of the IRIS location.
In 2015, Dr. Park left IRIS to set up her own practice 3.5 kilometers away. IRIS moved to enforce the non-competition clause.
The trial judge characterized the agreement as an employment agreement and found the non-competition clause to be unenforceable as it unreasonably covered a wide range of activities beyond direct competition with IRIS. The clause restricted Dr. Park from “being in conjunction with, directly or indirectly carrying on, and being engaged in or employed by persons or entities carrying on, engaged in, interested in or concerned with a business that competed with IRIS”. This included, for example, selling non-prescription glasses or sunglasses, which are available at a wide range of stores. Of note, the lower court was not concerned with the duration or geographic range of the restrictive covenant.
IRIS appealed and argued that the judge erred on the following three grounds:
- characterizing the agreement as an employment agreement;
- finding the non-competition clause to be unenforceable; and
- declining to use so-called “blue pencil” severance to convert the clause to a reasonable one if it was indeed unreasonable.
The Court of Appeal dismissed the appeal.
Was the Agreement Subject to the “Heightened Scrutiny” Test?
The Court held that the “heightened scrutiny” test, used to assess the reasonableness of a restrictive covenant, is not limited to employment contracts, and can apply to independent contractor agreements. It will apply to any agreement where there is a power imbalance between the parties. Only those agreements which include a payment for goodwill, such as often exists in the sale of a business, will be exempt from the test.
As Dr. Park had only been practising for four years when she joined IRIS and had no existing patient base, IRIS was a large national organization in business for 25 years, and there was no negotiation of the clause, the Court found that there was a clear power imbalance. Since IRIS was not purchasing any goodwill from Dr. Park, such as a client base, the “heightened scrutiny” test applied.
Was the Restrictive Covenant Enforceable?
In order to enforce the non-competition covenant, IRIS had to prove it was no broader than necessary to protect its legitimate business interests. This question normally has two elements:
- Is a restriction on competition necessary or would less restrictive measures such as a non-solicitation covenant suffice?
- If a non-competition clause is required, is the scope of that clause no broader than is necessary to protect the asserted interest?
This case focused on the second element. The Court found the clause to be overbroad, and thus unreasonable, for two reasons.
First, the clause was ambiguous. It was not obvious what IRIS meant by being “in conjunction with” another person, or how an individual could be “concerned with” a business in competition with IRIS. An ambiguous clause is prima facie unreasonable and therefore unenforceable.
Second, echoing the trial judge’s findings, the clause went well beyond what was necessary to protect IRIS’ interests.
Could the (or an) Agreement be Preserved?
The Court of Appeal noted that blue pencil severance is available in such cases, but only where:
- the part being removed is clearly severable, trivial, and not part of the main purpose of the restrictive covenant; and
- the contract is not otherwise ambiguous.
The agreement in this case failed on both counts. The Court concluded as follows: “IRIS clearly intended to prevent Dr. Park from competing with it in any way, however remotely. It would not be appropriate to rewrite the contract to create a more moderate restriction that does not reflect the intention of either party.”
Takeaways for Employers
IRIS offers several takeaways for employers thinking about including non-competition clauses in an employment or independent contractor agreement:
- An employer cannot contract out of the “heightened scrutiny” test. If there is an imbalance of bargaining power, and the employer is not purchasing goodwill as part of the agreement, the courts will very closely scrutinize the restrictive covenant.
- Non-competition clauses must be drafted with exacting precision. They must prohibit only reasonable competition activities, be that in relation to the connection the departing individual will have with a potential competitor or the nature of the potential competitor’s business.
- Courts will generally not save an unenforceable non-competition clause by reading it down into a reasonable restraint on trade. Boilerplate language seeking to capture every possible type of competitive activity is likely too broad and, as was the case here, ambiguous.