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December 17, 2014

A novel approach to non-competition clauses

By Steven Z. Raber

Most Canadian employment lawyers have been advising clients that non-competition provisions in employment agreements are difficult to enforce.  By their very nature, agreements preventing former employees from competing are considered by the courts to be a restraint of trade. In order to be enforceable, the restraints must be “reasonable.” This often means that competition cannot take place within a defined time and a defined geographical area, neither of which tend to be broad enough to satisfy the concerns of employers. 

A recent British Columbia Court of Appeal decision highlighted a different approach.  The employer was a veterinary clinic in southern B.C.  There were no other veterinary clinics within a 100-mile radius of the clinic, except for two across the American border.  The employee was a recent veterinarian college graduate.  She entered into a three year agreement with the clinic in which she acknowledged that she would gain knowledge of and a close working relationship with the clinic’s patients and clients, which relationships would injure the clinic if made available to a competitor or used for competitive purposes. 

The employee agreed that, in consideration of the investment in her training and transfer of goodwill by the clinic to her, if she were to set up a veterinary practice within a 25-mile radius in British Columbia of the clinic’s place of business, she would pay to the clinic the following amounts:

  1. If her practice were set up within one year of the termination of the contract - $150,000;
  2. If her practice were set up within two years of the termination of the contract - $120,000;
  3. If her practice were set up within three years of the termination of the contract -$90,000.

These amounts were not arbitrarily selected.  They were calculated as being the investment the clinic was making with respect to mentoring, training, and equipping the employee.  Further, it was calculated that the employee could take as much as 25% of the clinic’s business, or $60,000 in revenue, if she were to leave by virtue of her having been introduced to and working with the clinic’s clientele.  This was understood to likely decline if she waited one or two years before she began to compete, hence the declining payments prescribed by the contract.

Ultimately, the relationship between the employee and the employer faltered.  The employee filed a claim in the British Columbia Supreme Court indictating that she intended to set up a veterinary practice in the vicinity of the clinic and seeking to have the non-competition provision in the agreement declared unenforceable.  She won.

The clinic appealed.  In a two to one decision, the B.C. Court of Appeal found that the non-competition clause of the contract was prima facie a restraint of trade.  The court considered the lump sum amounts triggered under the clause to be enforceable as a genuine pre-estimate of the costs incurred by the clinic in training the employee.  Finally, the majority of the judges found that, having regard to the context in which the agreement was drafted, the non-competition provisions were unambiguous. 

As such, the court found that the non-competition provision, including the required payments, were reasonable and enforceable.  The intention of the clause was to protect the clinic against direct competition by its employee for the clinic’s patients and clients by reason of her knowledge and close working relationship with them.

Given the reasoning of the British Columbia Court of Appeal, both employers and employees should give careful consideration to non-competition clauses in employment agreements.  Employers may now find they have an additional tool with which to prevent what they might anticipate to be unfair competition by former employees.  Employees may find that there is now an enforceable “brake” on their ability to compete;  employees may be allowed compete, but at a price.

Steven Z. Raber is a lawyer, registered trademark agent, and trained mediator. You may reach Steven at (204) 957-8304 or by email at