Restrictive Covenants and Fiduciary Duites -- Employment Law Update

EMPLOYMANT LAW UPDATE

RESTRICTIVE CONVENANTS AND FIDUCIARY DUTIES

by DARRYL AARBO, BARRISTER AND SOLICITOR

In the recent Alberta Court of Appeal decision of Evans v The Sports Corporation, 2013 ABCA 14 (CanLII) the Court clarified and revisited restrictive covenants and fiduciary duties.  There is nothing new in this decision, but it is always extremely helpful to revisit these areas in a specific fact scenario to better understand these concepts.

No surprises on the restrictive covenant issue.  The Court confirms that the enforceability of these agreements are tough, to say the least.  In this case the Court of Appeal overturned the trail decision that was going to enforce it.  The Court of Appeal went back to its decision in Globex Foreign Exchange Corp. v. Kelcher, 2011 ABCA 240 to support its position.  When considering whether the agreement is reasonable and enforceable the clause, among many other things, must be unambiguous.  Again, being unambiguous is really one of many harsh tests that these clauses must pass.

The agreement in this case failed on this basis.  It found its plain meaning to be “ambiguous and reach undeterminable.”  It could not determine with certainty which clients were covered by the clause.

This ruling is consistent with a long line of cases that make the enforcement of restrictive covenants unenforceable.  Makes one wonder why employers even bother anymore, except in the rarest of cases.

The next issue was fiduciary duties.  This case is again consistent with former rulings out of this Court, but again it is always good to revisit the concepts in particular instances.  The key principle in play here is that one does not need to be an executive or high ranking officer of a company, or a director or a shareholder.  It found that: “…the status of a fiduciary does not emanate from holding corporate office. Rather, it relates to the responsibilities entrusted to an employee, including any attendant power to affect the economic interests of the company.” 

A final issue the Court deals with is whether the employee was relieved of his fiduciary duties when he was “wrongfully dismissed”.  The Court, without much discussion at all, distinguished the Alberta trial decision of ADM Measurements Ltd v Bullet Electric Ltd, by simply stating that this situation “is much different”.  It then goes on to state: “…we (do not) subscribe to the view that a termination of employment will automatically relieve a former employee of ongoing fiduciary obligations.”

The above quotes are given in more details below.  All citations form Canlii.

Background

[7] In 1999, Evans approached TSC about the possibility of becoming a sports agent. Trained as a lawyer, Evans had been working for six years as the director of legal and business affairs for the Professional Hockey Players’ Association. At a meeting during the NHL All-Star game in 2000, Evans was invited to join TSC. He was seen as someone who could take over the recruitment and management of the Czech and Slovak hockey players from Kotlowitz.

[8] Evans moved from Toronto to Edmonton and took over the Czech-Slovak Pipeline. The parties then, with the help of lawyers, negotiated an employment agreement with a three-year term. The contract contained the following restrictive covenant:

7.Non-Disclosure, Developments, and Unfair Competition

Evans acknowledges that he is a key employee of the Company and that in the course of his employment with the Company, he has been and will be entrusted with, has developed and will develop, and has obtained and will obtain confidential information and trade secrets concerning the business of the Company, the disclosure of any of which to the Company’s competitors or the general public would be highly detrimental to the best interests of the Company. Evans further acknowledges and agrees that the right to maintain confidential all of such confidential information and trade secrets constitutes a proprietary right which the Company is entitled to protect. Accordingly, Evans covenants and agrees with the Company that:

(b) he will not, either during the continuance of his employment under this agreement or for a period of 24 months thereafter, obtain or attempt to obtain the withdrawal from the Company of any employees of the Company.

(c) he will not, either during the continuance of his employment or for a period of 24 months thereafter, directly or indirectly through others, call on, solicit, divert or take away or attempts to call on, solicit, divert or take away any client of the Company which has been a client of the Company or any other company to whom Evans provided any services related to the Company’s business. This provision shall not apply to those clients of the Company from whom Evans has received or is owed payments under section 4 of this agreement.

(j) Evans acknowledges and agrees that any revenue generated by Evans’ activities which contravene paragraphs 7(a), (b), (c) (d) and (e) of this agreement will unjustly enrich Evans or another third party and will thereby create a trust in favour of the Company in relation to the revenue referenced in this paragraph.

Evans left his employer and continued to work with his clients and in particular, client sourced before his emplyment.

Restrictive Covenant

[27] … The majority judgment in Globex emphasized the requirement that a restrictive covenant be unambiguous when considering its reasonableness. The majority stated, at paras 19-20:

If it is impossible to predict when you are breaching a restrictive covenant, it is in essence unreasonable.

Second, the clause is ambiguous in another way. Read literally, all it prohibited was soliciting customers “for” any client of the appellant. There is no suggestion that the respondents’ new employer was a client of the appellant. It seems unlikely this is what the clause was meant to prohibit. But the example demonstrates the difficulty in ascertaining the reach of the clause.

[28] In this case, the non-solicitation clause in 7(c) is directed at “any client of the Company which has been a client of the Company or any other company to whom Evans provided any services related to the Company’s business”. It seems likely that this provision is aimed at prohibiting solicitation of other people previously given services by Evans while they were clients of this or a related company. However, the clause can also be read as prohibiting solicitation of past clients of TSC. It is difficult to understand why it would be reasonable to restrain Evans from soliciting past clients which have already left the company.

[29] In short, we are not satisfied that the restrictive covenant in clause 7(c) is plain or readily interpretable. Rather, its meaning is ambiguous and its reach undeterminable. As observed by the Supreme Court in Shafron v KRG Insurance Brokers (Western) Inc, 2009 SCC 6 (CanLII), 2009 SCC 6, [2009] 1 SCR 157, “a restrictive covenant is prima facie unenforceable unless it is shown to be reasonable. However, if the covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable” (para 43).

 Fiduciary Duties

[34] Evans correctly points out that he was neither a director nor shareholder of TSC, and that he could not hire or promote any employee. As this court pointed out, however, in Anderson, Smyth & Kelly Custom Brokers Ltd v World Wide custom Brokers Ltd, 1996 ABCA 169 (CanLII), 1996 ABCA 169 at para 15, 39 Alta LR (3d) 411, the status of a fiduciary does not emanate from holding corporate office. Rather, it relates to the responsibilities entrusted to an employee, including any attendant power to affect the economic interests of the company. In this case, while the Eastern European market was merely a segment of the overall business operations of TSC, Evans was entrusted with primary responsibility for its successful operation. TSC paid Henys and Kadlecek to find and recruit players who were then turned over to Evans. Evans could then use the power and influence arising from the personal relationship developed with these players, either for the benefit of TSC, or for himself. The great majority of the revenues flowing to Evans and his company, after he left TSC, were from the players originally entrusted to his care by TSC.

[35] While the trial judge did not frame it this way, the situation is akin to the appropriation of a corporate opportunity; namely, players entrusted to Evans to develop on behalf of TSC were diverted to his own benefit. We are satisfied, therefore, that the trial judge did not err in finding Evans a fiduciary in the circumstances of this case.

[36] Evans submits that even if he had fiduciary obligations, they were relieved when he was “wrongfully dismissed” on April 12, 2006. He cites ADM Measurements Ltd v Bullet Electric Ltd, 2012 ABQB 150 (CanLII), 2012 ABQB 150, 9 Alta LR (5th) 278, wherein the court concluded that, even if an employee is a fiduciary, any fiduciary obligation would end when the employee “was constructively dismissed without cause”(para 117).

 [37] In our view, Evans’situation is much different than that of the employee in ADM, nor do we subscribe to the view that a termination of employment will automatically relieve a former employee of ongoing fiduciary obligations. here, it was only after Evans gave notice that he would be departing on April 17 that TSC required that he immediately leave his office and asserted that it had no further need for his services. While we do not condone the failure of TSC to make payment for the five-day balance of the term, it is doubtful that the breach to make payment constituted a “wrongful dismissal” and, in any event, involved no repudiation of the employment contract. In these circumstances, TSC’s relatively minor breach of contract is irrelevant to Evans’ongoing fiduciary obligations, and does not serve to relieve him of them.