In People Corporation v. 2578649 Alberta Ltd. (Quinn Advisory Group), 2024 ABKB 711, the Alberta Court of King’s Bench summarized the law of restrictive covenants as it currently applies in Alberta.
The Plaintiff, People Corporation, is in the business of providing group insurance benefits to employers. Its growth model is to acquire smaller profitable firms who have strong reputations and client relationships. One such firm it acquired and amalgamated with was Lane Quinn Benefit Consultants Ltd. (LQBC). The defendant, Jay Quinn (Quinn) who was the majority shareholder and CEO of LQBC, became an employee of the Plaintiff upon the Plaintiff’s acquisition of LQBC. Approximately five years later, Quinn resigned and incorporated Quinn Advisory Group (QAG), a competing business. The Plaintiff applied for an injunction against Quinn, and other previous LQBC employees, who joined him at QAG.
Enforceability of the restrictive covenants
When Quinn became an employee of the Plaintiff, the parties entered into an Executive Employment Agreement (the Agreement) which contained non-solicitation and non-acceptance covenants which would expire 24 months after Quinn’s last day of employment with the Plaintiff.
The Alberta Court of King’s Bench confirmed the following principles apply when considering restrictive covenants:
- The scope of a restrictive covenant will vary with the nature of the relationship between the parties to the contract and the context in which the covenant was made. Restrictive covenants that may be lawful in the context of a sale of assets agreement (commercial context) may not be lawful in an employment context.
- A non-competition clause that applies outside the territory in which the business operates at the time of entering into the agreement is contrary to public policy.
- A territorial limitation is not absolutely necessary for the validity of a non-solicitation clause applying to all or some of the vendor’s customers, since such a limitation can be identified by analyzing the target customers.
- Restrictive covenants in an employment agreement are prima facie unenforceable restraints on trade and are contrary to public policy.
- A restrictive covenant will only be enforced if it is “reasonable,” whether or not the restrictive covenant is obtained in a commercial context.
- Reasonableness is measured in terms of time, geography and scope, and reasonableness of the scope depends on whether the employer has a proprietary interest in the subject matter.
- The restrictive covenant must be unambiguous.
- A court is not permitted to change the scope, time or geography of the agreement by rewriting, or notionally severing a restrictive covenant in an employment contract to reflect what the court thinks is reasonable.
Applying the above principles to the Agreement, the court determined that the non-solicitation covenants in the Agreement were unenforceable because the definitions of “Clients” and “Prospective Clients” were overly broad and ambiguous. The definition for “Clients” included all persons whom one of the thousands of employees of the Plaintiff had sold products or provided services to within 36 months prior to the alleged solicitations, or otherwise had a file in one of the Plaintiff’s employees’ active records. The definition for a “Prospective Client” included all persons who had been approached or whom a plan of action for approach had been developed by or on behalf of any member of the People Corporation Group within the 18-month period prior to the date an alleged solicitation had taken place. These definitions were not saved by the exception that such “Clients” and “Prospective Clients” did not include individuals that Quinn had not personally communicated with within the five-year period preceding his date of termination and had not received “Confidential Information” about the “Client” from any employee of the Plaintiff within that period due to the broad definition of “Confidential Information.”
The Court further found that the non-acceptance covenant was in substance a non-competition provision given that it prevents Quinn from providing competitive services to former clients of the Plaintiff, regardless of whether Quinn solicited these clients or they approached him of their own volition. The Court ultimately concluded that the non-acceptance covenant was unreasonable, since there was no geographical limitation and it exceeded what is necessary for the protection of the Plaintiff’s legitimate interests.
Based on the foregoing, the Court did not grant the Plaintiff’s application for an injunction as against Quinn.
Conclusion and takeaways
Restrictive covenants in employment agreements are presumptively unenforceable and should be drafted to only restrict the employee as reasonably necessary to protect the legitimate interests of the employer. What is considered reasonable will be determined in part by the context surrounding when and why the restrictive covenants were drafted.
If you have any questions about whether the restrictive covenants in your employment agreement are enforceable, or any other employment and labour questions, please reach out to Cristina Wendel and Jenny Wang, or any member of Dentons’ Employment and Labour group.
