Restrictive covenants have been in the news a lot in recent months. Most recently, there has been considerable high profile sabre rattling by CN concerning the prospective hiring of its former CEO, Hunter Harrison, by its arch competitor, CP. One of the reasons for the higher level of activity is that our economy is becoming increasingly knowledge-based, prompting companies to look for ways to keep their assets from “walking out the door”. These days, companies often attempt to use restrictive covenants to tie up engineers, salespeople, accountants, and others who they think hold sensitive positions, in addition to top management.

The area is also topical on the heels of a recent Court of Appeal decision Mason v Chem-Trend Limited Partnership[i], from which the Supreme Court denied leave.

Some Broad Background

Recognizing that non-competition and non-solicitation covenants are inherently anti-competitive, the courts have always been ready to strike down covenants that are either ambiguous in their wording, or too broad in their factual context having regard to time, place and scope. This is especially so in employment contexts, where the employer’s desire to protect itself have to be balanced against the individual employee’s ability to earn a livelihood using his or her skills and knowledge. It has also become an“up or down” challenge; if a covenant is offside in any way, then the whole covenant is bad and none of it will be enforced.[ii]

The Mason Case and Practical Ambiguity

The Mason case is another case adding to the high hurdles which employers have to negotiate to make their covenants enforceable. One of the prerequisites for enforceability is that the wording of restrictive covenants must be certain and unambiguous.[iii] In Mason, the Court of Appeal agreed that the wording of the covenant was clear and unambiguous, but added that this is not enough – it must also be clear and unambiguous in its practical implementation.The non-solicitation covenant in this case precluded Mr, Masons from contacting “any customer of the business”, and in the circumstances of his employment, could not know which customers were off-limits because the nature and geographic scope of his responsibilities were such that he did not have contact with all of the company’s customers, and therefore after termination could not know whether any particular person or company was a customer of the business.Even though the wording was clear, it was unworkable in practice.

Confidentiality Clauses and the Mason Case

Another aspect of the Mason decision which has wide ranging implications is the Court’s conclusion that since Mr. Mason was also bound by a confidentiality clause which protected the company against disclosure and misuse of its confidential information, the Court found the restrictive covenant to be overreaching and unenforceable.Legal agreements which include restrictive covenants routinely also include separate confidentiality clauses, the existence of which it would appear will constitute a factor to be taken into account when considering whether the restrictive covenant is too broad.

Coming back to the CN and CP dust-up (which actually is governed by Illinois law), CN’spublic position is that even though its restrictive covenant from its former CEO expired
December 31,. 2011, he should be prohibited from competing because he (allegedly) possesses vast knowledge of CN’s confidential information.The former CEO is undoubtedly bound, either by written agreement or by common law, from using or disclosing CN’s confidential information, and the rationale behind this part of the Mason decision strongly suggests that the existence of a separate obligation of confidentiality will not form a basis for extension of a non-competition obligation. We look for CN to find a face-saving retreat from its position.

What should we take away from the Mason decision?

On a technical level, the Mason case confirms and/or establishes that a restrictive covenant must be certain, clear and unambiguous in both its actual wording and in its actual practical implementation in the real world. The case also gives us a clear statement that when we include separate confidentiality clauses, their existence may be used to reduce the scope of enforceable covenants.

On a broader and perhaps more meaningful level, the Mason case reinforces our conviction that when it comes to restrictive covenants, less is more. Pressing the outer limits of enforceability only increases the risk of a “thumbs-down” from the bench. There is something to be said for simple clear wording, practical “real world” meaning, and limits of time, geography and scope that are narrow enough to be reasonably certain of enforceability, but broad enough to somewhat cripple but not eliminate a putative competitor.

[iii]Herbert Morris, Ltd. v. Saxelby, [1916] 1 A.C. 688; KRG Insurance Brokers (Western) Inc. v. Shafron, [2009] SCC 6 (S.C.C.)

For more information on corporate and commercial matters, contact Wesley Brown or Samantha Chapman at Morrison Brown Sosnovitch LLP, 1 Toronto Street, Suite 910, Toronto, ON M5C 2V6, by phone at (416) 368-0600 or by email at wbrown@businesslawyers.com or schapman@businesslawyers.com.

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