Court of Appeal deems restrictive covenant ‘overboard’

Ontario’s Court of Appeal has determined that a restrictive covenant in a brokerage’s employment contract was unenforceable and ‘overboard,’ overturning a ruling to the contrary by the Ontario Superior Court.
In Staebler Company Ltd. v. Allan, Tim Allan and Jeff Kienapple were commercial insurance producers with H.L. Staebler Company Ltd as of Oct. 15, 2003 when they submitted immediate resignations. The pair immediately accepted new posts at competing brokerage Stevenson & Hunt Insurance Brokers (KWC) Limited.
Over the course of the next two weeks, 118 of Staebler’s clients who had previously been serviced by Allan and Kienapple gave notice that they would be moving their insurance business to Stevenson & Hunt.
Both of the Staebler employment contracts signed by Allan and Kienapple contained restrictive convenants of two years duration purporting to limit the departing employees from conducting business with any customers of Staebler that were serviced by the employees at the date of their resignations.
The employment contracts also provided that the damages suffered by Staebler for breach of the employment agreements would be equal to 1-1.5 times the commission earned by the new employer from the clients who transferred their business as a result of a breach of the restrictive covenant.
In an October, 2007 decision, the Superior Court found the restrictive covenants enforceable, the liquidated damages clause was enforceable and that Stevenson & Hunt were liable to Staebler for inducing Allan and Kienapple to breach their contracts.
A three-judge panel of the Court of Appeal overturned the decision.
“The absence of a geographical limit combined with the blanket prohibition on conducting business renders the restrictive covenant ‘overboard’ and unenforceable,” the decision says. “It unreasonably restricts the employee’s economic interests and goes beyond that which is reasonably necessary to protect Staebler’s proprietary interest.”
In light of the conclusion that the restrictive conclusion is not enforceable, “it becomes unnecessary to decide the validity of the liquidated damages clause,” the Appeal Court ruled.