How enforceable are restrictive covenants?

How enforceable are restrictive covenants?

How enforceable are restrictive covenants? Companies naturally want to protect their business and restrict former employees or contractors from competing with it, but are non-compete clauses reasonable and hence enforceable?

An appeal court in British Columbia recently decided on such a case, as discussed by Heather Hettiarachchi of Integritas Workplace Law Corporation on mondaq.com.

The facts
An optometrist provided her services to IRIS, an eye care services provider as an independent contractor. An agreement outlined the terms and conditions that governed the arrangement. Part of the agreement was a non-competition clause that prohibited the contractor from competing with IRIS for three years, whether directly, in partnership or conjunction with anybody engaged in a competing business, within a five-kilometre radius of the IRIS premises.

However, the contractor wished to set up her own practice and asked IRIS to release her from the clause. IRIS refused.

The employee went ahead, anyway. She established her practice at an area within a 3.5-kilometre radius of IRIS, and the company subsequently sought an injunction, citing the terms of their agreement.

The decision
The trial court judge ruled that the non-compete clause was unenforceable because it was broader than necessary to protect the business interest of IRIS, even while it was reasonable as to duration and geographic limit.

The judge also said the agreement was closer to an employment agreement. It warranted a heightened degree of scrutiny to determine whether the non-compete was reasonable as it was between the parties.

IRIS appealed the decision.

The appeal court upheld the earlier ruling. It said that when the enforceability of a non-compete clause is in issue, it is the party seeking to enforce it that must show proof of its reasonability.
How can one tell if the clause is reasonable? Look at the context.

Context determines the degree of scrutiny to be applied. Here there is a distinction between non-competition clauses found in employment agreements and in agreements for sale of a business.
The appeal court agreed with the trial judge that the agreement was more like an employment agreement. For example:
  • There was a power imbalance that favoured IRIS. There was no negotiation on the terms and the agreement was presented in standard form, IRIS determined the optometrist’s hours of work approved her vacation days, controlled the fees she could charge. The optometrist was required to transfer her files to a colleague upon her leaving. She was relatively experienced and had no patient base of her own.
  • There was no goodwill payment as in a sale of a business.
The court said the agreement already had provisions to protect IRIS' trade connections as it had a non-solicitation clause.

Hettiarachchi reported that the non-compete clause was ambiguous because it was not clear how one would determine whether an individual is "concerned with" a business that competed with IRIS.
It went beyond what was required to protect IRIS' business interests because it also sought to prevent Dr. Park from engaging in work that did not compete with IRIS' business.

No blue pencil rule
IRIS asked the court to apply the "blue pencil rule" and strike out the unreasonable portions of the non-compete clause so that it would still be enforceable.

The court declined. Jurisprudence holds that courts should not rewrite an agreement for the parties because it would not reflect their intentions.


Related stories:
Enforcing restrictive clauses an “uphill battle”
Apple reaches settlement after allegedly breaching non-compete agreement