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Non–Competition Covenant Upheld
Published in the September 2007 issue of Litigation Notes - View Article
Tim Allan and Jeff Kienapple, were commercial insurance producers with H. L. Staebler Company Limited (“Staebler”), an insurance brokerage in Waterloo, Ontario. Allan had been employed there since 1982 and Kienapple had joined in 1995.
At the end of 1996, the controlling shareholder of Staebler retired and sold his shares to his son. The son implemented a number of changes to the senior management of the brokerage that did not sit well with Allan and Kienapple.June, 2003 Kienapple happened to be playing golf with a director of Stevenson & Hunt, an insurance brokerage based in London, Ontario.& Hunt were looking to expand by opening an office in Waterloo. Kienapple was put in contact with Steve Bryant, the president of Stevenson & Hunt. In August 2003, Bryant offered Kienapple a job.Allan decided to join him, as did their respective assistants.
Both Allan and Kienapple had signed an employment contract with Staebler which provided that for a period of two years following the termination of their employment, they would not conduct business with any clients of Staebler that they had serviced at the date of termination. The damages for a breach of the undertaking was expressed to be a sum equal to 1 1/2 times the commission income received by them or their subsequent employer on account of business conducted on behalf of Staebler
clients. These employment contracts were provided toStevenson & Hunt, who agreed to indemnify Allan and Kienapple for any damages that they might be ordered to pay for breach of the restrictive covenants..
On October 15, 2003 Allan and Kienapple submitted resignations to Staebler, effective immediately.same day, Stevenson & Hunt opened their new office in Waterloo. By the end of the day, Staebler began receiving written notification from clients of Allan and Kienapple, that they were transferring their insurance business to Stevenson & Hunt. By October 29, approximately 118 clients had moved their business to Stevenson & Hunt.On that day, Staebler obtained an injunction against Allan, Kienapple and their assistants, preventing them from approaching any Staebler customer for the purpose of soliciting business. Staebler also commenced an action against Allan, Kienapple, their assistants and Stevenson & Hunt, seeking damages for various causes of action including breach of the employment agreements, breach of fiduciary duty, conspiracy and inducing breach of contract.The defendants denied liability on the basis that the restrictive covenants were unenforceable, that the individual defendants were not fiduciaries and that the damage clause in the employment contracts was a penalty clause.
The Court reviewed the law with respect to the enforceability of restrictive covenants in employment agreements, which holds that a covenant in restraint of trade is enforceable only if it is reasonable as between the parties and with reference to the public interest. The validity of a restrictive covenant can only be determined by an overall assessment of the clause, the agreement and all of the surrounding circumstances. The onus of establishing that a restrictive covenant is reasonable between the parties is on the party seeking to rely on it and the onus of establishing that the restrictive covenant is contrary to the public interest lies on the party attacking it.
The Court went on to consider whether Staebler had a proprietary interest that it was entitled to protect and concluded that it did.Producers do not own their book of business. It owned by the brokerage.
The restriction contained in the employment contracts with Staebler was found to be reasonable. producers in the insurance industry have a close and personal relationship with their clients, as evidenced by the number of their clients who transferred their business to Stevenson & Hunt. Because of this close relationship a simple non-solicitation clause would not be sufficient to protect Staebler because the clients would be likely to follow Allan and Kienapple without any solicitation. The clause in the Staebler contract was a "hybrid" clause, meaning a combination of a non-solicitation clause and a non-competition clause.The clause prohibited Allan and Kienapple from conducting business with clients of Staebler that they had serviced but did not prevent solicitation.Nor did it stop them from acting as an insurance broker selling commercial insurance, or accepting employment with a competing insurance brokerage. They were free to contact Staebler clients that they had not serviced.
Furthermore the restrictive covenant contained in the Staebler employment contract was less restrictive than the covenant contained in the standard Stevenson & Hunt employment contract.Court pointed out that the Ontario Court of Appeal has held that “…a restrictive covenant entered into by an employee and his new employer is a relevant factor in assessing the reasonableness of a restrictive covenant in an employment agreement with the employee and his former employer as it goes to the issue of industry practice and the employee's understanding of what is appropriate in the industry."
The Court found that the restrictive covenant in the Staebler employment contract was not contrary to the public interest, as it did not prevent Allan and Kienapple from earning a living in their chosen field. The Court gave short shrift to the argument that the restrictive covenant was contrary to the public interest because it interfered with the ability of customers to obtain service from an individual knowledgeable about their insurance needs, stating that such an argument “…could of course be made about any restrictive covenant that prohibits competition, but in appropriate circumstances courts in Canada have held that non-competition clauses can be valid forms of restrictive covenants.” As to its duration the Court accepted evidence to the effect that two years is required for any new producer to become familiar with a client and for the client to become comfortable with the new producer. The two year duration was therefore reasonable.
The Court then went on to determine if Stevenson & Hunt should be found liable for inducing breach of contract. The caselaw required Staebler to prove that: 1) Staebler had valid and enforceable contracts with Allan and Kienapple; 2) Stevenson & Hunt was aware of the existence of these contracts; 3) Stevenson & Hunt intended to and did procure the breach of those contracts by Allan and Kienapple; and 4) Staebler suffered damages as a result of the breaches. The Court had already found that the employment contracts were valid and enforceable. Stevenson & Hunt had copies of them before making an offer of employment. Stevenson & Hunt had agreed to indemnify Allan and Kienapple. The timing of the resignations coincided with the opening of Stevenson & Hunt's Waterloo office. All in all, it was evident to the Court that Stevenson & Hunt “…was aware of the restrictive covenant contained in the Allan and Kienapple employment agreements with Staebler, knew that Allan and Kienapple did not intend to honour the terms of the restrictive covenant and encouraged and expected Allan and Kienapple and their assistants to solicit their Staebler clients to transfer their business to Stevenson & Hunt contrary to the terms of the restrictive covenant during the two-year period immediately following the resignations from employment at Staebler.”
Staebler suffered damages as a result of the breaches of the restrictive covenants and consequently Stevenson & Hunt was liable to Staebler for inducing breach of the contracts.
On the question of damages, the defendants argued that the clause in the Staebler employment contracts dealing with damages for breach of the restrictive covenant was a penalty clause and therefore unenforceable. The plaintiff argued that the damages clause was a reasonable pre-estimation of damages as opposed to a penalty clause. The Court concluded that it was not a penalty clause and, after considering expert evidence proffered by both sides, assessed the damages at $1.5 million.
The Court considered whether an award of punitive damages should be made and said that although “…the conduct of Allan, Kienapple and Stevenson & Hunt was cold, calculating and designed to catch Staebler unprepared to respond quickly…” it was not so vindictive, reprehensible and malicious or… sufficiently oppressive and high-handed as to offend the court's sense of decency.” The Court considered the fact that the amount awarded in favour of Staebler was more than the actual loss sustained.The courts have held that one of the factors to be taken into consideration when deciding to make an award of punitive damages is whether the award of other damages would be insufficient to achieve the goal of punishment and deterrence.The Court said that even if it had been found that the conduct of the defendants was deserving of sanction, it would have held that the difference between the actual damages and the damages calculated pursuant to the damages clause in the employment contract would be a sufficient deterrence. No punitive damages were awarded.
H.L. Staebler Company Limited v. Allan, 2007 CanLII 37692