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Court of Appeal Reverses in Staebler Case

Published in the August 2008 issue of Litigation Notes - View Article

Synopsis: The Ontario Court of Appeal reverses Superior Court on enforceability of a non-competition covenant

In the September, 2007 edition of Litigation Notes we reported on the case of H.L. Staebler Company Limited v. Allan. The case involved two employees of H.L. Staebler Company Limited (“Staebler”), Tim Allan and Jeff Kienapple, who left to join a competing insurance brokerage, Stevenson & Hunt Insurance Brokers Limited (Stevenson & Hunt).

Staebler sued its former employees as well as Stevenson & Hunt, invoking a restrictive covenant in the emplyees’contract of employment with the company. That restrictive covenant provided that for a period of two consecutive years following their departure, they could not conduct business with any clients or customers of Staebler “… that were handled or serviced by [them] at the date of [their] termination”. The covenant also provided that damages for any breach would be one and a half times the commission income received by them or their subsequent employer “…on account of business conducted on behalf of persons or businesses that were clients of Staebler” at the time of their termination of employment.

The Ontario Superior Court of Justice found that the restrictive covenant was enforceable and awarded Staebler $2 million in damages. In reaching his conclusion, the trial judge considered that the restrictive covenant was reasonably required for the protection of Staebler, because of the close relationship between the departing employees and their clients. He referred to the restrictive covenant as a “hybrid” clause, being a combination of a non-solicitation and non-competition clause. Although it prohibited the former employees from conducting business with clients that they serviced when at Staebler, it did not prevent them from acting as insurance brokers or soliciting other clients of Staebler with whom they did not deal prior to their departure.
The trial judge’s decision has now been reversed by the Ontario Court of Appeal. The Court of Appeal distinguished between non-competition clauses and non-solicitation clauses - the former being a “more drastic weapon in an employer’s arsenal” in that it attempts to keep an employee out of business. Courts have held non-competition clauses to be enforceable only in exceptional cases, where a non-solicitation clause would not suffice. The Court of Appeal disagreed that the restrictive covenant in this case was a “hybrid” clause. It held that it was a pure non-competition clause, because it not only restrained the departing employees from soliciting the clients and customers that they had served when they worked at Staebler, but also prohibited them from “conducting business” with any such clients or customers. This meant that even if they got out of the insurance business altogether, they could not do business with those clients for a period of two years following their departure from Staebler.

The Court contrasted this case with the cases where a non-competition covenant was found to be enforceable. In those other cases the departing individual was fundamental to the success of the business and had significant control over trade connections. In this case the two departing employees were only two of 50 employees and did not have exclusive relationships with their clients, who were served by other Staebler employees in various capacities. The Court therefore held that the restrictive covenant was more than was required to protect Staebler’s interests and was unenforceable.

H.L. Staebler Company Limited v. Allan,
2008 ONCA 576 (CanLII)