Ontario Court Finds Non-Solicitation Clause Valid Based on Unique Dealer Structure

6 July 2018

By Daniel Babin (Summer Law Student)

In our June 20, 2018 blog post, we noted that in National Bank Financial Inc. v Canaccord Genuity Corp. the British Columbia Supreme Court held that non-solicitation clauses in employment agreements between financial advisors and their employers may be found invalid for public policy reasons, as the interests of clients must be put ahead of those of the firm.

By contrast, in the recent decision of MD Physician Services Inc. v. Wisniewski, the Ontario Court of Appeal upheld a trial decision of the Ontario Superior Court of Justice enforcing a non-solicitation clause, and finding that the advisors (and their new employer) were liable for breach of such clause. The Court of Appeal specifically approved the lower Court’s application of specific criteria to the question of whether or not such a clause should be enforced.

Background: MD Physician Services Inc. (“MD”) hired the appellant advisors Joy Sleeth and Duane Wisniewsk in 2003 and 2005, respectively, to provide financial advisory services to MD's clients, who were primarily physicians and their families.

MD provided the advisors with a book of business, and paid them a salary and bonus based on a variety of factors. Each of the advisors signed agreements containing identical non-solicitation clauses.

The clauses stated:

Non-Solicitation: The Employee agrees that the Employee shall not solicit during the Employee's employment with the Employer and for the period ending two (2) years after the termination of his/her employment, regardless of how that termination should occur, within the geographic area within which s/he provided services to the Employer.

“Solicit” means: to solicit, or attempt to solicit, the business of any client, or prospective client, of the Employer who was serviced or solicited by the Employee during his/her employment with the Employee.

In 2013, the advisors left MD to join a competitor, RBC Dominion Securities Inc. ("RBC"). At RBC, advisors were expected to build their own businesses from scratch. Compensation was to be primarily based on a percentage of fees generated by such businesses. On their first day of work with RBC, the appellants wrote out from memory a list of clients that they had serviced at MD, and began soliciting them to move their accounts to RBC.

The trial judge concluded that both Sleeth and Wisniewski had breached the non-solicitation clause in their respective agreements, and that RBC was vicariously liable for the breach. The advisors and RBC appealed from the trial judge's finding.

Trial Judge’s Analysis: In order to determine whether the non-solicitation clauses were enforceable, the trial judge considered the following questions.

  1. Do the Plaintiffs have a proprietary interest entitled to protection?
  2. Is the covenant reasonable in terms of the public interest?
  3. Is the restrictive covenant ambiguous with respect to any of:
  1. Temporal length,
  2. Geographical scope, or
  3. Scope of the proscribed activities?

The trial judge found that the advisors did not have a proprietary interest in the client lists. The lists were not the result of either of the advisors’ hard work at MD or elsewhere, but were provided to them by MD when they began their employment.

The Court also found that as a specialized company dealing with physicians, MD had a genuine interest in ensuring that it was not used simply as an opportunity for advisors to establish contacts with physician investors, within the relatively protected environment of the firm, and then attempt to utilize those contacts to take clients away.

The Court held that an appropriately limited non-solicitation clause should offer protection for an employer, without unduly compromising a person’s ability to work in his or her chosen field. The court also considered the temporal length, geographic scope and the scope of the proscribed activities.

The Court determined that the clause protected MD without unduly compromising its former employees ability to work in their field.

The limitation period of two years from contacting MD clients was neither ambiguous nor unreasonable.

The geographic scope of the agreement was “trivial and not part of the main purport of the restrictive covenant”, as instant electronic communication meant that financial advice can be and is provided over both long and short distances with no trouble at all.

The scope of the prohibited activities was clear. It related to clients who had been serviced by the appellants during their MD employment, and prospective clients they had solicited during that time in their roles as MD employees. The clause did not restrict them from soliciting MD clients whom they had not worked with, or from soliciting physicians who were not MD clients.

The Court ruled that the advisors’ actions, in calling and soliciting their former clients, were clearly in violation of the non-solicitation clause, and that RBC, as the subsequent employer who had encouraged them to breach the clause, was vicariously liable.

Appeal: On appeal, the appellants argued that the agreement was so ambiguous that it must be held to be unenforceable. The Court of Appeal did not agree. It found that the trial judge “properly directed himself with respect to the legal principles that address the enforceability of a non-solicitation clause,” and that his findings were supported by the evidence.

The Court found that the evidence supported the trial judge's conclusion that the calls made to clients were not “courtesy calls”. The calls were clearly made with a view to bringing the clients to RBC, as they were made immediately after being hired by RBC, by personal telephone call, and they followed a predetermined structure.

The Takeaway: This decision provides helpful guidance regarding the circumstances in which a non-solicitation clause may be enforceable against advisors. However, some caution is warranted. The MD firm is likely unique as compared to other dealers, due to its focus on physicians and their families, and its compensation structure.

 

 


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