Proof of Loss for Breach of a Non-Compete Clause

The Dispute

A tutor taught for about sixteen months at a company that prepared candidates for a professional licensing examination, then fell out with the owner over a performance bonus and gave notice. He incorporated his own school and opened it in one of the municipalities his contract had put off limits, keeping the slides he had prepared while teaching there. The company sued for the students it said it lost, for the materials, and to close the new school.

The Parties’ Positions

The company advanced three contractual claims, the first resting on a non-competition agreement for which it had paid the tutor an hourly premium worth roughly a 43% increase on his rate. The second rested on a non-solicitation clause by which the tutor agreed not to divert or attempt to divert, for two years after termination, any business the company had enjoyed, solicited or attempted to solicit from its customers. The third rested on a confidentiality schedule under which every teaching material the tutor conceived, developed or contributed to during the engagement belonged to the company, whether or not it was made outside work hours. It sought damages, a permanent injunction, punitive damages and an award of special costs.

The tutor resisted each claim on the footing that a restrictive covenant is presumptively unenforceable, the burden of establishing its reasonableness lying on the company. He contended that the non-competition clauses were ambiguous and overly broad, one restraining him from being engaged in, concerned with or interested in any business the same as or competitive with a business the agreement nowhere defined, and the other carrying no geographic limit at all. He maintained that the teaching materials lacked the necessary quality of confidence, because they derived from a publicly available university course manual and its published bank of sample examination questions. On damages he submitted that nothing had prevented him from opening outside the restricted municipalities, so the company had proved no loss caused by the breach.

The Court’s Decision

The Supreme Court of British Columbia held the non-competition clauses enforceable, and found those clauses and the confidentiality schedule breached, the breach deliberate and calculated. It held the non-solicitation clause an unenforceable restraint of trade, because the clause reached customers the tutor had never dealt with and could not have identified as the company’s.

On quantum the court declined the six-month income comparison the company advanced, which allowed for none of the six factors its principal had conceded were likely to have affected enrolment, and assessed damages at under half the sum claimed. It refused a permanent injunction and refused punitive damages for want of an independent actionable wrong, and it awarded special costs because the tutor had answered the injunction application with a sworn affidavit he knew to be false. The award and the costs exposure landed five years after a departure the covenant had restrained for eighteen months.

Key Lessons for Covenant Holders and Departing Contractors

• Confine a non-solicitation covenant to the customers the departing person dealt with. The clause here reached any business the company had enjoyed or solicited from its customers, and it failed as a restraint of trade because it captured people the tutor had never dealt with.
• Pay separate and identifiable consideration for a restraint on competition. The premium the tutor negotiated for the non-competition agreement, worth roughly a 43% increase in his hourly rate, answered the contention that the parties had bargained from unequal positions.
• Assemble the evidence of causation before commencing, not after judgment on liability. The company established a deliberate breach and still recovered under half its claim, because its comparison allowed for none of the other factors its principal accepted had likely affected enrolment.
• Do not assume that material assembled from public sources falls outside a confidentiality clause. Publicly available course content, reorganized over years for a particular group of students, can carry the necessary quality of confidence, and a clause reaching everything conceived or contributed to during an engagement can extend to work done at home.

The outcome of this matter turned on the wording of the two agreements and on the evidence of loss before the court at trial. A similar dispute may resolve differently.

ATAC LAW acts for businesses enforcing restrictive covenants and for the contractors and employees bound by them.

Conducted by Roy Donghee Kim, Associate Lawyer at ATAC LAW.