By Ben Hanuka
Non-competition and non-solicitation agreements, which are “restrictive covenants”, are used to restrict one party from competing with the business of another, usually during and after the termination of a business relationship.
In the real estate industry, franchise arrangements tend to impose non-competition covenants on franchisee brokers and in some cases even on their sales representatives, to restrict them from engaging in a competitive business. Non-solicitation covenants aim to restrict franchisee brokers from soliciting customers, employees or other people associated with the franchise system.
In Canada, non-competition covenants must be unambiguous about the geographic territory of the restrictions, the period of time during which they are effective and the extent of the prohibited activities.
Non-solicitation covenants are not subject to the same territorial restrictions. In a 2013 Supreme Court of Canada decision, Payette v. Guay Inc., the court held that territorial restrictions in non-solicitation clauses have generally become obsolete in the modern economy since customers are not limited geographically.
The analysis of non-competition covenants is complex. They are required to be “reasonable”. Canadian courts have sought to balance the public policy against restraints of trade and the desire to promote freedom of contract in commerce, using the “reasonableness” test.
Key to this analysis is the nature of the contractual relationship.
In a pure commercial context, where a party may seek to restrain a seller of a business from competing with a buyer or prevent a shareholder from competing with a company he is leaving, the courts more readily enforce restrictive covenants. In Payette, the Supreme Court even created a presumption in favour of the restrictive covenants.
In employment cases, courts often find unequal bargaining power between an employer and employee and construe non-compete clauses more strictly against an employer. Non-compete covenants have to be restricted in their geographic territory and time to not more than what is reasonably required to protect an employer’s legitimate interests.
Franchise relationships in the real estate industry typically impose non-competition covenants on two distinct levels:
Level 1: Covenants against a franchisee broker
Level 2: Covenants against sales representatives
Starting with Level 2 for its simpler legal principles, real estate sales representatives are akin to employees for purposes of the legal analysis. Enforcing non-competition covenants against sales representatives, whether by the franchisor or franchisee broker, is likely very difficult given the much higher employment threshold.
On Level 1, franchise relationships fall on a continuum between a pure commercial relationship on the one hand, and an employment relationship on the other.
While real estate franchisors and franchisee brokers are independent contractors, many franchise agreements are “contracts of adhesion”. The agreements are drafted entirely by the franchisors and presented to the franchisees in a non-negotiable final form.
Canadian courts have traditionally agreed to consider many surrounding factors in franchise disputes relating to restrictive covenants, such as the nature of the franchise system; franchisees’ sophistication and access to professional advice; the extent of negotiations; the uniqueness and sophistication of the franchise system and its methods; training provided to franchisees; and the franchisee’s subsequent competing business that is at issue.
The sophistication of franchisors and their franchise systems in the real estate industry in Canada vary. There are large national and international networks, managed by highly sophisticated franchisors. And there are smaller systems, operated regionally. Some are owned and operated by an independent franchisor, while others are operated by a master franchisee regionally or nationally.
Franchisee brokerages similarly range from large and sophisticated multi-office networks with their own internal corporate head office and hundreds of sales representatives, to single broker offices.
Franchisees are provided with extensive franchise disclosure in Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island.
As professionals in their own right, real estate broker franchisees have ample access to legal and other professional advice.
The quality of restrictive covenants in these franchise systems’ franchise agreements similarly varies widely. Some are drafted clearly and concretely. Others are ambiguous, leaving the doors open to a legal challenge to their enforceability.
How all these and other relevant factors combine together greatly drives the question of whether a particular non-competition covenant is enforceable.
Ben Hanuka is principal of Law Works PC (www.lawworks.ca), a Toronto boutique firm practicing in the areas of franchise law and commercial litigation and arbitration. (416) 915-4212; email [email protected].