Who Owns the Customer Relationship

[FONT=Arial]Who Owns the Customer Relationship? [/FONT]

**[FONT=Calibri]Blaney McMurtry LLP **](http://www.lexology.com/contributors/23434/)[/FONT]
canada November 21 2016
Typical Fact Situation
As acondition of employment with a travel agency (“Donaldson’s”) , Mary wasrequired to sign, and did sign, an employment agreement in which she agreedthat
“in the event of termination or resignation she will not solicit or acceptbusiness from any corporate accounts or customers that are serviced byDonaldson’s, directly or indirectly.”
Fewwould argue that Donaldson’s did not have a legitimate reason for having Maryagree to this covenant.
Thegoodwill generated by Mary with Donaldson’s customers during her employment wasfinanced by the payment of Mary’s wages and expenses.
As aresult, it would be unfair for Mary to immediately start attacking thiscustomer base following the end of her employment without giving Donaldson’s
areasonable period of time to encourage its customers to maintain theirallegiance to Donaldson’s.
Aftereight years of employment, Mary resigned and took up employment with Goliger’s,a direct competitor of Donaldson’s.
Sheimmediately commenced soliciting customers of Donaldson’s to give their travelbusiness to Goliger’s. In response,
Donaldson’ssued Mary, Goliger’s and Goliger’s President seeking a court order prohibitingthese defendants from soliciting or accepting business from
Donaldson’scustomers and $500,000 in damages for having done so.
Was Donaldson’s Successful?
No.Instead, each of the defendants was successful in having the claims against itdismissed by way of summary judgment.
Reasoning of the Trial Judge

  1. Arestrictive covenant is enforceable if it is reasonable between the parties andwith reference to the public interest.
    2.In applying this reasonableness test the court will assess:
  • did the employer have a proprietary interest entitled to protection?
  • are the temporal or spatial features of the covenant too broad?
  • is the covenant a prohibition against competition generally and not limited to solicitation of customers?

Whilethe Court seemed to accept that Donaldson’s had a legitimate proprietaryinterest entitled to protection (its customer relationships),
thecovenant was defective and unenforceable because:

  • there was neither a geographic or temporal restriction.
  • it was not restricted to accounts and customers serviced by Mary during her employment.
  • by prohibiting “accepting business” from customers it constitutes a “non-competition clause”, which is only enforceable in exceptional circumstances,
  • which circumstances were absent.

What is the Lesson?
Donaldson’shad a legitimate proprietary interest to protect. Had it protected thisinterest with a covenant which met the standards set out in the case law,
theCourt would have provided a remedy. Donaldson’s, however, “over-reached” byinsisting on a covenant which went beyond that to which it is entitled at law.
Furthermore,the Court will not “read down” the covenant to what it would have enforced.Instead, the entire covenant is unenforceable.
Anemployer should resist the urge to impose comprehensive restrictions which gobeyond its legitimate right to protect the goodwill in its customer base.
Providedit is reasonable in terms of duration, geography and scope (i.e. restricted tothose customers with whom the employee had a level of control)
anddoes not prohibit “acceptance of business” the covenant will likely beenforceable.
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