Employers need to protect customer base: Sales plunged 96%

Imagine watching your sales plunge 96% after one employee quits.

Ohio-based car marketer Gunning and Associates (G&A) experienced that sinking feeling when their star Canadian salesman, Steve Kesler, quit and started his own business to compete directly.

In 2001, G&A had expanded into Canada by hiring Kesler. After signing a detailed employment contract, Kesler began doing what he did best.

Four years later, after landing 60 loyal customers, Kesler abruptly resigned. He immediately began soliciting his old customers. Before long, most abandoned G&A and moved their promotional work to his new company, ironically named Double Take Marketing.

Kesler played rough. Not limiting himself to just pitching his services, Kesler also attacked G&A to these customers, alleging it had not bothered to collect GST and claiming that this exposed these customers to unwarranted tax liability. Naturally, because none of the customers had ever met anyone at G&A besides Kesler, they believed what Kesler told them.

When attempts to negotiate a truce with Kesler failed, G&A sought a court injunction to protect its Canadian business from Kesler’s machinations. G&A petitioned for an order which would, for a period of one year from his resignation, prevent Kesler and Double Take from soliciting work from the customers Kesler developed while he was with G&A.

The G&A motion sought to enforce the non-solicitation covenant in the employment contract it had negotiated with Kesler, prohibiting him from soliciting any G&A customers for one year after the contract expired.

Despite its clear wording and Kesler’s admission that he had read and understood this provision, the court refused to enforce it. Since the clause was not limited to G&A’s Canadian customers or restricted to only the customers serviced by Kesler, the court found it to be overly broad. In other words, the G&A contract inappropriately used a hammer to crack a peanut. The law says if you have a clause restricting competition, it cannot provide you with more protection than you reasonably require.

Fortunately for G&A, the second prong of its attack succeeded. In granting G&A its injunction, the court focused on Kesler’s common law obligations to his employer, which remained in place even after his resignation. As a key G&A employee, taking on the senior role that he did, Kesler became a fiduciary, owing a high duty of loyalty to G&A. As such, he had no right to offer auto marketing services to G&A’s customers in Canada for one year from his resignation.

The lesson is this: The duties owed by departing employees are determined in relation to the employer. Is that employer vulnerable, and what harm has it suffered by its former employee’s post-termination solicitation and competition? The Court sided squarely with G&A on these issues because it had relied on Kesler alone to control its Canadian customer relationships.

Employers should do the following to protect their customer base from predatory, departing employees:

1. Know the law and draft your contract accordingly. Kesler’s non-solicitation restriction was overreaching at the time G&A insisted he sign it because it covered more of the business than he actually serviced. Courts will not read an overly broad provision more narrowly to cover a smaller group of customers. Instead, courts will always strike the entire clause down. If you ask for too much, you will get nothing, and there’s only one chance to get these provisions right.

2. Obtain specialist advice promptly: G&A’s counsel successfully highlighted Kesler’s refusal to answer questions about his current business and also underlined the lack of any evidence that there were no other opportunities available in the industry. Without such evidence, the Court ruled Kesler could earn a living for a year by servicing non-G&A customers.

3. Vigorously investigate post-employment conduct: Even without enforceable contracts, employers wronged by key employees can use the courts effectively. The case against Kesler became much stronger because he disparaged G&A through false allegations about tax liabilities.

4. Consider the commercial reasonableness of restrictions: G&A’s legal success was largely based on the evidence Kesler himself offered to the Court. By acknowledging he had in the past dealt with about 2,500 of Canada’s 3,500 car dealerships, Kesler admitted that it was reasonable that he not call on the 60 G&A customers for 12 months.

————
If you, or someone you care about, is dealing with employment law issues in the Toronto, Ontario Region, contact Lang Michener LLP.

This article is taken from an interview with Howard A. Levitt,Employment Lawyer at Lang Michener LLP, a Toronto, Ontario Employment Law Firm. Note that laws vary from province to province. Please consult with a lawyer in your own area to be sure of the laws and specific issues in your own jurisdiction.