Québec Superior Court Clarifies the Limits of the Post-Employment Duty of Loyalty

Recently, the Superior Court of Québec refused to issue a safeguard order preventing two former senior employees from continuing to develop a competing business following the termination of their employment. The former employees, who had held executive positions for many years, were alleged to have secretly planned a competing venture while still employed. Following their dismissal, their former employer sought an order prohibiting them from participating in the new business and from working in the same industry in Canada and the United States.

The Court dismissed the application. Although it recognized that the allegations raised issues regarding the employees’ contractual and post-employment duty of loyalty, it concluded that the employer had not demonstrated that the requested restrictions were warranted at this stage of the proceedings. In particular, the evidence did not establish that the former employees were actively competing with their former employer, soliciting its clients, or operating a business that posed an imminent threat. The Court also noted that the proposed competing business was not yet operational and that there was insufficient evidence to conclude that it would immediately compete with the employer’s activities.

In reaching its decision, the Court emphasized that, in the absence of a non-competition agreement, former employees remain free to compete with their former employer, provided they do so loyally and in good faith. While the post-employment duty of loyalty under article 2088 of the Civil Code of Québec may temporarily restrict certain conduct, it does not amount to a blanket prohibition on working in the same industry. Rather, the scope and duration of that obligation must be assessed on a case-by-case basis, taking into account the surrounding circumstances. The Court further observed that the employer had not presented sufficient evidence of disloyal conduct, such as the misuse of confidential information or the active solicitation of clients, to justify the broad restrictions sought.

Here are relevant extracts from the judgement:

[33] The Court adds that the limitation on the duration of a restriction under article 2088 C.C.Q. is not the only factor to consider. It is trite law that a restrictive covenant must also be limited as to its geographical scope. Hence, so must the statutory restriction of article 2088 C.C.Q.

(…)

[36] Yet, it argues that the Detroit mill will manufacture spiral welded steel and seems to conclude that it will necessarily be competitive; this absent any evidence that the Bhatias have appropriated client lists or are actively soliciting PPSL clients. This argument seems to run contrary to the following words of the Court of Appeal in Concentrés scientifiques Bélisle inc. v. Lyrco Nutrition inc.:
– En l’absence d’une clause de non-concurrence, l’ex-salarié peut en principe concurrencer son ex-employeur (soit en trouvant un nouvel emploi chez un concurrent, soit en fondant sa propre entreprise concurrente, soit en investissant dans une entreprise concurrente, etc.). Il peut même se livrer à une concurrence vigoureuse, à condition toutefois que cette concurrence demeure loyale et respecte le principe de bonne foi.

(…)

[39] … the Bhatias have the right to earn their livings as long as they do so loyally, which appears to be the case at this time.

(…)

[41] The balance of convenience clearly favours the Bhatias being permitted to develop the Detroit mill. There is no cogent evidence that they are (or were) engaged in disloyal conduct, such as using information obtained during their employment to solicit PPSL’s clients. They have agreed not to solicit any employees. Absent disloyal conduct, they have the right to compete and earn their livings.