Another Twist to Consider – The Allstate Case
Steven Borlak | September 14, 2009
Many of us are still trying to sift through, rationalize, and respond to the recent appellate decisions (Staebler, RBC Dominion Securities and Shafron) dealing with protection of customer lists from former workers. The insurance industry has yet another “restrictive covenant” case for us to digest, with a twist—Allstate Insurance Company of Canada v. Laroque et al.
The case focuses upon an additional troubling consideration for brokers: Suppose a brokerage has “gone to school” on the case law, and has systematically arranged for its staff to execute ironclad documents with suitably worded enforceable restrictions. With this protection in hand, what happens if the broker subsequently decides, without legal cause, to expressly terminate, or “constructively terminate” such a worker?
Based on employment law, the former worker will normally be entitled to damages based on the compensation that such a worker would have earned if he or she had been given proper notice of termination and continued to work during such period of time. However, what happens with the restrictions in such circumstances? In circumstances involving wrongful dismissal or constructive dismissal, a court will generally refuse to allow the employer to rely on its restrictive covenants, since this would allow the employer to benefit from the very contract that it sought to repudiate.
For the uninitiated, “constructive dismissal” occurs when an employer makes a unilateral change to a fundamental term of an employment contract without providing reasonable notice of that change to the employee.
Enter Allstate v. Laroque
The facts in Allstate would present well as a law school exam question.
Mr. Laroque was an employee of Allstate since 1985. After the completion of his training period, Laroque signed a contract (“1986 Contract”) containing the following restrictions:
- For a period of two years immediately following the termination of your employment under this agreement, you agree that you will not solicit insurance of any kind;
- With respect to any person, company or organization to whom you previously sold an Allstate policy, or
- Within one mile from any Allstate location from which you solicited or sold insurance during the year immediately preceding such termination.
Since 1990, Laroque elected to become a Neighbourhood Office Agent and thereby assumed much of the responsibility for office overhead, including leasing office premises at 471 Ontario Street, Sudbury, and the hiring and firing of staff.
In July 2007, Allstate announced the introduction of a new agent distribution model (“New Model”) for their agents. The New Model introduced many changes to Laroque’s situation with Allstate.
The New Model meant that Laroque would be required to close his agent’s office and relocate to a corporate office. As a result, Laroque argued that he would lose the benefit of goodwill he had developed in the form of his personal business identity.
The New Model introduced a new compensation formula with changes to the compensation occurring in two stages. Laroque’s former commission formula was to be immediately replaced, but was to be supported by an interim 24-month minimum income equal to his commissioned income earned in 2006. Allstate referred to this as a guarantee. At the end of the 24-month period, Laroque would be compensated strictly in accordance with the new formula. It is notable that the guarantee was conditional upon achieving unit or personal target levels to be set by Allstate.
Under the New Model, agents like Laroque were only permitted to sell new insurance products and the insureds would instead deal with other Allstate representatives for service and renewal.
The following statement was included with the announcement of the New Model:
“We are sensitive to the fact that a change in compensation systems can be settling or confusing. We are providing you with 24 months to adjust and transition to the new system. These effective dates, transitional measures and final implementation date correspond with our business plan and, importantly, allow us to provide ample notice to all our valued employees, including you. The period of time between today’s letter and the final implementation date will be considered as a working notice period.”
By the end of August 2007, Laroque concluded that the changes were substantial and unacceptable and amounted to constructive dismissal. He therefore resigned and replaced the Allstate sign with his new company name at 471 Ontario Street.
Allstate brought a motion for an injunction (heard January 2008) to restrain Laroque from violating the restrictive covenants in accordance with the 1986 Contract.
There was no evidence of Laroque retaining any confidential documents or information belonging to Allstate. There was no evidence of Laroque’s solicitation of business from his former Allstate customers. Allstate’s complaint was with respect to the sale of insurance by Laroque from his 471 Ontario Street location.
Laroque’s position was that Allstate had constructively dismissed him and, as a result, he was no longer bound by the restrictive covenants in the 1986 Contract.
How Justice Kane Viewed the Motion
Justice Kane declined to grant the injunctive relief, and leave to appeal from Justice Kane’s Order was rejected in March 2008.
On the motion, Allstate argued that there was no immediate change to Laroque’s compensation because of the guarantee during the 24-month notice period, and therefore there was no constructive dismissal.
Laroque argued that the guarantee was predicated upon achieving sales criteria to be unilaterally established by Allstate, and that the change in compensation was therefore immediate.
Based on the threshold test for obtaining an injunction, Justice Kane found that Allstate had not established a prima facie case to support its interpretation of the impact of the New Model. Justice Kane was of the view that the changes amounted to a substantial alteration of material terms in Laroque’s employment contract, thereby resulting in constructive dismissal and repudiation of the 1986 Contract and its restrictive covenants.
Impact on the Industry
Following the case, one should consider: Upon full presentation of evidence, will the court agree that the changes imposed by the New Model amounted to constructive dismissal? If so, will the court, on this basis, conclude that the 1986 Contract and the restrictive covenants have been repudiated?
If the constructive dismissal argument is rejected at trial, will the restrictions survive analysis by the court or will one or both of the covenants fail the reasonableness tests?
Best Estimation of What to Expect Based on What has Occurred
After digesting the recent decisions and the general principles, we can speculate on the outcome of a judicial analysis of the Allstate covenants.
Both covenants (A and B as set out above) are for a period of two years following the termination of employment. Although this seems to be pressing the envelope for employees, the recent cases would probably support a term of restriction as long as two years.
The first covenant in the 1986 Contract prohibits the sale of “insurance of any kind” with respect to any customer to whom Laroque previously sold an Allstate policy. Recent judgments have emphasized the importance of matching restrictions with the worker’s activity during employment. On the one hand, this covenant meets that test to the extent that its application is limited to the customers who previously purchased Allstate products from Laroque. However, the restriction purports to prohibit the sale of insurance of any kind. Did Laroque sell insurance of all descriptions to Allstate customers during his period of employment? If not, one could certainly argue that this covenant is unnecessarily broad and therefore unenforceable.
It is very difficult to imagine how the second covenant can survive the judicial reasonableness analysis. In addition to the challenges created by the breadth of the product description (re: insurance of any kind), the essence of the covenant is to prevent Laroque from soliciting insurance from 471 Ontario Street and a one-mile radius from there. Most significantly, this restriction is not limited to customers to whom Laroque previously sold an Allstate policy. It is drafted to prohibit sales of insurance of any kind from 471 Ontario Street and the one-mile radius, and is not confined to the Allstate customer base that did business with Laroque. To this legal mind, this sounds like and smells like a “non-competition covenant.” As a result, assuming that it becomes necessary for the court to comment on this issue, Allstate may have great difficulty convincing a court to enforce this covenant against Laroque.
If the second covenant is unacceptable, will the court permit the first covenant to be severed, or will the second covenant “toxify” the entire provision?
Keep your eyes on this case. Hopefully, we will be treated to some clear supportable logic and policies that brokers can learn from and respond to.
Steven C. Borlak, principal, Borlak Law Offices, based out of Markham, ON. Since 1985, Steve has focused his practice to provide extensive and specialized commercial assistance to general insurance brokers and insurance companies. Steve has written many industry-specific articles and has been involved in and produced numerous seminars qualifying for RIBO accreditation. |
