Executive Loses Incentive Comp Upon Resignation – Contract Enforceable, Court Finds No Restraint On Trade

 
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The Ontario Superior Court of Justice upheld a contract that forced an employee to forfeit restricted shares upon resignation in Levinsky v The Toronto-Dominion Bank.

The Plaintiff, a Vice President and Managing Director at the bank, participated in the bank's Long Term Compensation Plan. The Plan granted the Plaintiff Restricted Share Units each year. Under the Plan, shares that had not yet matured would be forfeited upon resignation. The Plaintiff resigned in 2010, and accordingly, lost his entitlement to shares allocated to him in 2007, 2008 and 2009. The value of the shares was over $1 Million. The Plaintiff argued that the requirement to forfeit shares on resignation was a restrictive covenant and unreasonable, and therefore unenforceable. He also argued that it was an unreasonable restraint on trade.

The Court rejected the Plaintiff's argument that he had no choice but to accept the terms of the Plan. The Court concluded that the Plaintiff was a sophisticated business man and knew the terms of the plan. The Court reviewed the jurisprudence involving contracts with unreasonable restraints on trade and noted the following principles:

First, employment contracts with clauses that forfeit future entitlements can be characterized as a contingency to the entitlement designed to obtain employee loyalty rather than a restraint on trade restricting commercial activity post termination; Second, a clause will not constitute a restraint on trade where it does not preclude the employee "from going anywhere and doing anything he choses to do." The judge concluded that in assessing a clause that is alleged to restrain trade, the court must consider whether the forfeiture, on its face or in practice, is tied to the end of employment, or whether it is tied to an employee's conduct following termination. If it is tied only to the termination of employment, the clause will not act as a restraint on trade, and therefore will be enforceable.

In the Plaintiff's case, the clause did not reference post-termination conduct and therefore was not a restraint on trade. The Plan did not create vested rights for the Plaintiff – in other words, it did not relate to compensation that was already earned or "accrued" to the Plaintiff, but rather compensation that still depended on a future contingency. Instead, the clause in question disentitled the Plaintiff from future benefits where the employee did not continue working for the bank. If he were not at work, he...

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