Levinsky v. Toronto-Dominion Bank: Forfeiture of Deferred Compensation and Restraint of Trade

Catching up on reading the Ontario Reports, I came across the decision in Levinsky v. Toronto-Dominion Bank, (2013) 117 O.R. (3d) 106, 2013 ONSC 5657 (Ont. S.C.J.).  Although ultimately unsuccessful, this case involves an interesting attack on a provision of an employment agreement that led to a forfeiture of $1.6 million in deferred compensation.

Facts of the Case

The plaintiff, Mr. Levinsky, participated in TD Bank’s long term compensation plan for roughly 8 of his 11 years of employment with the bank.  According to the plan, if Mr. Levinsky resigned, he would forfeit the restricted share units that were granted to him under the plan, but not yet matured and paid out.

When Mr. Levinsky resigned in 2010, TD Bank took the position that he lost his entitlement to RSUs for 2007, 2008 and 2009, collectively valued at $1,600,766.  Mr. Levinsky sued TD Bank on the basis that he was constructively dismissed and that the plan’s forfeiture clause was an unenforceable restrictive covenant.  He alleged that he did not freely accept the terms of the long term compensation plan imposed on him by TD Bank, and that his participation in the plan was not supported by any consideration.

Issues Before the Court

In addressing the claim of constructive dismissal, Mr. Justice Brown reviewed the options available to a constructively dismissed employee as set out in the Court of Appeal’s decision in Wronko v. Western Inventory Service Ltd., (2008), 90 O.R. (3d) 547, namely:  1) accept the employer’s unilateral change, 2) reject the change and sue for damages, 3) reject the change and insist on adherence to the original terms of the employment agreement.  Mr. Justice Brown found that Mr. Levinsky accepted the long term compensation plan without protest or complaint, and signed an agreement acknowledging his participation in the plan.  Noting Mr. Levinsky’s LLB/MBA degree and business experience, the judge also rejected the claim that the agreement was unconscionable based on an imbalance of bargaining power.

However, the central issue in this case was whether or not the forfeiture clause was an unreasonable restraint of trade.  Mr. Justice Brown reviewed the case law concerning clauses that defer compensation and require an employee to remain in service in order to receive the compensation.  In doing so, he identified two principles:

  1. If the entitlement to compensation does not depend on the nature of the employee’s commercial activity after resignation, then the clause is not a restraint of trade, but merely a reasonable condition designed to secure the employee’s loyalty and continued service.
  2.  If the compensation has already vested prior to the termination of employment, then the claims may be regarded as an unreasonable restraint of trade provided that the forfeiture was connected to the employee’s commercial activity after resignation.

Based on these principles, Mr. Justice Brown concluded that if “the forfeiture results simply from the cessation of the employee’s service, without more, the clause does not operate in restraint of trade because it does not fetter the employee’s ability to choose where he or she wants to work next.”

The judge found that the forfeiture clause had no effect on Mr. Levinsky’s range of post-resignation commercial activities.  In fact, after resigning, Mr. Levinsky set up his own hedge fund company and secured TD Bank as a client.  As one would expect, Mr. Justice Brown dismissed the action.

Practical Considerations

There are a couple of take-aways from this decision.  First, contingent compensation clauses that depend on the continuation of service may be considered as simply loyalty incentives, not restraints of trade.  Second, Mr. Justice Brown underscored the importance of the losing party preparing a bill of costs in opposing the successful party’s costs submissions.  Quoting now-retired Chief Justice Winkler, he wrote, “an attack on the quantum of costs where the court did not have before it the bill of costs of the unsuccessful party “is no more than an attack in the air””.

This article is intended only to provide general information and does not constitute legal advice.  Should you require advice specific to your situation, please feel free to contact me to discuss the matter further.