June 30, 2021
by Michael Carabash, BA, LLB, JD, MBA, CDPM
It happens daily. A dentist looking to practise is presented with an associate agreement. Meanwhile, another dentist, selling their practice, is presented with a purchase and sale agreement. Both agreements include a non-compete clause, which tries to restrict that dentist from practising within a certain geographic area (e.g. 5 km radius from the practice) and timeline (e.g. 5 years). But are these non-compete clauses legal and enforceable in Ontario? As it turns out: only sometimes.
In 2016, I wrote about this topic.2 After reviewing the jurisprudence, I concluded that, in a purely employment or quasi-employment context (e.g. principal/associate context) non-competes are generally unenforceable except in “exceptional circumstances” (more on that below). However, if a non-compete is part of an agreement of purchase and sale or an associate agreement that forms part of a purchase/sale transaction, they tend to be more enforceable.2 But why?
Because Courts were less inclined to restrict employees from earning a living by practising their trade or profession due to the power imbalance that exists between employer and employee; and that’s especially true when a clearly drafted and reasonable in scope non-solicitation clause would suffice (i.e. don’t try to take customers with you when you leave!) to protect an employer’s legitimate proprietary interests.3
Meanwhile, Courts were more inclined to come to a purchaser’s aid in enforcing a non-compete if they just paid oodles of money to buy a business and the seller agreed not to compete – so as to help preserve the business’ goodwill.4
So where do things currently stand in Ontario? Not much has changed.
Employee + Non-Compete = Unenforceable
In Camino Modular Systems Inc. v. Kranidis,5 a VP for a raised flooring business signed an employment agreement that prohibited him from competing within North America for a period of 12 months after leaving. The employee eventually resigned to work at a competitor business. The employer sued and tried to enforce the non-compete before the trial (by bringing a mini-trial called a “motion for an interlocutory injunction”).
The Ontario Superior Court of Justice refused to enforce the clause.
First, the Court found that the employer couldn’t establish a proprietary interest worth protecting. The employer could not identify specific information, products or projects that were proprietary. Nor could it explain how a 12 month non-compete made sense in its industry: there were no specific upcoming or ongoing projects that the former employee had specific knowledge of (that could be detrimental to the employer). The former employee also had no confidential information about the employer’s projects that could harm the employer in those 12 months.
Further, the Court stated that the non-compete clause was too ambiguous and overly broad. Based on how it was drafted, it could restrict the former employee from “taking any position at all in a competing business, including a position in which he is not actually competing.”
Given these deficiencies, the Court ruled that the employer did “not have a strong prima facie case with respect to the enforceability of the non-competition clause.” The employer lost the motion and the Court ordered them to pay the former employee’s costs.
Employee + Non-Compete = Unenforceable
In Crawford Packaging Inc. v. Dorata,6 a salesperson employee signed an employment agreement that included an 18-month non-compete clause covering a geographic area “within any sales territory where the employee worked.” The employee resigned to join a competitor business. The employer sued and tried to enforce the non-compete by bringing a motion for an interlocutory injunction.
To begin, the Ontario Superior Court of Justice noted the following legal principles about the enforceability of non-competes: “Ordinarily, a non-solicitation clause provides adequate protection, and only in exceptional cases will a non-competition clause be upheld as being reasonable… The restrictive covenant must be reasonable as to geographic scope and duration… The covenant must be clear and unambiguous.”7
But the Court did not get around to applying these principles here because the employer had failed to meet the very high standard of proving harm (which was also required for the Court to enforce the non-compete). Per the Court: “The [employer] has lost no business… None of its clients has departed. None of its employees has left their employment. Any future harm is purely speculative. Even taking the evidence at its highest from the perspective of the plaintiff, the very high threshold for a quia timet injunction has not been met.”
Importantly, in the employment agreement, the employee agreed that the non-compete was “reasonable, that he will not contest same, that [the employer] will be irreparably harmed” for an actual or threatened breach of the non-compete and that the employer “shall be entitled in equity to any interim and/or interlocutory injunction to restrain such breach or threatened breach.”8
Despite all of this, the Court held that such terms “cannot make enforceable what is legally unenforceable… If a covenant is unreasonable based on appropriate legal standards, a provision in the agreement that deems it to be reasonable is legally ineffective. Similarly, if the plaintiff cannot demonstrate irreparable harm, the agreement cannot deem the plaintiff to have done so.”9
The Employer’s motion was dismissed and they were ordered to pay the former employee $15,000 as costs.
Employee + Non-Compete = Unenforceable
In Labrador Recycling Inc. v. Folino,10 an employee of a scrap aluminum brokerage signed an employment agreement that precluded them from “accepting business” from the employer’s “current or prospective customers” for a period of 1 year after leaving. The employee resigned to start his own competing business. The employer sued to and tried to enforce this restrictive covenant by bringing a motion for an interlocutory injunction.
The Court found that the employer had not established a strong prima facie case that the restrictive covenant was reasonable.
First, the Court held that the 1-year time limit was unreasonably long: the employer’s deals came together in the aluminum scrap industry without hours and the employer didn’t need 1 year to solidify relationships with vendors and purchasers.
Second, there was no geographic limits set out in the clause. A non-solicitation clause, on its own, would not have required a geographic limit if customers were reasonably defined and identifiable. But in this case, the words “current or prospective customers” was overly broad and imprecise.
Third, the clause is ambiguous. “Current or prospective customers” was defined in the agreement as “an individual or entity with which [the employee] personally had direct or indirect contact, or access to conduct confidential information about, during the last two years of [his employment].” But this would restrict the former employee from accepting work from someone he may never have had contact with EVEN IF he had access to confidential information about them. It’s not clear how the employee would be able to identify such people. The clause also uses the word “indirect contact” without explaining what that means.
Fourth, the clause purports to restrict the employee from accepting work from his personal contacts who may have had nothing to do with the employer at any time.
Finally, the employer had not proven irreparable harm to justify enforcing the restrictive covenant. Per the Court: “I am not satisfied on this record that the [employer] is at risk of loss of market share, substantial loss of revenue, or damage to its business reputation. The [employer’s] evidence is, at turns, speculative, exaggerated, unsupported, or not forthright.”
The employer lost the motion and was ordered to pay the former employee $47,488.82 in costs.
Employee + Non-Compete = Unenforceable
In PointOne Graphics Inc. v. Roszkowski et. al.,11 a print shop employee signed an employment agreement that precluded him from competing for 1 year after leaving. The term of the contract was renewed only until 2007. In 2017, the employee left to start working at a competing print shop business. The employer sued to and tried to enforce the non-compete clause by bringing a motion for an interlocutory injunction.
The Ontario Superior Court of Justice reiterated the jurisprudence on the enforceability of non-compete clauses (i.e. they are generally presumed void as contrary to public policy, unenforceable except in exceptional circumstances; they must be reasonable; they must be needed to protect a legal proprietary interest; they must be clearly drafted, etc.).
But then the Court concluded that the non-compete here (one that the employer was trying to implicitly rely upon based on a decades’ old and expired employment agreement) “is a fiction.” Per the Court: “…courts should not be reading restrictive terms into employment contracts when the parties have not bargained for them. In my view, neither should courts read in or imply a restrictive covenant into an employment contract where the parties have bargained for one, and then allowed it to lapse.”12
As the employer could not prove that the non-compete existed, it could not seek an injunction. The Court dismissed the motion and ordered the employer to pay $29,000 in costs to the former employee.
Now Wait Just a Second…
As shown above, the non-compete clauses failed because the employer had no legitimate proprietary interest worth protecting. Or because the clauses were unreasonable, overly broad, or ambiguous. Or because the employer couldn’t establish damages (and regardless of whether the employment agreement said they needed to or not). Or because they were part of an expired agreement.
Now I know what you’re thinking: “But all of these recent Ontario cases only dealt with purely employment relationships. What about associate/principal relationships, which are typically framed as an independent contractor (associate) providing services to a client (principal)?”
Well, this takes us back to the beginning of this article: when it’s a purely associate/principal relationship (no purchase and sale involved), Ontario Courts have taken the same approach as an employer/employee relationship.
In the seminal case of Lyons v. Multari,13 the Ontario Court of Appeal found that a 3-year and 5-mile non-compete clause between a principal oral surgeon and his junior associate was unenforceable because:
The same legal principles discussed in the cases above would apply in a purely associate/principal relationship.
If you’re wondering what could constitute “exceptional circumstances” warranting enforcement, the Manitoba Court of Appeal in Winnipeg Livestock Sales Ltd. v. Plewman14 shed some light on this by noting the following relevant factors:
To date, I have found no Canadian court case where a non-compete in a purely employment or quasi-employment context is enforced on the grounds of “exceptional circumstances.”
Now, with that said, Canadian Courts have enforced non-compete clauses where someone sells their business and agrees not to compete. In these contexts, the buyer/employer and seller/employee have equal bargaining power at the time of entering into the non-compete and the buyer/employer requires extra protection to help preserve the goodwill that they just bought.15
Bottom line: dentists should be aware of the legal pitfalls that surround the enforceability of non-compete clauses in legal documents and seek professional help when negotiating or trying to rely upon them. If you’re considering selling, buying or entering into an associateship, you can contact the author for a free phone consult.
About the Author
Michael Carabash, BA, LLB, JD, MBA, CDPM is a founding partner of DMC LLP, Canada’s largest dental-only law firm that helps dentists prepare, market and sell practices in Ontario. Michael leads DMC’s annual Caribbean dental mission trips (Grenada, Jamaica and Turks & Caicos). If you’re thinking about selling, contact Michael at email@example.com or 647.680.9530.