Are Non-Compete Clauses Legal in Ontario? Only Sometimes.

It occurs every day. A dentist seeking to practise is introduced with an affiliate settlement. In the meantime, one other dentist, promoting their apply, is introduced with a purchase order and sale settlement. Each agreements embody a non-compete clause, which tries to limit that dentist from practising inside a sure geographic space (e.g. 5 km radius from the apply) and timeline (e.g. 5 years). However are these non-compete clauses authorized and enforceable in Ontario? Because it seems: solely generally.

In 2016, I wrote about this subject.² After reviewing the jurisprudence, I concluded that, in a purely employment or quasi-employment context (e.g. principal/affiliate context) non-competes are usually unenforceable besides in “distinctive circumstances” (extra on that under). Nevertheless, if a non-compete is a part of an settlement of buy and sale or an affiliate settlement that varieties a part of a purchase order/sale transaction, they are typically extra enforceable.² However why?

As a result of Courts had been much less inclined to limit workers from incomes a dwelling by practising their commerce or occupation because of the energy imbalance that exists between employer and worker; and that’s very true when a clearly drafted and affordable in scope non-solicitation clause would suffice (i.e. don’t attempt to take clients with you while you go away!) to guard an employer’s official proprietary pursuits.³

In the meantime, Courts had been extra inclined to come back to a purchaser’s support in implementing a non-compete if they simply paid oodles of cash to purchase a enterprise and the vendor agreed to not compete – in order to assist protect the enterprise’ goodwill.⁴

So the place do issues at the moment stand in Ontario? Not a lot has modified.

2019 Choice:
Worker + Non-Compete = Unenforceable
In Camino Modular Techniques Inc. v. Kranidis,⁵ a VP for a raised flooring enterprise signed an employment settlement that prohibited him from competing inside North America for a interval of 12 months after leaving. The worker finally resigned to work at a competitor enterprise. The employer sued and tried to implement the non-compete earlier than the trial (by bringing a mini-trial known as a “movement for an interlocutory injunction”).

The Ontario Superior Courtroom of Justice refused to implement the clause.

First, the Courtroom discovered that the employer couldn’t set up a proprietary curiosity value defending. The employer couldn’t establish particular info, merchandise or initiatives that had been proprietary. Nor might it clarify how a 12 month non-compete made sense in its business: there have been no particular upcoming or ongoing initiatives that the previous worker had particular information of (that could possibly be detrimental to the employer). The previous worker additionally had no confidential details about the employer’s initiatives that would hurt the employer in these 12 months.

Additional, the Courtroom acknowledged that the non-compete clause was too ambiguous and overly broad. Based mostly on the way it was drafted, it might prohibit the previous worker from “taking any place in any respect in a competing enterprise, together with a place wherein he’s not truly competing.”

Given these deficiencies, the Courtroom dominated that the employer did “not have a robust prima facie case with respect to the enforceability of the non-competition clause.” The employer misplaced the movement and the Courtroom ordered them to pay the previous worker’s prices.

2020 Choice:
Worker + Non-Compete = Unenforceable
In Crawford Packaging Inc. v. Dorata,⁶ a salesman worker signed an employment settlement that included an 18-month non-compete clause overlaying a geographic space “inside any gross sales territory the place the worker labored.” The worker resigned to hitch a competitor enterprise. The employer sued and tried to implement the non-compete by bringing a movement for an interlocutory injunction.

To start, the Ontario Superior Courtroom of Justice famous the next authorized ideas in regards to the enforceability of non-competes: “Ordinarily, a non-solicitation clause gives sufficient safety, and solely in distinctive circumstances will a non-competition clause be upheld as being affordable… The restrictive covenant have to be affordable as to geographic scope and length… The covenant have to be clear and unambiguous.”⁷

However the Courtroom didn’t get round to making use of these ideas right here as a result of the employer had failed to fulfill the very excessive normal of proving hurt (which was additionally required for the Courtroom to implement the non-compete). Per the Courtroom: “The [employer] has misplaced no enterprise… None of its purchasers has departed. None of its workers has left their employment. Any future hurt is solely speculative. Even taking the proof at its highest from the attitude of the plaintiff, the very excessive threshold for a quia timet injunction has not been met.”

Importantly, within the employment settlement, the worker agreed that the non-compete was “affordable, that he won’t contest identical, that [the employer] might be irreparably harmed” for an precise or threatened breach of the non-compete and that the employer “shall be entitled in fairness to any interim and/or interlocutory injunction to restrain such breach or threatened breach.”⁸

Regardless of all of this, the Courtroom held that such phrases “can not make enforceable what’s legally unenforceable… If a covenant is unreasonable primarily based on acceptable authorized requirements, a provision within the settlement that deems it to be affordable is legally ineffective. Equally, if the plaintiff can not show irreparable hurt, the settlement can not deem the plaintiff to have completed so.”⁹

The Employer’s movement was dismissed they usually had been ordered to pay the previous worker $15,000 as prices.

2021 Choice:
Worker + Non-Compete = Unenforceable
In Labrador Recycling Inc. v. Folino,¹⁰ an worker of a scrap aluminum brokerage signed an employment settlement that precluded them from “accepting enterprise” from the employer’s “present or potential clients” for a interval of 1 yr after leaving. The worker resigned to start out his personal competing enterprise. The employer sued to and tried to implement this restrictive covenant by bringing a movement for an interlocutory injunction.

The Courtroom discovered that the employer had not established a robust prima facie case that the restrictive covenant was affordable.

First, the Courtroom held that the 1-year time restrict was unreasonably lengthy: the employer’s offers got here collectively within the aluminum scrap business with out hours and the employer didn’t want 1 yr to solidify relationships with distributors and purchasers.

Second, there was no geographic limits set out within the clause. A non-solicitation clause, by itself, wouldn’t have required a geographic restrict if clients had been moderately outlined and identifiable. However on this case, the phrases “present or potential clients” was overly broad and imprecise.

Third, the clause is ambiguous. “Present or potential clients” was outlined within the settlement as “a person or entity with which [the employee] personally had direct or oblique contact, or entry to conduct confidential details about, over the past two years of [his employment].” However this might prohibit the previous worker from accepting work from somebody he could by no means have had contact with EVEN IF he had entry to confidential details about them. It’s not clear how the worker would be capable to establish such folks. The clause additionally makes use of the phrase “oblique contact” with out explaining what which means.

Fourth, the clause purports to limit the worker from accepting work from his private contacts who could have had nothing to do with the employer at any time.

Lastly, the employer had not confirmed irreparable hurt to justify implementing the restrictive covenant. Per the Courtroom: “I’m not happy on this document that the [employer] is liable to lack of market share, substantial lack of income, or harm to its enterprise repute. The [employer’s] proof is, at turns, speculative, exaggerated, unsupported, or not forthright.”

The employer misplaced the movement and was ordered to pay the previous worker $47,488.82 in prices.

2021 Choice:
Worker + Non-Compete = Unenforceable
In PointOne Graphics Inc. v. Roszkowski et. al.,¹¹ a print store worker signed an employment settlement that precluded him from competing for 1 yr after leaving. The time period of the contract was renewed solely till 2007. In 2017, the worker left to start out working at a competing print store enterprise. The employer sued to and tried to implement the non-compete clause by bringing a movement for an interlocutory injunction.

The Ontario Superior Courtroom of Justice reiterated the jurisprudence on the enforceability of non-compete clauses (i.e. they’re usually presumed void as opposite to public coverage, unenforceable besides in distinctive circumstances; they have to be affordable; they have to be wanted to guard a authorized proprietary curiosity; they have to be clearly drafted, and many others.).

However then the Courtroom concluded that the non-compete right here (one which the employer was attempting to implicitly depend on primarily based on a many years’ previous and expired employment settlement) “is a fiction.” Per the Courtroom: “…courts shouldn’t be studying restrictive phrases into employment contracts when the events haven’t bargained for them. For my part, neither ought to courts learn in or indicate a restrictive covenant into an employment contract the place the events have bargained for one, after which allowed it to lapse.”¹²

Because the employer couldn’t show that the non-compete existed, it couldn’t search an injunction. The Courtroom dismissed the movement and ordered the employer to pay $29,000 in prices to the previous worker.

Now Wait Only a Second…
As proven above, the non-compete clauses failed as a result of the employer had no official proprietary curiosity value defending. Or as a result of the clauses had been unreasonable, overly broad, or ambiguous. Or as a result of the employer couldn’t set up damages (and no matter whether or not the employment settlement mentioned they wanted to or not). Or as a result of they had been a part of an expired settlement.

Now I do know what you’re considering: “However all of those latest Ontario circumstances solely handled purely employment relationships. What about affiliate/principal relationships, that are usually framed as an impartial contractor (affiliate) offering providers to a consumer (principal)?”

Effectively, this takes us again to the start of this text: when it’s a purely affiliate/principal relationship (no buy and sale concerned), Ontario Courts have taken the identical strategy as an employer/worker relationship.

Within the seminal case of Lyons v. Multari,¹³ the Ontario Courtroom of Enchantment discovered {that a} 3-year and 5-mile non-compete clause between a principal oral surgeon and his junior affiliate was unenforceable as a result of:

• The affiliate dentist had solely been there for two years and was not the “dominant determine,” “entrance man” or “principal contact” with respect to referring dentists and sufferers.
• The affiliate took no commerce secrets and techniques with him when he departed and by no means noticed a listing of sufferers or referring dentists.
• The principal dentist managed the apply and, within the eyes of referring dentists, was the personification of that apply.
• The principal dentist might have no real interest in referring dentists that stopped or by no means referred to him.
• The principal dentist’s curiosity in defending his present referring dentists might have been protected with a easy non-solicitation clause.
• Solely in “distinctive circumstances” will a non-compete clause be upheld. This was not the case right here. Per the Courtroom: “Certainly, the Lyons-Multari relationship strikes me because the norm in knowledgeable setting.”

The identical authorized ideas mentioned within the circumstances above would apply in a purely affiliate/principal relationship.

Should you’re questioning what might represent “distinctive circumstances” warranting enforcement, the Manitoba Courtroom of Enchantment in Winnipeg Livestock Gross sales Ltd. v. Plewman¹⁴ shed some mild on this by noting the next related components:

1. The size of service with the employer.
2. The quantity of private service to purchasers.
3. Whether or not the worker handled purchasers solely, or on a sustained or recurring foundation.
4. Whether or not the information in regards to the consumer which the worker gained was of a confidential nature, or concerned an intimate information of the consumer‘s specific wants, preferences or idiosyncrasies.
5. Whether or not the character of the worker‘s work meant that the worker had affect over purchasers within the sense that the purchasers relied upon the worker‘s recommendation, or trusted the worker.
6. If competitors by the worker has already occurred, whether or not there may be proof that purchasers have switched their customized to him, particularly with out direct solicitation.
7. The character of the enterprise with respect as to if private information of the purchasers‘ confidential issues is required.
8. The character of the enterprise with respect to the power of buyer loyalty, how purchasers are received and saved, and whether or not the clientele is a recurring one.
9. The group concerned and whether or not there have been clientele but to be exploited by anybody.

Up to now, I’ve discovered no Canadian courtroom case the place a non-compete in a purely employment or quasi-employment context is enforced on the grounds of “distinctive circumstances.”

Now, with that mentioned, Canadian Courts have enforced non-compete clauses the place somebody sells their enterprise and agrees to not compete. In these contexts, the customer/employer and vendor/worker have equal bargaining energy on the time of getting into into the non-compete and the customer/employer requires additional safety to assist protect the goodwill that they simply purchased.¹⁵

Backside line: dentists ought to concentrate on the authorized pitfalls that encompass the enforceability of non-compete clauses in authorized paperwork and search skilled assist when negotiating or attempting to depend on them. Should you’re contemplating promoting, shopping for or getting into into an associateship, you may contact the writer for a free telephone seek the advice of.

References

1. Michael Carabash, “Are Non-Compete Clauses Authorized?”, Ontario Dentist, September 2016, pp. 58-60.
2. Ibid., p. 60.
3. See for instance: Lyons v. Multari 2000 CanLII 16851, H.L. Staebler Firm Restricted v. Allan, 2008 ONCA 576 (CanLII), Donaldson Journey Inc. v. Murphy et al, 2016 ONSC 740 (CanLII), reaffirmed in 2016 ONCA 649 (CanLII)
4. See for instance: Button v. Jones, [2001] O.J. No. 1976, Dr. Jack Newton Dentistry Skilled Corp. v. Towell, [2005] O.J. No. 4415
5. 2019 ONSC 7437 (CanLII).
6. 2020 ONSC 3555 (CanLII).
7. Ibid., at para. 21.
8. Ibid., at para. 4.
9. Ibid., at paras. 22-23.
10. 2021 ONSC 2195 (CanLII).
11. 2021 ONSC 629 (CanLII).
12. Ibid., at para. 25.
13. 2000 CanLII 16851.
14. [2001] 1 W.W.R. 153.
15. See for instance: Button v. Jones, [2001] O.J. No. 1976, Dr. Jack Newton Dentistry Skilled Corp. v. Towell, [2005] O.J. No. 4415 and Jones v Gerosa, 2016 ABQB 207 (CanLII).

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Concerning the Writer

Michael Carabash, BA, LLB, JD, MBA, CDPM is a founding accomplice of DMC LLP, Canada’s largest dental-only regulation agency that helps dentists put together, market and promote practices in Ontario. Michael leads DMC’s annual Caribbean dental mission journeys (Grenada, Jamaica and Turks & Caicos). Should you’re serious about promoting, contact Michael at [email protected] or 647.680.9530.

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