In Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, the ON Court of Appeal had to determine the enforceability of a non-competition clause in relation to a dental practice.
Background
Dr. Sims purchased Dr. Cooke’s dental practice (the “Practice”) in July 2017. The share purchase agreement (the “Agreement”) required Dr. Cooke to work two-five years in the Practice. Pursuant to the Agreement as well as a stand-alone agreement, Dr. Cooke also covenanted not to work within a 15 km radius of the Practice for a period of five years after leaving the Practice.
Approximately eight months after the parties’ association ended, in November 2020, Dr. Cooke commenced working for a dental practice located 3.3 km away from the Practice. Dr. Sims obtained an interlocutory injunction against Dr. Cooke and from August 2021 until April 2022 Dr. Cooke worked at a different location. At trial, Dr. Cooke argued that the non-competition clause in the Agreement was unenforceable given the duration and geographic location. When he was unsuccessful, Dr. Cooke appealed to the ON Court of Appeal.
Decision
Affirming the decision of the lower court, the Court of Appeal held that the covenant was enforceable.
The Court noted that although courts “regularly find” restrictive convents with a duration of five years to be reasonable in the context of the purchase and sale of a business and the purpose of a restrictive covenant in these circumstances was to protect the goodwill of a business that is sold from being diminished by the vendor’s own actions, “[e]verything depends on the nature of the business, and each case must be assessed in light of its own circumstances”. The Court noted, in the circumstances of this case, the trial judge accepted Dr. Sims’ evidence that the five-year period that the parties had agreed to, reflected the reality that it took a patient several years to build a relationship of trust with their dentist and that Dr. Cooke’s own evidence at trial had been that he knew that more than 100 patients intended to leave the Practice at the end of the two-year period, when his association was terminated.
In terms of geographic location, the Court stated the trial judge had noted that a 15 km radius had been considered appropriate in other cases involving dental practices, and it was reasonable in the current circumstances as it would have made it very easy for Dr. Cooke’s patients to have followed him if he had moved to a location that was nearby. The Court also noted that Dr. Cooke’s counsel had not raised any objections about the duration and scope of the Agreement, during negotiations.
Takeaways
- The purpose of restrictive covenants in the context of the purchase and sale of a business is to protect the interests of the purchaser and the goodwill of a business.
- Restrictive covenants in the context of the purchase and sale of a business are generally presumed to be valid. However, the reasonableness of impugned restrictive covenants must be determined based on the facts and circumstances of each case.
- Parties should exercise due diligence when entering into restrictive covenants. The time to raise concerns about the reasonableness of a restrictive covenant is during negotiation. In the current situation, the evidence of Dr. Cooke’s solicitor at trial was that it was not raised as an issue at the time the parties entered into the Agreement.
- NB: unlike restrictive covenants in purchase and sale situations, restrictive covenants in employment relationships are presumed to be invalid, and the burden of proving otherwise lies with the employer. Note also that effective October 25, 2021, non-compete clauses in employment relationships are prohibited in Ontario with certain exceptions.
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