Ambiguous and Overbroad Non-Compete Covenant Deemed Unenforceable

Written on behalf of Peter McSherry

Our recent blog post provided an overview of Ontario’s new rules around non-competition and non-solicitation clauses in employment contracts. In a recent decision, the Ontario Court of Appeal provided us with an opportunity to better understand the application of these concepts in the employment law world.

Pharmacist entered into contract that included non-competition covenant

In M&P Drug Mart Inc. v. Norton, the respondent pharmacist, Norton, had worked for Hometown IDA pharmacy since 1980. In 2014, Hometown IDA was acquired by M&P Drug Mart (“M&P”), who wished to continue employing the respondent after the acquisition. Accordingly, the parties entered into an employment agreement on May 8, 2014, which stated that the respondent would serve as the pharmacy manager. 

The respondent had obtained legal advice before entering into the agreement and, therefore, the terms of the agreement, specifically the non-competition covenant, had been the subject of substantial negotiations between the parties. The respondent had leverage over M&P due to his level of experience. Further, M&P made concessions in his favour to secure his employment.

The terms of the non-competition covenant

The non-competition covenant in the employment agreement read as follows:

“The Employee agrees that during the Employee’s employment with the Company and during the one-year period following the termination of the Employee’s employment with the Company, for any reason whatsoever, the Employee shall not carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to or competitive with the business within a fifteen (15) kilometre radius of the business located at [Hometown IDA’s business address].” 

The employment contract also included a provision whereby the respondent acknowledged that the non-competition covenant was necessary to protect M&P’s legitimate business interests and was “reasonable in the circumstances.”

Pharmacist terminates employment and takes job with another pharmacy

On September 25, 2020, the respondent pharmacist resigned from his employment with M&P. He went to work as a pharmacist at another pharmacy less than three kilometres away from Hometown IDA. M&P reminded the respondent of the terms of the non-competition covenant, however, the respondent claimed that it was unenforceable. 

M&P applied to the Ontario Superior Court of Justice to have the non-competition covenant enforced against the respondent. 

Application judge finds the non-competition covenant unenforceable

In its application, M&P alleged that the respondent breached the non-competition covenant when he began working for another pharmacy prior to the end of the one-year term, as stipulated in the covenant. 

The application judge dismissed the application, finding that the covenant was unreasonable because it was ambiguous or because its scope prohibited activities that were overly broad. Accordingly, the covenant was deemed unenforceable. 

M&P appealed the decision to the Ontario Court of Appeal.

Court of Appeal explains common law framework for analyzing non-competition clauses

The Court of Appeal noted that the events leading up to the litigation took place prior to the amendments to the Employment Standards Act, which expressly prohibit non-competition covenants outside of very limited circumstances, and therefore, the common law rules applied to the case.

The Court explained that at common law, the general rule is that a contractual provision which restrains an employee from competing with their employer, after terminating their employment, is unenforceable on public policy grounds. However, such a provision may be upheld if it is reasonable given the context and the interests of the parties and the public. To assess reasonableness, the Court must examine the covenant’s scope, duration, and geographic reach. 

Court of Appeal agrees with application judge’s finding of ambiguity

Applying the framework to the facts of the case, the Court first turned to the question of whether the application judge erred in deciding the covenant was ambiguous. In this case, M&P had the onus of establishing that the clear meaning of the covenant was a reasonable restriction of the activity. This onus is not satisfied if the covenant language is found to be ambiguous.

Analyzing the specific wording of the non-competition covenant, the Court held that the wording restricted all undertakings that have non-pharmacy aspects to their business, and therefore have non-pharmacy-related job positions. In theory, this could preclude the respondent from working in a non-pharmacist role at a supermarket that had a pharmacy department. As such, the Court found no error in the application judge’s decision that the covenant was ambiguous. 

Court of Appeal concurs with application judge’s determination of overbreadth 

M&P argued that the application judge erred in finding that covenant was overbroad. The application judge had determined that the covenant would prevent the respondent from doing work unrelated to working as a pharmacist for a business that had a pharmacy. The language seemed to prevent the respondent from being a passive investor in any such business, given the use of the terms “interested in” or “concerned with.”

The Court of Appeal agreed with the application judge in finding that M&P’s argument on this point was flawed. 

Court of Appeal upholds application judge’s interpretation of the covenant

M&P alleged that the application judge wrongly interpreted the language in the covenant to include activities beyond the respondent working as a pharmacist. M&P referred to pre-contractual negotiations which, it claimed, showed that its main concern was with the respondent going to work as a pharmacist at another pharmacy.

The Court of Appeal dismissed this argument, saying that the language of the covenant is the primary indicator of contractual meaning. Ultimately, in this case, the language of the covenant was found to be overly broad. 

Contact Peter A. McSherry Employment Lawyer in Guelph for Advice on Non-Solicitation and Non-Compete Clauses

Have you been asked to sign an employment contract that includes a non-compete or non-solicitation clause? At Peter A. McSherry Lawyers, our experienced employment law team can help you understand your employment agreement. We will also advise you on the enforceability of a non-compete or non-solicitation clause. We ensure that every employee’s rights are protected throughout negotiations and litigation, if necessary. To speak with a trusted employment law team member, contact us online or by phone at 519-821-5465.