When someone is offered a new job or the opportunity to sell their business, it is not uncommon that they may jump into their new arrangement without necessarily reading, appreciating, or perhaps intending to follow the contract in its totality. A particular type of clause that can cause concern is a non-compete clause. The intention of such a clause might be to prohibit an employee from leaving one employer to work with a competitor, or to prevent someone from selling a business to immediately start a new one of the same nature.
In October 2021, Ontario passed the Working for Workers Act (the “Act”) which prohibits employers from imposing non-compete agreements with employees. However, as we see in a recent decision from the Ontario Superior Court of Justice in Parekh et al v. Schecter et al, the Act does not necessarily mean that people who have already entered into such agreements can now ignore non-compete clauses.
Father-son dentists sell their practice, father signs non-compete agreement
The plaintiffs purchased a dental practice from the father, Dr. Ira Schecter (referred to as “I.S.”), and son, Dr. Michael Schecter (referred to as “M.S.”), defendants in 2020. M.S. joined his father’s practice in 2006 and it was then marketed as a father-son business. In 2012 or 2013, I.S. sold his shares in the practice to M.S. but he continued to practice dentistry with the company and treat clients outside of the clinic.
In 2020, M.S.sold the practice to the plaintiffs for $5.6 million. I.S. said he was involved with the sale to some degree, but M.S. primarily led the sale. There were a number of conditions related to the sale, including that I.S. would continue working at the practice for four years, as the plaintiffs deemed him an integral part of the business. Another condition was a non-compete clause which would restrict I.S. from practicing dentistry within a 5-kilometer radius of the existing practice, and restricted him from directly or indirectly soliciting clients from the existing business if he were to work elsewhere.
I.S. resigned from the practice in 2021 and shortly thereafter began to treat patients at another office which was “just” over a 5 kilometer drive from his previous practice, however was still technically within a 5-kilometer radius. A preliminary hearing found that I.S. was prohibited from treating patients at his new employer’s practice, however it was unclear how long the prohibition would last.
Disagreement between radius and driving distance
The court quickly confirmed that I.S. remained employed as a dentist under a new employer, whose practice was within a 5-kilometer radius of his previous practice. However, in driving distance, a route could be anywhere from a 5.2 to 6.2-kilometer drive. The court confirmed that the non-compete clause with the plaintiffs was breached, and then turned its attention to whether or not the clause should be enforced.
I.S. argued that the implementation of the Working for Workers Act renders the non-compete clause void as he was considered an employee of his old practice at the time it was sold. He asked the court to apply the Act retroactively to void the clause.
The court referenced the Supreme Court decision of Machtinger v. HOJ Industries Ltd., which held that legislation which affects substantive rights should only be presumed to have a prospective effect, as opposed to a retroactive effect, unless the legislation clearly states that it is intended to apply retroactively. In Parek et al, the Act was silent on any intention to be applied to individuals who had entered into non-compete clauses prior to the Act’s ban which came into enforcement on October 25, 2021.
Non-compete clause breached, but question about enforcement
Since the non-compete clause was determined to still be valid, the court took time to analyze whether an injunction against allowing I.S. to work with his new employer should remain in effect, and if so, for how long.
The court applied a two-part test in determining whether the non-compete clause should be enforced and the injunction upheld. First, it must be established that the clause in question is clear and specific, which it was, as it included specific wording restricting I.S. from working for another dental practice within a 5-kilometer radius (as opposed to a driving distance) and was effective for two years after I.S. was no longer with the practice.
The court rejected the argument from I.S. that there was ambiguity within the language of the clause. Further, the court found there was evidence that I.S. was actively involved in the negotiation of the purchase of the business, and in discussions of a non-compete clause, had requested that the radius be reduced to 5-kilometres from 10-kilometres, which was the distance originally stated in the contract.
Damages probably if clause not upheld
Upon review of the evidence, the court was satisfied that the non-compete clause arose in negotiations between both parties, and that I.S.’ involvement in the business after its sale was a critical piece of the deal. The court did not find the non-compete clause so unreasonable as to go against the public interest, nor did it find it incredibly restrictive, as I.S. was free to seek employment at a dental practice outside of the specified radius. Finally, the clause was only to be enforced for two years after such a triggering date.
The court expected that the plaintiffs would suffer damages if I.S. was allowed to work with the new employer, leading the court to conclude that it would be “fundamentally unjust” to allow I.S. to breach the clause and continue work at the new practice, subsequently allowing the injunction to stand and the clause remained enforced.
Contact Guelph Employment Lawyer Peter A. McSherry for Advice Regarding Non-Compete Clauses
Peter A. McSherry is a trusted and knowledgeable employment lawyer, and has advised clients on various employment law matters, including navigating employment contracts and understanding non-compete clauses. If you have been asked to sign a non-solicitation clause, or have questions regarding the impact of a non-compete clause on your future employment, we will work to ensure that you feel confident before signing any agreement which may impact your future. To find out more about how we can assist you, please contact our office by phone at 519-821-5465 or online.