OK, so I get into these heated debates with other lawyers and dentists about the enforecability of non-compete clauses, non-solicit clauses and liquidated damages clauses (you know the thing that says you’ll need to pay $250k if you solicit a staff member?). My view is supported by cases that stretch back decades: (1) non-competes for entry level associates are generally unenforceable except in exceptional circumstances, (2) non-solicitation clauses can be enforceable but they should specify what kinds of activities are prohibited, and (3) liquidated damages clauses are often a punishment (which a court will have difficulty enforcing) instead of a genuine pre-estimate of damages (which a court will enforce). Despite these views, people still push to include them in their agreements. Likely because they’re good to have in their for negotiating positions / settlements.
Well, let me tell you something: I love being right. And here’s another example of a recent case in British Columbia that dealt with these exact issues.
In IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (decided November 7, 2016), the B.C. Supreme Court had to decide whether a non-compete, non-solicit, and liquidated damages clauses found in an employment agreement with an optometrist were legal and enforceable. They were not.
By way of background, Dr. Hannah Park was an employee of IRIS the Visual Group Western Canada Inc. Those parties entered into 2 written agreements that contained restrictions. The first restriction was a non-compete. It said that Dr. Park couldn’t compete within 3 years after the agreement was terminated within 5 km of the IRIS Vernon outlet. Second, Dr. Park agreed not to solicit, interfere with or endeavour to entice any customer, patient, etc. that is “in the habit of dealing with” her employer. Third, Dr. Park agreed that, if her employer wanted her to transfer her patient records and she didn’t, she would have to pay a chart fee of $100 per chart. Finally, and importantly, if Dr. Park does violate these sections, she’s on the hook for some hefty amounts owed to her employer – namely, the higher of $75,000 OR $50,000 multiplied by the number of years / partial years that Dr. Park practices optometry from the location after starting with her employer up to $250k!
Non-Compete: the Court found that the non-compete was unenforceable because it was too broad:
Interestingly, the Court found, based on the evidence before it, that the restricted geographic area and time were reasonable in those circumstances in light of IRIS’ legitimate interest in protecting its patient base.
Non-Solicit: Dr. Park ran an ad in 3 editions of a local newspaper which included information about the opening of her new clinic and included the words “Dr. Park looks forward to seeing familiar faces and welcoming new patients”. IRIS argued that the “familiar faces” reference meant she was soliciting their patients. But the court disagreed because of the precise wording used in the non-solicit clause – which made reference to customers “in the habit” of dealing with her employer. The Court noted that this phrase “in the habit” was too vague to be enforceable. The Court further noted that, a non-solicit clause, unless it specifically says so, doesn’t prevent someone from doing general advertising in the media. This was following 2 Ontario court cases which I’ve previously discussed here. Given the difficulty in interpreting the clause and figuring out whether Dr. Park had intentionally targeted repeat customers, the employer’s claim failed.
Liquidated Damages: Dr. Park didn’t pay too much attention to the liquidated damages clause when she signed. She was concerned with her hours, just had a baby, etc. But when she got to court, she argued that the liquidated damages clauses were actually ILLEGAL penalties and NOT a LEGAL genuine pre-estimate of damages. The Court noted that the provisions allowed Dr. Park to end up paying, at the maximum, $250k if she violates the failure to pay $100 per chart / non-compete / non solicitation clauses discussed above. The Court found it “extravagant and unconscionable that a single breach of section 6, which would result in a $100 payment under that section, could also expose Dr. Park to a claim for $250,000 in damages under section 7. In light of this, I conclude that section 7 provides for a penalty and not liquidated damages”. When a clause is found to be a penalty, the next thing the Court will ask is whether any relief should be granted against the penalty. In this particular case, the Court didn’t have enough evidence before it so it refused to decide whether Dr. Park should be relieved from the penalty.
What happens if you’re buying / selling a practice or doing a corporate re-organization and you need to transfer an associate / staff agreement over to the new corporation? Is it binding and enforceable? Do you need the associate or staff’s consent to assign? Let’s look at the recent Alberta case of Goska J. Nowak Professional Corp. v. Robinson,  A.W.L.D. 3752. There, the Alberta Court of Appeal had to determine whether a non-compete clause in a dentist associate agreement was binding in light of a series of transfers / transactions taking place.
Here’s what happened:
Everybody with me so far? This is fairly standard stuff in the world of dental practice mergers and acquisitions… but I digress…
So at trial, the judge basically said that the associate agreement with the non-compete was particular to Dr. Robbie Robinson as a consequence of his skill. Thus, it could NOT be assigned without his consent and was unenforceable in the absent of that consent. So when R. Robinson PC transferred its assets and was dissolved in 2002, it disavowed all of its rights under the associate agreement and abandoned any rights to services under the agreement. Per the trial judge, the associate agreement was effectively unenforceable – even after Dr. Nowak revived R. Robinson PC to try to enforce the agreement.
On appeal, the Court of Appeal agreed with the trial judge:
I heard this song on the radio this morning, and it went really well with an email I received from a Dentist today:
I keep my eyes in new employment cases in Ontario but also across Canada. There was a recent case about policy manuals that caught my attention because I know a lot of Dentists operate their practices in a similar way.
Here’s the main takeaway: an Employee Policy Manual has to be introduced and used properly if the policies are to be effective. Read more
As I normally advise my dentist clients (who are usually — if not always — employers), their staff have to co-operate in the accommodation they request. It is not a “one-way street” – its a process where the two parties work together to find the best solution. Read more
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or email@example.com.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or firstname.lastname@example.org.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or email@example.com.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or firstname.lastname@example.org.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or email@example.com.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or firstname.lastname@example.org.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.