So once in a while, we get a case where the court is asked to decide on whether a non-solicitation clause is valid and enforceable. And we dental lawyers need to be on top of these cases because a lot of what we draft includes non-compete and non-solicitation clauses (purchase and sale agreements, associate agreement, staff contracts, etc.).
So in July of this year, the Ontario Superior Court of Justice released its decision in the case of MD PHYSICIAN SERVICES INC. et al. v. DUANE WISNIEWSKI et al. , ONSC 2772. The facts of that case are as follows: MD Management Limited and a bunch of other companies owned by it (“MDM“) offered products and services primarily to Canadian physicians. We have 2 individuals, Duane Wisniewski and Joy Sleeth, who were employees of MDM until they left in 2013 to join a competitor firm, RBC Dominion Securities. MDM alleged that these individuals breached the non-solicitation terms of their employment contracts.
Now, the individuals claimed that those terms were unenforceable because they were too vague, too unreasonable, and there was a lack of consideration (required to make a bargain) that was given to these individuals in exchange for including the non-solicit clauses. Alternatively, these individuals claimed that they never breached the non-solicit because it was reasonable for them to notify clients of their new employment and that it was contrary to public policy to enforce these types of clauses anyways (so clients can have a more fully informed decision about the future direction of their investments).
The Ontario Superior Court of Justice didn’t buy it. First off, Joy Sleeth had signed / acknowledged non-solicitation clauses as part of her employment with MDM over many years and promotions. For his part, Duane Wisniewski had done the same. So the court ruled out that these individuals didn’t know what they were signing and sufficient consideration (namely continued employment) had been given.
With respect to the use of non-solicit, the Court stated the following:
Then the Court moved on to the issue of whether the specific non-solicit clause was enforceable. Did MDM have a proprietary interest entitled to protection? Yes. Because the individuals are paid based on a percentage of fees generated by that business, with no base salary. The book of business hence became a capital asset for them. But the client lists were provided to the individuals and created based on the efforts of MDM. MDM should have its list protected because it has a genuine interest in ensuring that it is not used simply as an opportunity for financial planners to make contact with physician investors within the relatively protected environment of the firm and then attempt to utilize those contacts to take customers away from it.
Was the restrictive covenant reasonable in terms of the public interest? Yes. It was only for a 2 year time limit after the relationship ended. It wasn’t a drastic non-compete clause. And there were lots of other Ontario cases that enforced a 2 year non-solicit: Syntax Systems Ltd. v. Mid Range Computer Group Inc.  O.J. No. 3684 (Ont. S.C.J.), Smilecorp Inc. v. Pesin  O.J. No. 5734 (Ont. S.C.J.). Based on this, the non-solicit was neither ambiguous nor unreasonable.
Was the restrictive covenant ambiguous with respect to length of time, geographic scope or scope of proscribed activities? No. The individuals were limited in who they could contact based on the terms of the agreement and the Oxford definition of “solicit”. But they could still, for example, freely solicit clients of MDM whom they had not serviced and anyone else, including physicians, who had never been a client of MDM whom they had served as an investment advisor or had encouraged to become an investor with MDM.
Now, importantly, the geographic restriction which was included in the non-solicit agreement appeared to be unhelpful: the non-solicit said that the individuals were not to solicit “within the geographic area within which s/he provided services to the employer”. Well, this is pretty vague and without precision. So would the court throw out the whole non-solicitation clause on this basis? NO. Instead the court held that the geographic description neither adds to nor detracts from the non-solicitation provision. The reason being that the individuals could have serviced or solicited clients of MDM from wherever they were (financial advice can and is provided over both long and short distances). The geographic restriction was so trivial and not part of the main purports of the restrictive covenant that it was simply severed and did not form part of the Court’s assessment as to whether the non-solicitation agreement is enforceable!
For these reasons, the Court found that the individuals had breached the non-solicitation clauses and RBC Dominion Securities was vicariously liable because it instructed them to contact former clients and coached them on how to do it. Costs were to be decided at a later point.
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.
I heard this song on the radio this morning, and it went really well with an email I received from a Dentist today:
Just following up on some unconventional non-compete cases that recently came out of BC and Alberta (that left a somewhat unsatisfactory taste in my mouth), which I blogged about here, I’m pleased to announce that Ontario Dentist will be publishing a new article entitled written by myself, Jonathan Borrelli (our employment law lawyer) and Ljubica Durlovska (our employment law lawyer) entitled “Are Non-Complete Clauses Legal In Ontario? It Depends…” It will be out later this year (likely in the Fall) and, as usual, it will be available for download for free on this website.
Hmmm… some interesting things are happening out West with non-compete clauses in associate agreements (the first one involved a veterinarian associate in BC; the second one involved two dentist associates in Alberta). Here are some recent cases and my thoughts are at the end:
Unconventional Non-Compete (BC Case) = Enforceable!!!
In a recent B.C. case involving a veterinarian, the B.C. Court of Appeal enforced an unconventional non-compete clause. In Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97, a veterinarian (Dr. Steph Rhebergen) signed an employment agreement with a veterinary clinic (Creston Veterinary Clinic Ltd.) that contained a non-compete clause. The non-compete clause required Dr. Rhebergen to pay fixed sums of money to the Clinic if she “sets up a veterinary practice in Creston, BC or within a twenty five (25) mile radius” of the Clinic within certain timeframes after the termination of the employment contract. The amounts varied from $150,000 if her practice was set up within 1 year of the contract being terminated to $90,000 if her practice was set up within 3 years of the contract being terminated. This non-compete was unconventional because the amounts to be paid were based upon the occurrence of an event (as opposed to a breach of the contract) – namely, setting up a competing veterinary clinic within a restricted area.
Dr. Rhebergen challenged the non-compete and asked that it be declared unenforceable. The B.C. Supreme Court agreed, finding that it was an illegal penalty, unreasonable, and vague. The Court also cited the Ontario case of Lyons v. Multari in concluding that this was not an exceptional case warranting the enforcement of a non-competition clause.
On appeal, however, the B.C. Court of Appeal upheld the non-compete. The Court noted that the lump sum payment wasn’t an illegal penalty but rather compensation for the costs incurred by the veterinary clinic for training Dr. Rhebergen (which she acknowledged was reasonable). Further, the Court found that the non-compete clause was clear enough to be enforceable. If Dr. Rhebergen intended to provide veterinary services on a regular or continuous basis within the restricted area, then the non-compete would be triggered. The Court also took into account the factual matrix: there were no other veterinary clinics around, and given that there were only 8 dairy herds (patients / clients of the Clinic) in the restricted area where Dr. Rhebergen was interested in targeting, she would necessarily have to set up her practice within that restricted area. Dr. Rhebergen admitted that her intention was to set up a practice in order to compete with the clinic for its existing clients, thereby violating the non-compete clause. For these reasons, her case was dismissed.
Unconventional Non-Compete (Alberta Case) = Enforceable!!!
A recent Alberta case resulted in the Court upholding an unconventional non-compete clause.
In Jones v. Gerosa, 2016 ABQB 207, Dr. Robert Martin Jones sued two former associate dentists (Drs. Mary Gerosa and Jack Phan) for breaching identical non-compete clauses in their associate agreements after they resigned and set up a new clinic shortly thereafter. The non-compete clauses stated that the associates were not to be “engaged in the practice of Dentistry at any location with the City of Fort McMurray, Province of Alberta or a radius of fifty miles thereof”; the non-compete had no time limitation. Unconventionally, the non-competes said that the associates were free to practice anywhere so long as they purchased their portion of the goodwill from Dr. Jones’ clinic, calculated at $90,000 each.
Drs. Gerosa and Phan argued that the non-compete clauses were unenforceable because, among other things, they constituted an illegal penalty and were uncertain and unreasonable (namely, because 50 miles surrounding Fort McMurray was too large, there weren’t any time limitations, and they were contrary to the public interest).
The Alberta Court of Queen’s Bench, however, found in favour of Dr. Jones and ordered the associates to each pay him $90,000. The Court found that the permissive nature of the non-compete clauses constituted license fees to compete instead of an illegal penalties. The clauses were also clear and reasonable enough to enforce. Despite there being no time limits, the reality was that Drs. Gerosa and Phan set up their new clinic very quickly after leaving and acquired 800 patients from Dr. Jones’ clinic within the first 2 years, generating over $650,000 in fees. These facts, coupled with a lack of evidence to suggest that them each paying $90,000 would be crippling and tantamount to an absolute prohibition, led the Court to conclude that that amount was reasonable. There was also no evidence to suggest that the territorial restriction was too broad or unreasonable.
With respect to the non-compete clauses being unreasonable in the public interest, the Court wrote: “I do not think the public is too concerned about how much money dentists are able to generate from their practices, or what it may cost them to set up. There is ultimately no evidence as to any negative impact the clauses may have had on the public in Fort McMurray at the time.”
I think these cases are interesting because the non-compete clauses are permissive in nature; if you want to compete, you just need to pay. And that’s what makes them different from a traditional non-compete which, following the seminal Ontario case of Lyons v. Multari, are generally unenforceable except in exceptional circumstances (particularly given that a non-solicitation could have sufficed). I actually think the courts came to the right decision in not characterizing these payments as penalties but rather license fees to compete.
I think the biggest difficult I have in loving the BC Court of Appeal’s decision in Rhebergen v. Creston Veterinary Clinic Ltd. is that they didn’t (nor did they have to) give any credit to Lyons v. Multari – as the lower court in that case did. The BC Court of Appeal wrote a very SHORT decision and focused on issues such as reasonableness, the factual matrix, and the way in which the veterinary brought the legal challenge forward. I’m not in love with this decision.
I’m also not in love with the Alberta Court’s decision in Jones v. Grosa because there was no temporal limitation on the non-compete and because there was a general lack of evidence on a lot of the different topics that were important to the court’s ultimate decision. So the court simply looked at the facts (before and after material events took place) and made decisions with 20/20 hindsight.
These things being said, I do recognize that these courts were faced with an unconventional non-compete clause and unusual circumstances. I’m curious to see how an Ontario court – following Ontario laws but faced with an unconventional non-compete clause such as the one above – would decide cases like the two above. Keep in mind that an Ontario Court would be influenced to follow Lyons v. Multari as a starting point and NOT Rhebergen v. Creston Veterinary Clinic Ltd. (despite it being a BC Court of Appeal case) and NOT Jones v. Grosa (a decision from an Alberta lower court).
Please note that the information contained herein is for educational purposes only and is not intended to be relied upon for any legal advice. If you need legal advice, please contact me (Michael Carabash) or David Mayzel.
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