Here at DMC, we keep a close eye on whenever courts in Canada have something to say about restrictive covenants and non-solicits (just like Michael Carabash did not too long ago).
I just read a recent case (from Quebec) that put a nice big check mark on the side of Principals and Employers and protecting their Non-Solicitation (non-solicit) clauses and their businesses.
Filed under Blog, Non Compete | Non Solicit, Staff · Tagged with are non solicitation clauses legal, associate agreements, damages, dental lawyers, dental office, DMC LLP, jointly and severally liable, Jonathan Borrelli, liquidated damages, non solicit, non solicitation, non solicitation agreement, penalize employee, quebec not ontario, restrictive covenants
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.
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 firstname.lastname@example.org.
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 email@example.com.
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 firstname.lastname@example.org.
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 email@example.com.
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 firstname.lastname@example.org.
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 email@example.com.
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.