A 2024 decision of the Ontario Court of Appeal, Dr. C. Sims Dentistry Professional Corporation v. Cooke, affirmed the enforceability of a restrictive non-competition covenant or clause (sometimes referred to informally as a "non-compete")1 in a business purchase and sale agreement of a dental practice. The court also set out the conditions that will help it determine the enforceability of a such clauses.
Background
In July 2017, Dr. Sims entered into a purchase and sale agreement to purchase Dr. Cooke's dental practice (the "Agreement"). The Agreement included a non-competition covenant which specified that Dr. Cooke was required to work in the practice for a period of two to five years to ensure patients properly transition to the new dentist and he was prohibited from working within a 15 km radius of the practice for five years after his association with the practice ended. Following his departure from the practice, Dr. Cooke began working at a dental practice 3.3 km away. Dr. Cooke argued that the non-competition covenant in the Agreement was unenforceable.
Dr. Sims commenced an action in the Superior Court of Ontario. The trial judge found the non-competition covenant was reasonable and enforceable. Dr. Cooke appealed this decision.
Court of Appeal Decision
Upholding the Superior Court decision, the Court of Appeal affirmed that the covenant was reasonable and enforceable between the parties. The Court provided specific guidance regarding the conditions in the non-competition covenant that make it enforceable.
1. General Principles of Enforceability of Restrictive Covenants
A court will generally scrutinize the reasonableness of a restrictive covenant more in an employment context due to the power imbalance between the parties. However, when restrictive covenants arise in a commercial context for the sale of a business, these covenants are presumed to be valid. Additionally, when these covenants are the "best and most reliable expression" of the parties' joint intentions, they will be presumed to be legal. However, the specific circumstances of the restriction will still be assessed, such as duration and geographic scope of the restriction.
The Court of Appeal found that the trial judge appropriately assessed the specific circumstances of the parties' transaction and the covenant as a whole. There was evidence that both parties intended to include a15 km radius for 5 years which was outlined in the Agreement. Dr. Cooke had a valuation of the practice prepared for prospective buyers of his dentistry practice which considered "maximum patient retention" and a limitation on engaging in the practice of dentistry within a "reasonable radius". Both parties also had legal representation during negotiations and in that time, Dr. Cooke's counsel did not raise any issue with the scope or duration of the non-competition covenant.
2. Duration of a Non-Competition Covenant
A court's determination of whether restrictive covenants with a specified duration are reasonable depends on the "nature of the business" and is ultimately a case-by-case determination.
Dr. Sims argued that 5 years was reasonable because that is typically the amount of time it would take to build trusting relationships where patients transition to a new dentist, since patients usually only see their dentists annually. The purpose of the covenant is to protect the business (and purchaser) from competition or from being devalued by losing patients during this transitional period. Therefore, Dr. Cooke's employment at a nearby dentistry practice was found to be a breach of the covenant.
3. Geographic Scope of a Non-Competition Covenant
Generally, the geographic scope of a restrictive covenant should be limited to the location where the business conducts activities.
Dr. Cooke argued the geographic scope was broader than necessary to protect Dr. Sims legitimate business interests. The Court disagreed citing the trial judge's consideration that a 15 km radius was appropriate in similar cases involving dental practices (indicating how far a patient might be willing to travel to access dental services). The court also noted that Dr. Cooke had agreed to the geographic scope of the covenant.
Key Takeaways
This decision provides a greater understanding of what courts view as reasonable with respect to the duration and geographic scope of a non-competition covenants in a practice purchase and sale agreement.
- A five-year non-competition covenant will generally be considered reasonable, but this ultimately depends on the nature of the business and whether there are any unique circumstances to consider.
- A 15 km geographic scope may be reasonable, but when setting the geographic scope of a non-competition covenant one should consider the area in which the business participates in the marketplace, which may include how far clients are willing to travel to access the dentist's services.
- When drafting and negotiating purchase and sale agreements it is important to protect the goodwill and interests of the party purchasing the business.
- Negotiating parties should be careful and diligent in reading their agreement – and seek legal assistance – so that they understand the terms and covenants at the time of entering into the agreement.
Footnote
1. Non-compete clauses typically restrict a party from working with, or starting, a competing business for a specified time and within a specified geographic area.
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