Retrospective Enforcement of Non-Competition Clauses

Running a business is tough, but it’s even tougher with competition. One of the worst kinds of competition can come from a former employee.

Some employers have tried to limit this risk through the use of what is called a non-competition clause, a provision in an employment agreement that bars a former employee from running a business in competition with their former employer.

The common law has generally disliked the use of non-competition clauses, and as far bas as 1894, the House of Lords stated in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd,

The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable—reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.

This principle was also adopted in Canada, with the Supreme Court of Canada stating in 1978 in Elsley v. J.G. Collins Insurance Agencies Ltd.,

The principles to be applied in considering restrictive covenants of employment are well‑established….

A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. As in many of the cases which come before the courts, competing demands must be weighed. There is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants. On the other hand, the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power. In assessing the opposing interests the word one finds repeated throughout the cases is the word “reasonable.” The test of reasonableness can be applied, however, only in the peculiar circumstances of the particular case. Circumstances are of infinite variety. Other cases may help in enunciating broad general principles but are otherwise of little assistance.

Where these clauses have been upheld in Canada, courts have been particularly careful to read them down to ensure they are reasonable in geographic and temporal scope, and only in light of legitimate interests of an employer.

The public interest is defined more broadly for professions, given that their clients have an interest in procuring the specialized services that they offer. Restrains on trade for professionals could have the unexpected consequence of eliminating these types of services from the public consumption.

The Court of Appeal for Ontario discussed this context in 2000 in Lyons v. Multari, where a dental practice with a basic restrictive covenant was found to be unenforceable, because it would effectively keep the former employee out of business. The court stated,

[46] The broad non-competition clause in this appeal cannot be enforced on the basis that it was required to protect confidential information. When he departed, Dr. Multari took no trade secrets or confidential information with him. He never saw a list of Dr. Lyons’ patients and referring dentists. He did know, of course, the names of the referring dentists of patients he had treated personally. However, a simple non- solicitation covenant would have prevented him from soliciting those dentists.

[49] It is natural that many of those relationships will end after a few years. Sometimes the firm will terminate the relationship; in other cases the associate will decide to move on. For professional and personal reasons, many associates will want to continue to work in the same community after they have left their original employer. There is nothing wrong with such a preference. However, the employer has a legitimate interest to protect — namely, its clients. In my view, in the circumstances of this case, a proper balancing of the interests of the employer and the departing employee is struck by the line drawn in Elsley. As a general rule, non-solicitation clauses are permissible; “in exceptional cases” only, non- competition clauses will be upheld.

This was the state of the law until Dec. 2, 2021, when Bill 27 received Royal Assent. This amendment of the Employment Standards Act, 2000 added new provisions that prohibited non-competition clauses,

67.1 …

“employee” means an employee as defined in subsection 1 (1) and includes an applicant for employment; (“employé”)

“employer” means an employer as defined in subsection 1 (1) and includes a prospective employer; (“employeur”)

“non-compete agreement” means an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends. (“clause de non-concurrence”)

67.2 (1) No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement.

(2) For greater certainty, subsection 5 (1) applies and if an employer contravenes subsection (1), the non-compete agreement is void.[1]

(3) If there is a sale of a business or a part of a business and, as a part of the sale, the purchaser and seller enter into an agreement that prohibits the seller from engaging in any business, work, occupation, profession, project or other activity that is in competition with the purchaser’s business after the sale and, immediately following the sale, the seller becomes an employee of the purchaser, subsection (1) does not apply with respect to that agreement.

(4) Subsection (1) does not apply with respect to an employee who is an executive.

Non-competition clauses are now illegal in Ontario. But how do we deal with a clause that was written and agreed to prior to Bill 27?

The Ontario Superior Court of Justice recently decided this in Parekh et al v. Schecter et al, which also dealt with a dental practice, which was purchased by the plaintiffs. The Share Purchase Agreement contained a term that all dentists at the practice would enter into an employment agreement with the purchasers on closing in 2020.

One of the former dentists stayed with the new owners until 2021, and started his own practice within a 5 km radius of his former employer. This distance was less than the 5 km stipulated in the non-competition agreement.

On his last day of work, the dentist was viewed on video taking 2-3 dozen patient molds. The plaintiffs had not received any transfer requests from any patients, but the defendant dentist claimed he did this out of concern for continuing treatment of these patients.

Justice Sharma heard a motion for injunctive relief, which included upholding the non-solicitation clause. He cited Benner v. Canada (Secretary of State) at para 39, clarifying the distinction between “retroactivity” and “retrospectivity,” and stated,

[45] Remedial legislation is to have a broad and liberal interpretation: Machtinger v. HOJ Industries Ltd.1992 CanLII 102 (SCC), [1992] 1 SCR 986 at p. 1002-1003. However, “new legislation that affects substantive rights will be presumed to have only prospective effect unless it is possible to discern a clear legislative intent that it is to apply retrospectively” (see R. v. Dineley2012 SCC 58, [2012] 3 S.C.R. 272 at para 10).

[47] Faced with this express legislative intent to make the ESA amendments applicable as of October 25, 2021, and not earlier, it cannot be said the provisions with respect to the non-compete clause applies to contracts of employment with non-compete clauses entered into before October 25, 2021.

He noted that restraints of trade faced stricter scrutiny in the employment context given the public interest in these professional services, but concluded that the non-compete covenant was more closely attracted to the contract for sale of business than one in the employment agreement. Bill 27 specifically was deemed to come into force on October 25, 2021, which was an express legislative intention to make the amendments applicable as of that date.

The dentist was still free from working anywhere beyond a 5 km radius, and only limited for two years, and the balance of convenience favoured granting the injunction. In addition to upholding the non-compete, he also upheld a non-solicitation of patients from his former employer.

While this decision clarifies that Bill 27 will likely not apply to non-competition agreements entered into prior to October 25, 2021, it does not mean that courts will automatically uphold these clauses. The public interest, and the emergence of these clauses in employment agreements, will typically mean that courts will continue to find them enforceable.

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