Case Provides Clarity on Enforcement of Restrictive Covenants Following Sale of a Practice and Effect of New Legislation

When health professionals sell their practices, purchasers often require the inclusion of restrictive covenants such as Non-Compete and Non-Solicitation clauses in the purchase and sale agreements. Although such clauses may seem straightforward (i.e. prohibiting the vendor from establishing a new practice in competition to the practice they sold, or from soliciting the patients of the practice), whether they are enforceable and what conduct they prohibit is often the subject of litigation. In Parekh et al v. Schecter et al, the Superior Court of Justice provided clarity on the enforceability of non-compete clauses in employment contracts versus purchase and sale agreements, as well as whether a new provision added to the Employment Standards Act, 2000 (“ESA”) applies to past agreements. The decision also provides insights into what conduct may be caught by a non-solicitation clause.

Background

In 2020, Dr. Parekh and his corporation (the “Purchaser”) bought a dental practice from Dr. Schecter (the “Principal Owner”), a dentist whose father (the “Owner”), had founded the practice and stayed on as an associate after selling his shares to his son. A term of the Share Purchase Agreement was that the Owner, whom the Purchaser recognized as highly important to the business, would enter into an Associate Agreement and continue working at the practice for four years. Three covenants were also included: (1) a non-compete covenant restricting the Owner from practising dentistry within a 5 km radius of the practice; (2) a non-solicitation covenant restricting the Owner from directly or indirectly soliciting patients from the practice; and (3) a clause restricting the Owner’s use of confidential information including information which forms part of the patients’ files.

Allegations

The Purchaser alleged that after resigning as an associate, the Owner began to practice at a different clinic that was more than a 5 km drive from the practice but was within a 5 km radius. The Purchaser also alleged that prior to departing, the Owner solicited patients and took dental moulds as well. The Purchaser brought an interlocutory motion seeking orders prohibiting the Owner from practising within a 5 km radius (enforcing the non-compete clause), enjoining him from soliciting patients until a specified date (enforcing the non-solicitation clause), and requiring him to return all patient information (the moulds) within 24 hours (enforcing the clause restricting the use of confidential information).  

The Owner disputed each issue and argued the Purchaser should be denied equitable relief because he did not have “clean hands”. The Owner alleged that the Purchaser moved his long-time assistant to another office without telling him; treated staff poorly; and had not paid the Owner for some work he performed.

The Decision

The Court granted the requested relief. Having found that the Owner took moulds on his last workday, and this constituted a clear breach of the Associate Agreement, the Court ordered the Owner to return all patient information. The Court also found that there was no policy basis not to enforce the non-compete and non-solicitation clauses. On the issue of “clean hands”, the judge was not persuaded that the allegations against the Purchaser related directly or that the Owner’s allegations, if established, would disentitle the Owner to equitable relief.

Discussion and Takeaways

Application of New Provision of the ESA

After determining that there was a strong prima facie case to enforce the non-compete clause, but before applying common law, the Motions Judge addressed the effect of Bill 27, Working for Workers Act, a recently added provision to the ESA. It states that no employer shall enter into an agreement with an employee that includes a non-compete cause unless there is a sale of business and/or that the employee is an executive. In response to the Owner’s argument that the legislation applies to void the non-compete clause because he signed an associate agreement which is an employee contract, the Judge found that the non-compete covenant was more akin to a contract for the sale of a business than an employment context. Further, the Motions Judge found that the new ESA provision came into force October 25, 2021, a date before it received Royal Assent, and as such was intended to not apply to agreements entered into prior to the enforcement date.

Enforcement of Non-Solicitation Clause

On the issue of whether the non-solicitation clause should be enforced, the Owner argued that he was not soliciting when he informed patients he was leaving and would give them his personal email or cell number, should they wish to stay in his care. The Motions Judge saw this as “splitting hairs” and granted the injunction, having found that the Owner’s conduct was tantamount to an invitation and thus, solicitation, which was a relevant factor in determining whether the non-solicitation clause should be enforced. 

Enforcement of Non-Compete Clause

With respect to enforcement of the non-compete clause, courts are generally averse to restricting trade because the ability to practise one’s profession freely is deemed to be in the public’s best interest. Further, non-compete clauses are seen as more severe than a non-solicitation clause because the former restricts one’s ability to practice one’s profession, whereas the latter merely defines a certain group of customers one cannot work with. Therefore, non-compete clauses are more difficult to enforce and generally will be void if they are overly broad, or where a non-solicitation clause would have sufficed.

Interestingly, the distinction between a non-compete term in an employment contract versus one prepared for a purchase and sale agreement lies in the balance of power. In recognition of the inequality between an employer and employee, the Court will not enforce a non-compete in an employment context except in special circumstances. However, there is no inequality between parties in a purchase and sale agreement, and the Court sees the purchaser as buying the goodwill of the company which, as a proprietary interest, warrants protection. 

In this case, the Motion Judge found that the Owner’s conduct which included being involved in the management of the practice as well as its sale firmly planted him on “equal footing” in the context of the transaction thereby excluding him from the protections afforded to an employee.

If you have questions regarding the enforcement of restrictive covenants, disputes following the purchase and sale of a practice, or any matters pertaining to associate or purchase and sale agreements, please contact us for guidance.