OK, so I get into these heated debates with other lawyers and dentists about the enforceability 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:
- non-competes for entry-level associates are generally unenforceable except in exceptional circumstances;
- non-solicitation clauses can be enforceable, but they should specify what kinds of activities are prohibited; and
- 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 there 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 determine 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 two written agreements that contained restrictions.
The first restriction was a non-compete. It said that Dr. Park couldn’t compete within three 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 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!
The Court found that the non-compete was unenforceable because it was too broad:
Interestingly, based on the evidence before it, the Court found that the restricted geographic area and time were reasonable in those circumstances in light of IRIS’ legitimate interest in protecting its patient base.
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 referred 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 doesn’t prevent someone from doing general advertising in the media unless it expressly says so. Given the difficulty in interpreting the clause and determining whether Dr. Park had intentionally targeted repeat customers, the employer’s claim failed.
Dr. Park didn’t pay too much attention to the liquidated damages clause when she signed. She was concerned with her hours, compensation, 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.