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New Non-Compete Case Dentists Can Learn From…

By August 27, 2019February 17th, 2021Employment Law
Dentists sign documents with non-competition clauses in them all the time.  These clauses can be found in associate agreements (which I would argue are highly unenforceable against a new grad, but more so enforceable against a Selling Dentist who’s sticking around after the closing).  They can also be found in purchase and sale documents, as well as partnership / shareholder agreements.
In the case of One Insurance Group Ltd. v. Roy et al., 2018 CarswellMan 580, 2018 MBQB 190, [2019] 5 W.W.R. 726, 301 A.C.W.S. (3d) 71, 89 C.C.L.I. (5th) 54, the Manitoba Court of Queen’s Bench cited the Oxford and Merriam-Webster dictionaries to define “compete”:
  • “strive to gain or win something by defeating or establishing superiority over others”
  • “to strive consciously or unconsciously for an objective such as position, profit, or a prize; be in a state of rivalry competing teams, companies, competing for customers”.
Importantly, Ontario courts used the following test to determine whether a non-compete is enforceable:
  • Is the non-compete drafted clearly and completely enough to be meaningful?  If a non-compete is vaguely worded (e.g. “you can’t compete within a 2 km distance of the Greater Toronto Area” is not very clear because “distance” could be “radius” or “traffic routes” and “Greater Toronto Area” is not as identifiable as a specific address or city boundaries.
  • Does the claimant (party seeking relief) have a propriety interest entitled to protection?  A dentist can spend a lot of time, money and effort developing a patient list, patient records, marketing systems, etc.  These documents, information and systems may need protection from an associate who just walks in and has access to it (and decides to leave and use it for their own benefit).
  • Are the temporal or spatial features of the restrictive covenants too broad?  Courts are loath to enforce a non-compete because it goes against the concept of freedom and free trade.  They will, however, tend to enforce clauses that are reasonable – i.e. significantly limited in time, distance covered, and prohibited activities.  The more reasonable the non-compete, the higher the chances of it being enforced.
  • Is the covenant unenforceable as contrary to public policy? Dentists go to school for a long time and spend a lot of money doing so.  They may also invest a lot of time and money establishing their practice.  These things all tend to influence a Court AGAINST wanting to enforce a non-compete (particularly against a new grad or a dentist associate who is NOT also selling their practice).
  • Was the non-compete entered into improperly?  This has nothing to do with the words on the paper, but rather whether the party who signed it did so under duress, as a result of undue influence, or if it was part of an unconscionable bargain.  If the answer to any of these is ‘yes’, then the non-compete could be voided.
In the recent case of Fuller v. Aphria, 2019 CarswellOnt 10062, 2019 ONSC 3778, 307 A.C.W.S. (3d) 81, the Ontario Superior Court of Justice had to go through the analysis and determine whether Jon-Pual Fuller (“Fuller“) and his company JPF Komon Kaisha Inc. (“JPF Inc.“) had breached a non-compete and thereby forfeit it’s exercise of 200,000 stock options (pursuant to an agreement Fuller and JPF Inc. had with marijuana producer Aphria Inc.).  So Fuller had been involved with Aphria in 2012, but was told in 2014 that his services weren’t needed because Aphria needed a more experienced CEO to attract investment once Aphria went public.  So Fuller and Aphria negotiated a parting of ways, which included a consulting agreement and a non-compete.  The consulting agreement compensated Fuller with 2000,000 options to purchase common shares of Aphria.
Aphria eventually went public and in December of 2017, Fuller tried to exercise his options (by offering to pay $120k for the 200,000 shares in Aprhia).  But Aphria rejected his exercise of options in part because it claimed Fuller had VIOLATED his non-compete.  The Non-Competition Agreement stated: “During the Term, the Vendor shall not, on its own behalf or on behalf of or in connection with any Person, directly or indirectly, in any capacity whatsoever including as an employer, employee, principal, agent, joint venturer, partner, shareholder or other equity holder, independent contractor, licensor, licensee, franchiser, franchisee, distributor, consultant, supplier or trustee or by and through any Person or otherwise carry on, be engaged in, have any financial or other interest in or be otherwise commercially involved in any endeavour, activity or business in all or any part of the Territory which is in competition with the Business.”
Aphria had learned from the OPP that Fuller had been charged with illegal production of marijuana and possession for the purposes of trafficking in connection with a LARGE marijuana grow op (which was close to Aphria’s facilities).  The OPP raided the property, which was owned by a corporation which Fuller was the sole director / president of!
So Fuller brought an application seeking relief and damages from Aphria.  But the Court dismissed Fuller’s application.  FIRST, the Court noted that the non-compete was inter-related to the consulting agreement and stock option agreement.  SECOND, the Court found that the lease between Fuller’s company and the landlord at that other property constituted a breach of the non-compete agreement.  Per the Court, the lease itself mentioned how Fuller’s business “is in the same business as Aphria, i.e. the production of medical marihuana”.  THIRD, the Court rejected Fuller’s argument that the landlord is not caught by the non-compete on the basis that the non-compete prohibits involvement “in any capacity whatsoever”.  FOURTH, Fuller tried to attack the non-compete on the basis that the word “Territory” was too broad because it means “North America” and at the time of signing, Aphria would only carry on business in Canada; but the Court rejected this on the basis that the medical marijuana business was in its infancy not only in Canada but North America too and Fuller’s knowledge / experience in licensing requirements would be valuable to Canadian and U.S. companies.  FINALLY, per the terms of the Non-Compete, Fuller was supposed to have notified Aphria of the breach of the non-compete, but he did not.  As such, he did not have ‘clean hands’ when he showed up to court, asking for equitable relief.
As a result, the Court concluded that Aphria had not breached the agreements by refusing to allow Fuller to exercise them (no breach of contract means no damages for Fuller either).  Per the Court “Simply put, there is no jurisdiction for the court to award damanges on this application”.  On the issue of damages, however, the court awarded Aphria $75,000 in costs (to be paid by Fuller).

Lessons For Dentists:

  1. If you’re asking for another dentist to sign a non-compete, appreciate the context (associate vs. seller).
  2. Is the non-compete protecting a proprietary interest you have?
  3. Is the non-compete drafted clearly and meaningfully enough to be enforceable?
  4. Is the non-compete reasonable in time, geographic scope and activity?  A non-compete that covered a 10km radius would be less enforceable in downtown Toronto than in Kenora, Ontario.  Same with a 5 year restriction vs. a 10 year restriction.  And would a non-solicit suffice instead of a non-compete?