“Restrictive Covenants” is a fancy legal way of saying “You Agree To Restrict Yourself”. These are terms and conditions in an agreement (such as an associate agreement, partnership agreement or agreement of purchase and sale). Typical examples include: not disclosing confidential information, not competing in the same business and not soliciting relationships of a party. These restrictions are meant to protect one party against the other because they have something worthwhile (e.g. a dental practice, patients, patient records, etc.) that needs protecting.
Recent BC Case
In Genesis Fertility Centre Inc. v. Yuzpe, 2019 BCSC 233, the BC Supreme Court had to deal with whether a grouIp of physicians had violated their non-compete obligations. That case involved a breakdown in relations among a group of physicians who practiced medicine together in Vancouver through a company called Genesis.
The departing group of physicians decided they could no longer practice with a specific physician so they left the company and got bought out by the physician who stayed. As part of a shareholders agreement (a private contract between all the shareholders of Genesis), the departing physicians had 60 days to sell their shares in Genesis to the physician who stayed. Importantly, the shareholders agreement said that, if there was a buyout, the non-competition covenant would not apply to the departing physicians.
At issue for the Court was the extent to which the departing physicians were entitled to take steps, during this 60 day interim period, to continue their practices in competition with Genesis. The departing physicians had actually negotiated a new lease and hired Genesis senior managers for a new clinic during this 60 day period in order to eventually set up shop and compete with Genesis.
The Court noted that professionals such as doctors, dentists and lawyers do not have the same proprietary right to their patients or clients as does a corporation to its customers. Professionals provide a personal service and establish a personal relationship with their clients, regardless of where or how the client or patient arrived at the firm or practice.
The client or patient ought not to be “handcuffed” to the business and should have freedom of choice. We’ve heard this kind of language before coming out of Ontario Courts – namely, that you can’t have a proprietary interest in patients themselves (as they’re free to go wherever they want), but you can protect the proprietary interest in their records (which generally the health practitioner creates and owns), subject to privacy laws and patients’ interests in their own records.
Here, the Court did not interpret the non‑competition clause as preventing the departing physicians from taking reasonable steps, in the interim period prior to closing, to establish a new practice and book patients to be seen after closing. The Court found that, unless the departing physicians could book patients in advance, they would be precluded from competing with Genesis for some period of time after closing of the sale; furthermore, preventing patients from making future appointments with the departing physicians would interfere with the patients’ rights to receive timely treatment from a physician of their choice and would thus be inconsistent with the ethical responsibilities of the parties.
The Court interpreted the non‑competition provisions as being limited to prohibiting the departing physicians from actually seeing patients and providing services other than through Genesis during the interim period prior to closing. Accordingly, the departing physicians were entitled to secure new premises for their practices, to make arrangements to permit them to provide uninterrupted medical services to their patients and to inform other physicians of the establishment of their new practice. In the Court’s view, these steps included making staffing arrangements within reasonable limits.
The Court also found that any restriction on the ability of the departing physicians to communicate with referring doctors was an unacceptable restriction on the right of patients to be treated by the doctor of their choice. The Court added that it was also in the public interest that referring physicians be provided with up to date and accurate information as to the professional staff of a clinic to whom they are making referrals.
At the same time, the Court commented that the departing physicians owed a duty of good faith to Genesis in the 60 day period and were required to act fairly towards it during that period. This included treating patients through Genesis during this 60 day period, being candid with Genesis and not taking steps that would harm Genesis.
Overall, the Court found that the departing physicians were allowed to take significant steps to establish a new clinic as soon as they knew they were being bought out of Genesis and would no longer be practicing there. The idea of forcing the departing physicians to wait 60 days before taking any significant steps to arrange for a new lease or arrange financing for a new practice would put a significant limitation on the departing physicians’ right to compete (as they were allowed to per the shareholders agreement) and impair the ability of patients to receive timely care from a physician of their choice.
Dentists should proceed with caution when negotiating or relying upon non-compete and non-solicitation clauses in agreements. The enforceability of these clauses is generally dependent on court cases, specific facts, and the legal principles and lessons that emerge from them. Clauses not only need to be drafted clearly and meaningfully (to protect a true proprietary interest), but they need to be limited – based on time, geographic area and scope of activities – to what is reasonable in the circumstances. Not having properly drafted and negotiated restrictive covenants could put a dentist (principal or purchaser) at risk with major financial repercussions.
The Genesis case highlights the importance of negotiating and implementing meaningful non-compete and non-solicitation clauses when, for example, purchasing a practice, entering a partnership or hiring associates.
We actively inform our selling dentist clients that having durable non-compete and non-solicitation clauses in agreements is key to protecting their business and goodwill. If you’re thinking of buying or selling a practice, contact one of our lawyers to ensure you have your bases covered.