Perhaps one of the biggest questions we get as lawyers who prepare, market and sell dental practice is: how enforceable are the restrictions that I’m going to be asked to sign. And we typically say: well, you’re getting a boat-load of cash and transitioning, so you better be prepared to accept these restrictions because the buyer wouldn’t do the deal without them (especially based on the advice of their lawyer, accountant and banker)! And we understand that our seller dentists want to keep their income-generating opportunities open because things may not work out with the buyer. But that’s the risk, right?
What if the buyer borrows a lot of $$$ and then things don’t work out for them (the selling dentist leaves and sets up shop across the street and takes patients and team members with them). They need protection too, right? Otherwise, again: they wouldn’t have done the deal!
So with that said, here’s a really good case that came out of Manitoba earlier this year that has to do with the enforceability of restrictive covenants (non-compete, non-solicit) against a dentist who sold their practice. The case raised a number of issues – like the selling dentist claiming the restrictions aren’t enforceable because the buyer didn’t come to court with “clean hands”, or because of broader public policy issues that dentists shouldn’t be restricted from practicing dentistry, or because the selling dentist was an “employee” and not an “independent contractor” associate and thus the restrictions subject to different legal considerations, . It all makes for a very good read for all dentists thinking about selling now or in the next few years.
The Manitoba Case: Temporary Enforcement of Restrictive Covenants
In the case of Dentalcorp Health Services Ltd. et al. v., 2023 MBKB 75 (CanLII), a Manitoba Court was asked to TEMPORARILY enforce a non-compete / non-solicit against a seller dentist. The buyer of a few dental practice locations (DentalCorp) had claimed that the selling dentist had breached their non-compete / non-solicit in the legal paperwork and thus sued in court. But because trials can take a long time to get to, DentalCorp brought what’s called an interlocutory injunction (a quick mini-trial) to have the court temporarily order the enforcement of the non-compete / non-solicit clauses against the selling dentist. In order to be successful in getting such an order, DentalCorp would have to prove that it would suffer more harm (if the restrictions were NOT enforced) than the selling dentist would suffer (if the restrictions WERE enforced).
And to cut the chase: the Court did so! As we will see by the end of this blog, the Court restricted the selling dentist from competing and soliciting patients.
What’s important to note is that, while this court case came out of Manitoba, it is very relevant to Ontario. Seminal Ontario court cases – including Button v. Jones 2001 CanLII 28303, Dr. Jack Newton Dentistry Professional Corporation v. Towell, 2005 CanLII 37351, Smilecorp Inc. v. Pisen 2012 ONCA 853, and Parekh et al v. Schecter et al, 2022 ONSC 302 – were cited throughout this case in support of the conclusion to temporarily enforce the non-compete / non-solicit until the actual trial. And the review of these various cases – and the legal principles that came out of those cases – are relevant to ALL Ontario dentist sellers who are asked to sign such clauses.
The Legal Paperwork
In this case, the selling dentist received just over $2.8-million from DentalCorp (the buyer) for selling two dental practice operations.
In exchange for selling the practices and receiving the money, the selling dentist agreed that, for the duration of the 5 year associate agreement and for 36 months thereafter, the selling dentist would not:
- Carry on or be engaged in or concerned with or interested in the practice of dentistry, anywhere within a five (5) kilometre radius of Reflections (a NON-COMPETE clause)
- Disclose or otherwise communicate or make available to any person, the name of any patient of what is now DentalCorp, or the contents of the whole or any part of patient records of such patients, except as required by law (a NON-DISCLOSURE of patient records clause);
- Contact, solicit, interfere with or endeavour to entice away from DentalCorp in any manner whatsoever, any patient for their own account or on behalf of any other person who carries on a professional practice similar to or in competition with DentalCorp (a NON-SOLICIT OF PATIENTS clause); and
- Contact, solicit, interfere with or endeavour to entice away from DentalCorp, in any manner whatsoever, any personnel working for DentalCorp on or after March 1, 2014 (a NON-SOLICIT of team members clause).
And the associate agreement had the typical clauses that go along with these types of restrictions. Clauses like: the parties agree that DentalCorp could bring an interlocutory injunction (i.e. a quick and temporary mini-trial to enforce the restrictions before the actual trial occurred) in the event of a breach and without needing to establish actual damages.
DentalCorp alleged that the selling dentist had breached the aforementioned restrictive covenants in the associate agreement.
Specifically, DentalCorp alleged that the selling dentist tried to solicit patients to follow him to a third-party dental practice that was within a 5 km radius of the practice location that had been sold.
DentalCorp further alleged that the selling dentist improperly provided his personal cellphone number and business cards to patients and improperly removed patient records.
And DentalCorp alleged further violations that included the selling dentist making various posts on social media, placing a large billboard overlooking the practice location that he been sold, and the selling dentist participating in an interview with a local community newspaper about his new practice.
So DentalCorp sued the selling dentist to temporarily enforce the restrictions until the actual trial.
Side Issue #1: Withholding Payment
The selling dentist tried to attack the enforceability of the restrictions on various grounds.
First, the selling dentist tried to argue that the Court should NOT enforce the restrictions against the selling dentist because DentalCorp did not have “clean hands” in coming to court. Specifically: the selling dentist alleged that DentalCorp had improperly (i.e. without the legal right to do so) withheld payments owing to the selling dentist under the agreements to the tune of $173k.
The Court found that these allegations, while perhaps relevant at a trial where they needed to be resolved properly, were not persuasive enough to prevent DentalCorp from enforcing the restrictive covenants in the mini-trial.
The issue before the court was whether the selling dentist had breached the restrictive covenant and whether any relief should be given to DentalCorp during the period BEFORE the trial happens. These mini-trials or interlocutory injunction motions are designed to protect the parties seeking to enforce the restrictive covenants because trials could take years to actual happen and it wouldn’t be fair to allow an offending party to continue breaching said covenants before the trial.
Side Issue #2: Against Public Policy
The selling dentist also alleged that the purchase of the practices by DentalCorp “is an orchestrated scheme to restrict the public’s right of choice of dentist in violation of the Agreements between the parties, as well as the applicable statutory and regulatory provisions governing the practice of dentistry in the province.”
But the Court rejected the argument that the private contracts entered into between DentalCorp and the selling dentist somehow violated the regulatory schemes and regulatory provisions governing the conduct and practice of dentistry. Had the court found otherwise, there’s a chance it could have invalidated the restrictions on the grounds of them being against public policy (which is a difficult argument to establish in order to strike down clauses that have been agreed upon by private parties).
But instead, the Court cited the case of Smilecorp Inc. v. Pesin which provided: “Disputes between practitioners or contractual arrangements should not prejudice the future treatment of patients, restrict patients’ rights to choose the dentist of their choice, or limit the access of patients to their dental charts or records.” In other words: so long as the contracts do not try to interfere with a dentist’s professional obligations towards their patients, they won’t be contrary to public policy.
Hence, the Court was not prepared to dismiss the restrictive covenants on the basis of public policy arguments, especially when the parties had received legal advice, valuable consideration (i.e. $2.8-million), and they had agreed to specifically be bound by the terms of their private agreements.
Side Issue #3: Employment Relationship
The selling dentist also tried to argue that his relationship with DentalCorp was more akin to that of employee/employer or dependant contractor and NOT independent contractor/client. As such, the selling dentist argued that applicable employment standards laws applied to the relationship (i.e. the reasoning here is that restrictive covenants are generally not as enforceable against employees / dependent contractors, who have an equal bargaining power against the employer, as they would be against independent contractor businesses who bargain on a more equal playing field and who get lots of money for selling their business and then stick around to provide services through some kind of engagement).
But the Court didn’t buy this argument either.
All the legal paperwork specifically pointed to the relationship between DentalCorp and the selling dentist as being an independent contractor AND NOT employee or dependent contractor of Dental Corp. The court noted that the restrictive covenants were put in place as part and parcel of the sale of a customer or client-centred business (which has been accepted by the court). And that these covenants are necessary to protect the sale of the goodwill by the selling dentist to the buyer in order to let the buyer’s dentists and other team members get to know the patients and build a relationship. And on top of all of that, the factual matrix in which DentalCorp and the selling dentist operated all pointed to an independent contractor/client relationship. Per the Court: “Nor is there any relationship here which bears the hallmarks of an employment or dependent contractor relationship. The relationship is that of an independent contractor.”
The selling dentist tried to argue that the non-compete clause (i.e. 5 km radius from the 2 locations within 5 years of the sale and 3 years after associating) was too ambiguous and unreasonable to be enforceable.
DentalCorp claimed that the selling dentist had associated at a third-party dental practice within a 5 km radius of the locations that it had purchased from the selling dentist, in contravention of the non-compete clause in the legal paperwork. The selling dentist, however, claimed that the 5 km radius was based on “driving distance” (though these words weren’t used in the legal paperwork at all) and that the new place of business was 5.3 km (thus beyond the 5 km radius).
But the Court sided with DentalCorp and wrote:
“In respect of the geographical restriction imposed by the Restrictive Agreement, I have no hesitation in finding that Dr. Hamin is in breach of the five kilometre radius restriction. There is no justification for interpreting the definition of radius to mean the driving distance between the Reflections Location and his new place of business. The evidence establishes that his new place of business is within the five kilometre radius of the Reflections Location.”
On the issue of reasonableness, the Court turned to the legal paperwork and noted that both parties agreed to these restrictions in exchange for valuable consideration (DentalCorp got the practices and the selling dentist got lots of money). The purpose of the restrictions was to protect the assets and interests sold by the selling dentist to DentalCorp. And DentalCorp would suffer harm if the non-compete wasn’t enforced before the trial.
The Court found that the clauses “do not restrict competition unnecessarily or generally in the Winnipeg market, or in respect of the Kenora, Ontario dental practice. In my opinion, they are carefully and specifically focussed on protecting the [DentalCorp’s] proprietary interest.”
As such, the Court ruled that the non-compete restriction was clear and reasonable and as such, until the actual trial, the selling dentist was restrained from competing within the 5 km radius of the premises (for both the Winnipeg and Kenora Ontario locations) for a period of 3 years from September 30, 2022.
The selling dentist argued that his interactions with patients before and after leaving the practices he sold didn’t amount to “solicitation”. The selling dentist also claimed that he didn’t breach the confidentiality covenants by retaining certain specific patient data (including a patient logbook, which was being held by their lawyer in trust until the matter was decided).
But the Court rejected these arguments, stating that DentalCorp had established that the selling dentist had breached the non-solicitation clause by attempting to entice patients to follow him to his new place of business. As such, the Court temporarily ruled that the selling dentist was restricted from soliciting, endeavouring to entice away and/or enticing away patients and/or clients of the plaintiffs for a period of three (3) years, commencing September 30, 2022. The Court also restricted the selling dentist from using or disclosing any confidential information belonging to DentalCorp, including patient records.
If you’re a dentist thinking about selling now or in the next few years, you should have proper legal representation and advice when it comes to agreeing to restrictions – including non-competes, non-solicits, non-treatment, and confidentiality! Don’t play lawyer and assume you know best, because you could avoid paying a lot of money in legal fees and costs with a little bit of education from a team of competent dental lawyers (who prepare, market and sell dental practices for a living!).