Hmmm… some interesting things are happening out West with non-compete clauses in associate agreements (the first one involved a veterinarian associate in BC; the second one involved two dentist associates in Alberta). Here are some recent cases and my thoughts are at the end.
Unconventional Non-Compete (BC Case) = Enforceable!!!
In a recent B.C. case involving a veterinarian, the B.C. Court of Appeal enforced an unconventional non-compete clause. In Rhebergen v. Creston Veterinary Clinic Ltd., 2014 BCCA 97, a veterinarian (Dr. Steph Rhebergen) signed an employment agreement with a veterinary clinic (Creston Veterinary Clinic Ltd.) that contained a non-compete clause. The non-compete clause required Dr. Rhebergen to pay fixed sums of money to the Clinic if she “sets up a veterinary practice in Creston, BC or within a twenty five (25) mile radius” of the Clinic within certain timeframes after the termination of the employment contract. The amounts varied from $150,000 if her practice was set up within 1 year of the contract being terminated to $90,000 if her practice was set up within 3 years of the contract being terminated. This non-compete was unconventional because the amounts to be paid were based upon the occurrence of an event (as opposed to a breach of the contract) – namely, setting up a competing veterinary clinic within a restricted area.
Dr. Rhebergen challenged the non-compete and asked that it be declared unenforceable. The B.C. Supreme Court agreed, finding that it was an illegal penalty, unreasonable, and vague. The Court also cited the Ontario case of Lyons v. Multari in concluding that this was not an exceptional case warranting the enforcement of a non-competition clause.
On appeal, however, the B.C. Court of Appeal upheld the non-compete. The Court noted that the lump sum payment wasn’t an illegal penalty but rather compensation for the costs incurred by the veterinary clinic for training Dr. Rhebergen (which she acknowledged was reasonable). Further, the Court found that the non-compete clause was clear enough to be enforceable. If Dr. Rhebergen intended to provide veterinary services on a regular or continuous basis within the restricted area, then the non-compete would be triggered. The Court also took into account the factual matrix: there were no other veterinary clinics around, and given that there were only 8 dairy herds (patients / clients of the Clinic) in the restricted area where Dr. Rhebergen was interested in targeting, she would necessarily have to set up her practice within that restricted area. Dr. Rhebergen admitted that her intention was to set up a practice in order to compete with the clinic for its existing clients, thereby violating the non-compete clause. For these reasons, her case was dismissed.
Unconventional Non-Compete (Alberta Case) = Enforceable!!!
A recent Alberta case resulted in the Court upholding an unconventional non-compete clause.
In Jones v. Gerosa, 2016 ABQB 207, Dr. Robert Martin Jones sued two former associate dentists (Drs. Mary Gerosa and Jack Phan) for breaching identical non-compete clauses in their associate agreements after they resigned and set up a new clinic shortly thereafter. The non-compete clauses stated that the associates were not to be “engaged in the practice of Dentistry at any location with the City of Fort McMurray, Province of Alberta or a radius of fifty miles thereof”; the non-compete had no time limitation. Unconventionally, the non-competes said that the associates were free to practice anywhere so long as they purchased their portion of the goodwill from Dr. Jones’ clinic, calculated at $90,000 each.
Drs. Gerosa and Phan argued that the non-compete clauses were unenforceable because, among other things, they constituted an illegal penalty and were uncertain and unreasonable (namely, because 50 miles surrounding Fort McMurray was too large, there weren’t any time limitations, and they were contrary to the public interest).
The Alberta Court of Queen’s Bench, however, found in favour of Dr. Jones and ordered the associates to each pay him $90,000. The Court found that the permissive nature of the non-compete clauses constituted license fees to compete instead of an illegal penalties. The clauses were also clear and reasonable enough to enforce. Despite there being no time limits, the reality was that Drs. Gerosa and Phan set up their new clinic very quickly after leaving and acquired 800 patients from Dr. Jones’ clinic within the first 2 years, generating over $650,000 in fees. These facts, coupled with a lack of evidence to suggest that them each paying $90,000 would be crippling and tantamount to an absolute prohibition, led the Court to conclude that that amount was reasonable. There was also no evidence to suggest that the territorial restriction was too broad or unreasonable.
With respect to the non-compete clauses being unreasonable in the public interest, the Court wrote: “I do not think the public is too concerned about how much money dentists are able to generate from their practices, or what it may cost them to set up. There is ultimately no evidence as to any negative impact the clauses may have had on the public in Fort McMurray at the time.”
I think these cases are interesting because the non-compete clauses are permissive in nature; if you want to compete, you just need to pay. And that’s what makes them different from a traditional non-compete which, following the seminal Ontario case of Lyons v. Multari, are generally unenforceable except in exceptional circumstances (particularly given that a non-solicitation could have sufficed). I actually think the courts came to the right decision in not characterizing these payments as penalties but rather license fees to compete.
I think the biggest difficult I have in loving the BC Court of Appeal’s decision in Rhebergen v. Creston Veterinary Clinic Ltd. is that they didn’t (nor did they have to) give any credit to Lyons v. Multari – as the lower court in that case did. The BC Court of Appeal wrote a very SHORT decision and focused on issues such as reasonableness, the factual matrix, and the way in which the veterinary brought the legal challenge forward. I’m not in love with this decision.
I’m also not in love with the Alberta Court’s decision in Jones v. Grosa because there was no temporal limitation on the non-compete and because there was a general lack of evidence on a lot of the different topics that were important to the court’s ultimate decision. So the court simply looked at the facts (before and after material events took place) and made decisions with 20/20 hindsight.
These things being said, I do recognize that these courts were faced with an unconventional non-compete clause and unusual circumstances. I’m curious to see how an Ontario court – following Ontario laws but faced with an unconventional non-compete clause such as the one above – would decide cases like the two above. Keep in mind that an Ontario Court would be influenced to follow Lyons v. Multari as a starting point and NOT Rhebergen v. Creston Veterinary Clinic Ltd. (despite it being a BC Court of Appeal case) and NOT Jones v. Grosa (a decision from an Alberta lower court).