The Latest on Non-Competition Covenants

On December 2, 2021, the Working for Workers Act, 2021, came into force. The Act prohibits non-competition clauses in employment or other agreements in the context of a sale of the business, or if the employee operates at an executive level. The effective date of the Act is October 25, 2021. The Court has held that it does not apply to agreements entered into prior to that date.

Non-competition clauses have always been fertile ground for litigation simply because many employers consider them vital to their business. But, they are also very difficult to enforce. At the end of the day, at common law, the enforceability of such clauses depends on whether or not a court considers them reasonable. For that reason, it is important for both employers and employees to give careful thought to how a Court will make that determination when negotiating the terms of a non-competition clause.

In the recent case of M & P Drug Mart Inc. v. Norton and Whitehead Pharmacy Ltd., the Ontario Court of Appeal took the opportunity to review this process.

Norton, a pharmacist, had been the pharmacy manager of a pharmacy owned by M & P in Huntsville, Ontario. His employment agreement contained a non-competition covenant. The clause in issue provided that for one year after the termination of Norton’s employment for any reason, he would not “carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to, or competitive with the business within the 15 km radius of the business located at 10 Main Street East, Huntsville, Ontario”.

The agreement also provided an acknowledgement on Norton’s part that the clause was necessary to protect M & P’s legitimate business interests and was reasonable in the circumstances.

Norton resigned and became an employee at a pharmacy less than 3 km away.

M & P sued Norton and the matter was determined by Application. The Application judge found the covenant to be unreasonable and therefore unenforceable. The Application was dismissed. The decision was appealed to the Court of Appeal, which dismissed the appeal.

The Court of Appeal began its analysis by observing that, as a general rule and on public policy grounds, a non-competition clause is unenforceable unless it is reasonable considering the interests of the parties and the public based on the circumstances at the time that the covenant is made. In order to determine whether the clause is reasonable, the Court will consider the extent of the activity to be prohibited, the geographic coverage of the restriction, and its duration. The covenant must be clear as to activity, time and geography. If it is ambiguous on any of these factors, it is likely to be considered unenforceable simply because the ambiguity will make it impossible to show that it is reasonable.

If the covenant is clear and unambiguous, it will then be assessed for reasonableness. The Court will not rewrite the covenant in accordance with what it thinks is reasonable. If it is unreasonable, the Court will simply decline to enforce it.

In this case, M & P argued that the clause merely restricted Norton from working as a pharmacist for a pharmacy or a store that includes a pharmacy. However, the words contained in the clause went well beyond this restriction. In the view of the Court, the covenant would have prohibited Norton from working in a job at a supermarket, for example, that included a pharmacy department, even if his job was in a completely different department and he was not employed as a pharmacist. Furthermore, Norton would have been prevented by the clause from being a passive investor in any such business.

As it happens, Norton did become re-employed as a pharmacist. Nevertheless, as the clause included activities beyond working as a pharmacist, it was considered overly broad and, therefore, unenforceable.

The jurisprudence is filled with cases in which a non-competition clause was found to be unenforceable. This is because historically, employers have insisted on protections well beyond what is truly necessary, thinking that inclusion of an acknowledgment by the employee that the employer’s concerns are reasonable will preserve the clause.

While the number of such cases will start to decrease given the new legislation, the vast majority of contracts existing today that include such clauses will not be subject to the legislation. They will continue to be litigated, and Courts will continue to be vigilant in protecting the ability of employees to make a living elsewhere unless the clause restricting the new employment is eminently reasonable.

Even with the new legislation, the common law will apply to “executive” employees. In addition, this issue will arise in the context of the sale of businesses. In the latter cases, while the attitude of the Court has always been more generous to parties seeking to enforce non-competition covenants, the issue of reasonability will continue to be one to which attention must be paid.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s