Brace Yourself: Court of Appeal for Ontario Upholds Non-Compete in Transfer of Dental Practice.

Introduction

In many industries, such as healthcare, consulting, and professional advisory services, client relationships and goodwill are integral to the value of the business. Upon a business sale, the purchaser will need time to build trust with clients, and reasonable restrictive covenants are essential to preserving the value of the business while ensuring that the purchaser gets what they bargained for.

But what is “reasonable” as a restrictive covenant in the realm of business sales?

The recent decision by the Court of Appeal for Ontario in Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, 172 OR (3d) 376 [Sims], provides insights into this question and on the broader enforceability of restrictive covenants in commercial agreements.

Summary Analysis of the Case

This case revolves around the sale of a dental practice and the subsequent dispute over a non-competition clause. In July 2017, Dr. C. Sims, through his corporation, purchased Dr. Kevin Cooke's dental practice for $1.1 million. As part of the sale, Dr. Cooke agreed to work as an associate in Dr. Sim’s practice for at least two years, with either party able to terminate the association with 90 days’ notice. Additionally, Dr Cooke agreed to a non-solicitation/non-competition clause that prohibited him from practising dentistry within a 15 km radius of the practice for five years following the termination of his association.

In December 2019, Dr. Sims terminated Dr. Cooke’s association with the practice. Shortly thereafter, Dr Cooke announced his intention to work at a dental practice 3.3 km away, arguing that the non-competition clause was unenforceable. Dr. Sims initiated legal action, resulting in an injunction that prevented Dr. Cooke from working at the new practice.

The Superior Court of Justice ruled in favour of Dr Sims, upholding the enforceability of the non-competition clause.

Dr. Cooke appealed the decision, arguing that the trial judge had erred in several respects, particularly in assessing the reasonableness of the non-competition clause. The Court of Appeal, however, dismissed the appeal, affirming the lower court’s decision on the following grounds:

• Burden of Proof and Commercial Context: Dr. Cooke contended that the trial judge had reversed the burden of proof by suggesting that he needed to prove the unreasonableness of the non-competition clause. The Court of Appeal disagreed, noting that in a commercial context, restrictive covenants are presumed lawful unless shown to be unreasonable. The trial judge cited Payette v. Guay inc., 2013 SCC 45 [Payette], in her decision, which states, “In a commercial context, the restrictive covenant is deemed to be lawful unless it can be shown to be unreasonable” and the appellate court emphasized that the trial judge’s reliance on Payette as relevant and binding authority was justified.[1]

• Reasonableness of Duration and Geographic Scope: Dr Cooke argued that the five-year duration of the non-competition clause was excessive and that the geographic scope was overly broad. The Court of Appeal upheld the trial judge’s findings, highlighting that the duration was reasonable given the nature of the dental practice and the time required to transition patients, considering that it takes several visits for a patient to build a trusting relationship with their dentist.[2] Regarding the geographic scope, the court found that a 15 km radius was typical in similar cases and necessary to protect the goodwill of the business sold[3] and was appropriate, considering the market area of the business sold (and not the business of the purchaser).[4]

Takeaways

The decision in Sims has several important implications for the use of restrictive covenants in the sale of business transactions in various industries, particularly where client relationships and goodwill are critical to the business value.

• Latitude in determining the enforceability of restrictive covenants in commercial contexts: The ruling underscores that restrictive covenants are generally enforceable in commercial transactions if they are reasonable in scope, duration, and geographic area. In arriving at this conclusion, the Court emphasized that parties are presumed to have equal bargaining power and are competently advised in commercial agreements. Therefore, restrictive covenants in these contexts are given more latitude than those in employment contracts.

• Precedent value for reasonableness of duration and geographic scope: The Court’s affirmation that a five-year duration and a 15 km radius were reasonable for a dental practice is valuable as a benchmark in scoping restrictive covenants for similar businesses.

• Judicial reluctance to overrule competently advised agreements: The ruling further reinforces the principle that courts rarely intervene to overrule the judgment of competently advised parties in commercial agreements. This provides certainty and stability for businesses across various industries, encouraging them to negotiate and draft clear, reasonable covenants with confidence.

Overall, the decision in Sims serves as a critical reference for businesses and legal practitioners supporting the enforceability of well-drafted restrictive covenants in commercial transactions, provided they are reasonable.

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[1] Sims at para 11.

[2] Ibid, at para 18.

[3] Ibid, at para 23.

[4] Ibid, at para 25.