Non-Competition Agreement in Dental Practice Sale is Enforceable: Court of Appeal for Ontario Provides Something to Chew On
The Court of Appeal for Ontario recently enforced a non-competition agreement that was entered into further to the sale of a dental practice in the case of Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388.
Dr. Sims and Dr. Cooke both practiced dentistry in the Hamiton area. In 2017, Dr. Sims purchased the dental practice of Dr. Cooke for $1.1 million. As part of the sale, Dr. Cooke agreed to work for Dr. Sims as an associate in the dental practice. Dr. Cooke agreed to work for a minimum of two years, but either side was able to terminate the association on 90 days’ notice. The sale also included a non-competition agreement that prohibited Dr. Cooke from practicing dentistry within a radius of 15kms from the dental practice for a period of five years following the end of his association with Dr. Sims.
Two and a half years into their association, Dr. Sims gave notice of termination. Dr. Cooke, shortly thereafter, began to work at a dental practice 3.3 kms away, taking the position that the non-competition agreement was unenforceable. Dr. Sims obtained an injunction against Dr. Cooke, and Dr. Sims subsequently won at trial in the Superior Court of Justice, where the trial judge enforced the non-competition agreement. Dr. Cooke appealed.
Dr. Cooke argued that the non-competition agreement was unreasonable in length of time and unreasonable in geographic scope.
The Court of Appeal started its analysis by pointing out that in the negotiations of the sale of the business, both sides were represented by legal counsel and had equal bargaining power. They freely entered into the sale agreement, which included a non-competition agreement. This commercial context was important in determining the enforceability of the non-compete.
Dr. Cooke argued that the duration of the agreement was unreasonable because it had been his intention to work in association with Dr. Sims for three to five years prior to retiring. He argued that Dr. Sims’ interests in the sale transaction were sufficiently protected by a non-solicitation clause for existing patients of the practice. The Court disagreed, noting that courts regularly find non-competition clauses of five years’ duration to be enforceable. In the case of a dental practice in particular, numerous visits with patients over an extended period of time are required to build up trust and rapport. The evidence in this case showed that more than 100 patients intended to leave the practice, and it would be very easy for those patient to find Dr. Cooke if he opened up a new practice nearby. The Court noted that Dr. Cooke’s retirement plans were not a relevant consideration in light of the express agreement of the parties, and the provisions contained in that agreement to protect the goodwill of the practice purchased by Dr. Sims.
Dr. Cooke argued that the geographic scope was unreasonable because a 15 km radius covered certain smaller towns around Hamilton that were not in the actual service area of the practice. The Court rejected this argument, holding that it is not uncommon for the territorial scope of a non-competition agreement to be defined in terms of radius; that the radius needed to be large enough to cover communities that were in the service area; that other judicial decisions have found 15 kms to be a reasonable radius for non-competition agreements in the sale of dental practices; and that Dr. Cooke himself had signed a non-competition agreement with a 15 km radius in another dental practice earlier in his career.
Since the non-competition agreement was reasonable, it was enforceable by Dr. Sims, and the appeal of Dr. Cooke was dismissed.
Note: The Employment Standards Act, 2000 (“ESA”) prohibits non-competition clauses in employment agreements. This is a recent addition to the ESA, informed by policy considerations around the power imbalance between employers and employees. However, there is an exception in the ESA to this prohibition in cases of employment agreements flowing out of the sale of a business. The typical power imbalance concerns present in the usual employer/employee relationship are not present in such circumstances.
