Non-Compete Agreement Declared Invalid by Ontario Court of Appeal
In M & P Drug Mart Inc. v. Norton, 2022 ONCA 398, the Ontario Court of Appeal reviewed a non-competition agreement involving a pharmacy and its employee. This case occurred prior to the coming into force of the Working for Workers Act, 2021, S.O. 20221, c. 35 (the “WWA”), and thus, the decision considered the common law principles surrounding the enforceability of non-competition provisions.
Mr. Norton, a pharmacist, was employed by Hometown IDA in Huntsville, Ontario. He began working at the IDA in 1980, and worked continuously until 2014, when M & P acquired the pharmacy. At the time, he was the pharmacy manager. M & P negotiated the terms of a new employment agreement, which included a non-competition provision, which stated:
“The Employee agrees that during the Employee’s employment with the Company and during the one-year period following the termination of the employee’s employment with the Company, for any reason whatsoever, the Employee shall 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 a fifteen (15) kilometer radius of the business located at 10 Main Street East, Huntsville, Ontario, P1H 2CP”.
Mr. Norton had legal advice and negotiated the agreement, which only came into force after a period of time, and he specifically acknowledged the necessity and reasonableness of the provision for the protection of the legitimate business interests of M & P. On September 25, 2020, after the non-compete provision came into force, Mr. Norton resigned from his employment and before one year had elapsed, went to work for another pharmacy within three (3) kilometers from the Hometown IDA.
Litigation ensued. The applications judge found that the non-competition provision was unenforceable because it was ambiguous or the scope of prohibited activities was too broad. The applications judge reviewed the common law principles:
- Covenants in restraint of trade, such as a non-compete provision, are prima facie unenforceable for public policy reasons;
- Non-competition provision will only be upheld if (a) the employer had a legitimate business interest to protect; (b) the scope of prohibited activities, the length of the restriction and the geographical scope are not overly broad or ambiguous.
The trial judge acknowledged that had the business restriction been limited to “working as a pharmacist at a pharmacy”. The clause may have withstood judicial scrutiny, but the restriction to any involvement whatsoever in any business that was competitive was overly broad. Words such as “concerned with” and “similar to” and “indirectly” were ambiguous.
M & P appealed to the Ontario Court of Appeal. M & P argued that the covenant was not ambiguous or overly broad, and that it was the product of a negotiated agreement through legal counsel. The Court reaffirmed the basic principle that in order to be enforceable under the common law, a non-competition agreement must be clear and precise as to activity, time and geography. A covenant that is unclear or overly broad on any of these factors will be unenforceable. On appeal, M & P argued that the clause restricted his activities as a pharmacist and that such a restriction was reasonable. The difficulty is that the provision did not say that – it said much more and included any business that was competitive and extended far beyond pharmacy related activities. As such, the appeal was dismissed.
Review of Statutory Amendments
By way of background, last Fall, the Ontario government enacted the WWA which amended the Employment Standards Act, 2000, which prohibited employers from entering into any employment contracts or other agreements with an employee that includes a non-compete agreement, as of October 21, 2022. A “non-compete agreement” is defined as any agreement that prevents an employee from engaging in business, work, occupation, profession, project or other activity that is in competition with the employer’s business, after the employment relationship ends. There are two notable exceptions:
- Where there is a sale of business and where immediately following the sale, the seller become an employee of the purchaser, an agreement that prohibits the seller from competition with the purchaser’s business after the sale; and
- Where the employee is an executive, such as a Chief Executive Officer, President, Chief Financial Officer, or any other executive position.
There is no statutory prohibition against non-solicitation agreements or non-disclosure agreements. A non-solicitation agreement prohibits an employee from soliciting or actively pursuing clients, customers, vendors, business partners, or other employees of their employer, during the employment relationship or after the employment relationship has ended. A non-disclosure agreement prohibits an employee from sharing confidential information such as pricing, marketing strategies, trade secrets, and other internal methods. Had the decision been argued after these provisions been in force, the result would have likely been the same for the reasons explained by the Ontario Court of Appeal, but given that the provision did arise in the context of a sale of business, M & P may have validly claimed an exemption from the statutory protections.
For employers, the use of non-competition provisions should only be used in the clearest of cases, when required for the protection of legitimate business interests following a sale of business, or for executives of an organization. Non-solicitation provisions and non-disclosure agreements remain effective tools to protect business interests after an employee departs, but these too, must be carefully and clearly drafted. Please reach out to us if you require a review of any existing employment agreements, or if you require any of these provisions for your employment agreements.