While non-compete clauses are unpopular and presumptively unenforceable in employment contracts, a recent Ontario Court of Appeal ruling serves as a helpful reminder of their enforceability in M&A deals, says Charlie Kim, a partner at Robins Appleby LLP.
According to a January Angus Reid poll, over half of Canadians support banning the clauses in employment contracts. A non-compete clause prohibits an employee from working with a competitor following the cessation of their employment. Ontario banned them from employment contracts, with certain exceptions, in 2021. In April, the US Federal Trade Commission approved regulations largely prohibiting non-compete agreements in the employment realm. Kim, who practices in the firm’s business and transactions group, says this prohibition mirrors the law in Ontario.
“It’s important to distinguish a non-competition clause within the context of employment agreement versus the context of an M&A transaction,” he says. In an employment agreement, the courts will generally view a non-compete clause as illegal and unenforceable, says Kim, unless it is “reasonable and necessary” to protect a justifiable position of the employer. But, in an M&A transaction, courts generally prefer not to intervene. “They take the reverse presumption in a commercial context. The restrictive covenant is deemed to be lawful unless it can be shown to be unreasonable.”
Kim says Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388 illustrates the point. In this case, Sims purchased Cooke’s Hamilton, Ont.-based dentistry practice. Cooke agreed to work for Sims as an associate for at least two years and not to practise dentistry or allow his name to be used in another dentistry practice within a 15 km radius of Sims’ clinic for five years. Sims terminated Cooke two years after the sale. Cooke then joined a dental practice 3.3 km away from Sims’ clinic, taking the position that the non-competition covenant was unenforceable.
