Ontario ban on non-competes does not apply to agreements before October 25, 2021 – new case
As we reported back in December 2021, one of the changes brought about by the Ontario Working for Workers Act (“Act”) was to ban non-compete agreements, except in certain limited circumstances such as for some executive level employees and in the context of a sale of business. However, one unanswered question was whether the ban would render void all existing non-compete agreements in Ontario.
Justice Mohan D. Sharma’s recent decision in Parekh et al v. Schecter et al, 2022 ONSC 302 has provided an answer to that question: The Act does not ban non-compete agreements entered into before October 25, 2021.
Background of the decision
In 2020, the plaintiffs purchased a dental practice from Dr. Michael Schecter, the son of Dr. Ira Schecter (“Ira”), the defendant. Ira originally owned the dental practice but sold it to his son in 2014. The two operated the father-son clinic in tandem, with Ira heavily involved with the management of the clinic despite selling his shares to his son. The Schecter’s took on other associate dentists over the years leading up to the 2020 sale.
A condition of the 2020 sale was that all associate dentists at the practice, including Ira, would enter into an Associate Agreement on closing. A further condition was that Ira would continue working at the practice for four years as the plaintiffs were fully aware of the importance of Ira to the practice, and the amount of the practice’s goodwill that was vested in Ira. The plaintiffs specifically sought three restrictive covenants from Ira within the Associate Agreement, namely: (1) a non-compete covenant, restricting Ira from practicing dentistry within a 5 km radius of the clinic; (2) a non-solicitation covenant, restricting Ira from soliciting patients; and (3) a clause restricting Ira’s use of confidential information. Ira remained an associate of the practice until his resignation in October 2021. Shortly thereafter, he began to work at a different practice within a 5 km radius of the clinic.
The plaintiffs brought a motion for an injunction to enforce the restrictive covenants. One of the arguments of Ira’s counsel was that the restrictive covenants were unenforceable in light of the Act and its prohibition on non-competes.
Reasoning of decision
The Ontario Superior Court (“Court”) confirmed that remedial legislation, such as the Act, should be given a broad interpretation but that “new legislation that affects substantive rights will be presumed to have only prospective effect unless it is possible to discern a clear legislative intent that it is to apply retrospectively”. The Court reviewed the Act and concluded the legislative intent was to have the prohibition on non-competes come into force on October 25, 2021, which was deemed to be the effective date in the Act. Given the express legislative intent, the Court concluded that the prohibition with respect to the non-compete clause did not apply to agreements entered into before October 25, 2021.
The Court ultimately ruled in favour of the plaintiffs and prohibited Ira from engaging in the practice of dentistry within the 5 km radius. As of the date of this article, we are unaware of any appeal having been filed in relation to this case.
Implication for your business
While we continue to monitor how the case law develops, the Parekh decision provides Ontario employers with some assurance that their non-compete agreements entered into prior to October 25, 2021 will not be rendered void by the Act.
Aside from the Act, drafting and enforcing non-compete agreements, whether in Ontario or other provinces, can be challenging and requires legal advice. Accordingly, employers are encouraged to seek counsel from our team if they have any specific questions or concerns regarding restrictive covenants, including non-compete provisions.
This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact a member of our Labour and Employment group.
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