'The clause did not state in what capacity the employee could not compete'
The Ontario Court of Appeal has upheld a lower court’s finding that a non-competition covenant that didn’t mention the worker’s position or job duties was too ambiguous and broad to be enforceable.
“What appears to be the biggest issue here is the wording of the non-compete clause,” says Ronald Minken, founder and managing principal at Minken Employment Lawyers. “And it should be noted that the clause did not state in what capacity the employee could not compete.”
The worker was a pharmacist at the Hometown IDA, a pharmacy in Huntsville, Ont., starting in 1980. He worked continuously at Hometown except for a short break in the mid-1980s, and eventually became the pharmacy manager.
In 2014, the pharmacy was acquired by M&P Drug Mart, who wanted the worker to continue in his role. The two sides negotiated an employment agreement in May 2014 that included non-competition covenants, including one stipulating that during his employment with the pharmacy and for one year following the termination of his employment, the worker could 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 15-kilometre radius” of the pharmacy’s address in Huntsville. This covenant applied when the worker reached the age of 60.
Breach of covenant
In 2020, the worker resigned from his employment with M&P effective Sept. 25. After he left, he started working as a pharmacist at another pharmacy in Huntsville located less than three kilometres from Hometown IDA.
M&P reminded the worker of the non-competition covenant, but the worker said that it was unenforceable. M&P launched a legal application alleging that the worker breached the covenant by working as a pharmacist nearby before the end of the one-year term of the covenant.
The application judge found that the non-competition covenant was unreasonable and unenforceable because it was ambiguous or the scope of prohibited activities was too broad.
The judge noted that the ban on the worker being “concerned,” even indirectly, with any “undertaking involving a business” similar to Hometown IDA was overly broad, as well as the fact that it prevented him from even doing work unrelated to the practice of a pharmacy in a business that contained a pharmacy. These restrictions were “wider than reasonably required to afford adequate protection to M&P’s legitimate proprietary interests,” the judge said.
“The clause did not state in what capacity the employee could not compete – for example, it didn't say that you cannot compete as a pharmacist, which we believe was the problem with the clause,” says Minken. “However, if the pharmacist went to another business, such as a general store that happened to have a pharmacy within that store – it sold tires, food and many other things but also had a pharmacy – this person could still not even work there in any capacity, whether as a shelf stocker or whatever.”
Clearly unambigious?
M&P appealed the decision, arguing that the covenant was unambiguous and only addressed the worker working as a pharmacist within that 15-kilometre limit. It also argued that it was reasonable with respect to the public interest.
The Court of Appeal noted that, generally, a contract provision that restrains an employee from competing with the employer upon leaving employment is on its face unenforceable. The only exception would be if it was reasonable first in the interests of the parties and then the public, said the court, adding that the application judge was right in ruling that a covenant that is ambiguous on activity, time, or geography is not enforceable.
Read more: The Ontario Superior Court of Justice found two former employees and their new employer liable for breach of a non-solicitation agreement the employees had with their former employer.
Restrictive covenants such as non-competition clauses must be reasonable in the circumstances for the interest of the parties first and, once that is established, they have to be reasonable for the interests of the public, according to Tanya Sambi, an associate lawyer also at Minken Employment Lawyers.
“You'd be looking at things like, is the geographic scope reasonable in this case, given the proprietary interests that the pharmacy has? And then you also have to look at the temporal scope – is 12 months an OK time to limit an employee's ability to comopete, or is six months better?” says Sambi. “And then you have to look at, is it reasonable in the interest of public, and that's something that the court would assess only if it's reasonable in the interest of the party.
“In this case, it didn't go beyond the ambiguous analysis – it was decided that it was ambiguous because it was too broad and could have captured something like [working as] a cleaner in a supermarket that had a pharmacy.”
Don’t overreach in covenants
Minken agrees, noting that courts don’t like employers to overreach in such covenants.
“If it overreaches, then the court doesn't want it there and they'll probably strike it down,” he says. “There is this presumption that the clause is unenforceable due to restraint of trade, so then it's on the employer to establish that it’s not ambiguous.”
The appeal court agreed that the non-competition covenant did not specifically state that the worker could not work as a pharmacist. Instead, it banned him from being engaged or interested in any business that included a pharmacy, even if he didn’t work as a pharmacist. This restricted activities with employers with non-pharmacy aspects to their business and non-pharmacy-related employee positions, said the court.
The court agreed with the application judge that M&P did not demonstrate that the covenant restricted the worker just from working as a pharmacist. It upheld the appeal and determined that the non-competition covenant was unenforceable.
New Ontario legislation
Minken notes that back in October 2021, the Ontario government passed new rules under the province’s Employment Standards Act, 2000, which made non-competition agreements invalid except for those that were the result of the sale of a business where the seller becomes an employee of the purchaser, or for certain executives.
“Essentially, the legislation says that we're not going to enforce any [non-competition] clause,” says Minken. “So now we have the courts that have jumped in, and by doing this, they've put the final nail in the coffin for non-competition agreements or clauses in Ontario,” other than for the specified exceptions.
Read more: Ontario’s Working for Workers Act, 2021, bans non-compete agreements as a way to give the province a competitive advantage in attracting global talent.
However, there is still a lesson to be learned when it comes to employment agreements in general, as more careful wording in M&P’s non-competition covenant – which was drafted before the new legislation came into force – could have made a difference in enforceability, says Minken.
“The wording in every agreement should be a little bit different in a non-competition clause, depending on the circumstances, and, of course, include the name and the position of the person in the clause,” he says. “Otherwise, as we've seen here, they kick the clause out – had the position [of pharmacist] been there, the clause would have likely been upheld.”
The key to avoiding language that is too general or ambiguous is not to use precedents or standardized wording in agreements, according to Minken.
“Using a precedent or general language is not going to be enforceable,” he says. “But COVID has taught us to be flexible – I'm sure everyone in the last year or two has been making numerous changes to their agreements, some with respect to a temporary layoff clause, others with respect to a clause that allows the employee in certain circumstances to change that person's duties and perhaps even location.
“It teaches us to be very cautious and careful when drafting [agreements] and give a lot of thought to: is it possible that the clause could be rendered unenforceable, given the circumstances?”
See M&P Drug Mart Inc. v. Norton, 2022 ONCA 398.
