Drafting Non-Competes in Canada: Clarity is Key

Agreements

In late 2021, the Ontario legislature passed the Working for Workers Act, 2021 (WWA) which had the effect of disallowing non-competes in Ontario as of October 25, 2021. The WWA permitted, however, non-competes in senior executive agreements and was silent on its effect on non-competes entered into before October 25, 2021. Since then, Ontario courts have held that the prohibition on non-competes did not apply to agreements executed prior to October 25, 2021 (see for example, Parekh et al v. Schecter et al, 2022 CarswellOnt 847 (Ont. S.C.J.)).

Other provinces in Canada, however, continue to permit non-competes in employment agreements, and Ontario still permits them for senior executives. Given their continued relevance, the recent ruling by the Ontario Court of Appeal in M & P Drug Mart Inc. v. Norton, 2022 CarswellOnt 6804 (Ont. C.A.) provides helpful guidance on drafting enforceable non-compete agreements.

Facts

The employee in the case, Norton, worked as a pharmacist at a local pharmacy for several decades before the pharmacy was purchased by M & P Drug Mart (M&P). Norton signed a new employment agreement with M&P following the purchase, becoming pharmacy manager at the new business. While negotiating his agreement, he had the benefit of legal advice.

The non-compete contained in the agreement was a topic of specific negotiation between the parties resulting in the following non-compete language:

“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) kilometre radius of the business located at 10 Main Street East, Huntsville, Ontario P1H 2C9.”

In and around September 2020, Norton resigned and started working at a pharmacy within 3 km of M&P’s pharmacy. Norton took the position that the non-compete was unenforceable, while M&P disagreed and proceeded to apply for an injunction to enforce the non-compete.

Lower Court Decision

Ruling on the application, Justice Bale explained that non-competes in an employment context needed to be reviewed under a more rigorous test than commercial non-competes. Namely, the employer had to prove that the non-compete was reasonable based on several factors:

  1. Did the employer have a proprietary interest entitled to protection?
  2. Was the scope of the non-compete, its length, or its geographical limitation overbroad?
  3. Was it reasonable with respect to the public interest?

Justice Bale found that the non-compete as written was unreasonable because it was ambiguous and the scope of the activities it prohibited was overbroad. It was unclear whether the non-compete prohibited Norton from working only as a pharmacist in a pharmacy, or whether it prohibited him from working a broader range of positions within the geographic area. Justice Bale found that the non-compete could be interpreted broadly, in a manner that would prohibit Norton from working in any non-pharmacy business or role if it sold products similar to what M&P sells (for example, greeting cards, toothpaste, etc.). The non-compete was an unreasonable restraint on trade and therefore unenforceable. Furthermore, Justice Bale found that even if the parties had a common understating of the intended interpretation of the non-compete, it would still be unenforceable due to poor drafting.

Justice Bale ruled in favour of Norton.

Ontario Court of Appeal

M&P appealed Justice Bale’s ruling. Writing for the Court of Appeal, Zarnett J.A. found that the non-compete did not say that Norton could not work as a pharmacist in a pharmacy, it was much broader and ambiguous regarding Norton’s involvement in non-pharmacy related work. Even if the non-compete was not ambiguous, the only way to square the language with the effect would be to interpret it as extending to work beyond pharmacy work. If read in this way, the non-compete would go beyond the proprietary interests that M&P was seeking to protect.

The key, Zarnett J.A. wrote, is the language of the non-compete. While M&P argued for more restrictive interpretation, those interpretations largely ignored the wording of the non-compete. Negotiations leading up to the agreement are not able to overcome the actual text of the agreement or change the meaning of the words used in the agreement. Courts do not have the ability to rewrite non-competes. Norton may have agreed to the non-compete, and his breach of the agreement may be considered unethical, but legal consequences are not the same as business ethics.

The Court of Appeal found in favour of Norton and the appeal was dismissed.

Takeaways

While Ontario’s ban on non-competes reduces the utility of this judgment in Ontario, the reasoning the Court of Appeal adopted is still applicable in executive agreements and will be persuasive in provinces outside Ontario that have not yet adopted legislation similar to the WWA.

Employers, and counsel, need to take care to ensure that any non-compete agreements are well drafted and only protect those proprietary interests that the employer can legitimately protect. Attempts to extend non-competes beyond the employer’s proprietary interests carries the risk of unenforceability.

More importantly, and perhaps crucially, employers should not rely on statements made in contract negotiations when drafting a non-compete agreement. The law on this matter looks at the formal requirements, i.e., the wording of the clause and interpretation of the wording, rather than what the parties though they were agreeing to during negotiations. As such counsel needs to be front and center ensuring that all non-compete agreements are well-written and thoughtfully restrictive. This analysis applies to all parts of an employment agreement, not just to non-competes, as courts in Canada will strictly interpret the wording of all parts of a contract.

In the application decision, Justice Bale explained that if the non-compete had simply said that what was prohibited was “working as a pharmacist in a pharmacy”, the non-compete may well have been upheld. If that was the original intention of the parties, then that is what the parties should have written into the agreement.

If you have any questions about non-competes, or about employment law, human rights, workplace investigations, human resources, or immigration law, please contact Bridge Legal & HR Solutions at 647-794-5442 or at admin@bridgelegalhr.ca, we are here to bridge the gaps for you.

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