In 2017, one dentist bought all the shares of another dentist's Hamilton practice. As part of the deal, the seller dentist agreed to a "non-compete" clause preventing him from practicing dentistry within 15 km of his former practice for five years. Then, in 2020, he began working at a dental practice 3.3 km away, taking the position that the non-compete clause was unenforceable.
The parties took this issue to court, where the purchaser dentist prevailed. The trial judge held that in a commercial context — as distinct from an employment context1 — a non-compete clause is presumed to be lawful, and the seller dentist had not provided evidence that the clause was unreasonable. The seller dentist appealed to the Ontario Court of Appeal, arguing that the trial judge incorrectly "reversed the burden of proof".
The seller dentist focused his arguments on the Supreme Court's decision in Payette v. Guay Inc., 2013 SCC 45, where the Court held that "[i]n a commercial context, the restrictive covenant is deemed to be lawful unless it can be shown to be unreasonable". The appellant dentist argued that because Payette was decided under the Civil Code of Québec, the trial judge was wrong to apply a presumption of legality to non-compete clauses in an Ontario common law case.
In Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, the Ontario Court of Appeal concluded that Payette was a "relevant and binding authority", finding that the presumption it referred to "follow[ed] from the recognition that the parties to a commercial agreement for the purchase and sale of a business are best placed to determine what is reasonably required to protect the purchaser's interest in the goodwill". As a result, the trial judge was correct to recognize the "central importance of the commercial context" in the dentists' dispute. In the circumstances of the case — which included a valuation that anticipated a five-year non-compete covering a reasonable radius, and the fact that the parties were represented by counsel — it "made sense to treat [the non-compete] as presumptively legal".
The Court of Appeal then went on to address two specific aspects of the non-compete clause at issue in determining that it was reasonable:
- Duration: the court recognized that a five-year period is often deemed reasonable for restrictive covenants in commercial transactions. However, it stressed that the reasonableness of the duration depends on the nature of the business and must be assessed on a case-by-case basis; and
- Geographic Scope: the court noted that the territory covered by a non-compete clause in a commercial transaction is typically limited to the area where the business operates. While a specific radius is often used to define the scope, the court highlighted that the radius should reflect how far customers are willing to travel to access the services. The focus should be on protecting the business that was sold, rather than the purchaser's other business interests.
The Cooke case demonstrates that a court will, where the parties' agreement is the "best and most reliable expression of their joint intention", apply a presumption of legality when a commercial non-compete clause is challenged. In this case, the Court of Appeal was highly deferential to the dentists' commercial arrangement, stressing the reduced scrutiny that applies when commercial non-competes are challenged, as compared to the employment context. Parties considering non-compete clauses should take care that they align with the specific circumstances and objectives of the transaction.
Footnote
1. The ability to enforce restrictive covenants in the employment context is increasingly becoming the subject of legislative restrictions. See, for example, s. 67.2 of the Employment Standards Act, 2000, S.O. 2000, c. 41 which bans non-compete agreements for employees.
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