The Ontario Court of Appeal (the “OCA”) has recently upheld (Sims Professional Corporation v. Cooke, 2024 ONCA 388) a non-competition clause, and in the process confirmed several important points about the Court’s approach to reviewing such clauses. 

This is good news for the direct selling industry and signals that properly drafted non-compete clauses with independent contractors can be upheld in Canada.  However, each company’s clauses should be considered in the context of the Court’s approach, as enforceability can depend on the details. 

The Facts

In Sims v. Cooke the clause in issue was contained in a purchase and sale agreement for a dentistry practice sold by Dr. Cooke to Dr. Sims.  The clause prohibited the senior dentist from competing directly or indirectly in the practice of dentistry for five years within 15 kms of his former dental office.

The OCA Decision

The OCA indicated that the enforceability of each clause must be assessed based on the particular facts.  Quoting prior caselaw the OCA indicated that non-competition clauses will be presumptively valid where negotiated as part of a business sale, but that courts will give more scrutiny to the reasonableness of such clauses in the employment context whether the burden lies on the party seeking to enforce the clause to prove it was reasonable as between the parties. 

Reasonability depends on the scope of the non-competition agreement, including the period of time (e.g., 5 years) and the geographic restrictions (e.g., 15 km).  In Sims v. Cooke the OCA found the trial judge had correctly determined the 5-year restriction was reasonable in the context of dentistry, where visits are 6 to 12 months apart, and it may take several visits for patient to develop a relationship with their dentist.  The OCA also found the trial judge had correctly determined the 15 km radius geographic restriction to be reasonable.  In Sims the 15 km range almost covered the entirety of the city of Hamilton (where the former practice was located).  The evidence was that a 15 km radius had been considered appropriate in past cases involving dentists (and Dr. Cooke had subsequently signed a similar restrictive covenant at another practice).  Accordingly, the trial judge found the geographic restriction reasonable, and the OCA agreed. 

Takeaways

This case is a good reminder of the judicial scrutiny undertaken in terms of the reasonability of non-compete clauses – with each component required to be reasonable (not overbroad) in terms of protecting the legitimate interests of the business involved. 

Where Canadian courts have found non-compete clauses to be unreasonable/overbroad in respect of any one component, the clauses have been struck down in their entirety (i.e., Canadian courts will not “read down” the clause to something they consider reasonable). 

Accordingly, as the OCA stated when drafting non-compete clauses it is important to ensure that the clause is no broader “than is necessary to protect the legitimate interests” of the party.

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