ONTARIO – Court grants interlocutory injunction enforcing non-competition and non-solicitation covenants contained in a Dentist Associate Agreement related to the sale of a business, preventing the associate of dental practice from i) practicing within a 5 km radius ii) from soliciting clients and iii) from using confidential patient information from the purchased business.
Parekh et al v. Schecter et al
2022 ONSC 302 December 12, 2021
Ontario Superior Court of Justice, (Sharma J.)
In 2006, Michael Schecter purchased a dental practice from his father, Ira Schecter (“Ira”) for $500,000.00. Ira continued to be employed as an associate dentist at the practice after Michael’s purchase.
The plaintiff (“Purchaser”) purchased the Schecter dental practice from Dr Michael Schecter in 2020 for $ 5.6 Million. The deal was structured as a share purchase. As part of the deal, Ira was employed as an associate dentist pursuant to an Associates Agreement for 4 years. The practice was renamed Regal Heights Dental Centre (“RHDC”).
Ira resigned as an associate dentist from RHDC in October 2021 and began practicing at Yorkville Village Dentistry. (“YVD”) which is located just over a 5 km drive from RHDC and within the prohibited 5 km radius.
The plaintiff sought enforcement of three restrictive covenants granted by Ira in the Associate Agreement, namely: (1) a non-compete covenant, restricting Ira from practicing dentistry within a 5 km radius of RHDC; (2) a non-solicitation covenant, restricting Ira from directly or indirectly soliciting patients from RHDC; and (3) a clause restricting Ira’s use of confidential information, which in this case, relates to confidential patient information which forms part of RHDC’s patient files.
Ira was involved in negotiating the terms of his Associate Agreement. Ira treated 29 RHDC patients at YVD and took patient dental molds from RHDC: para.16.
The Associate Agreement provided for mediation and arbitration for disputes arising from the agreement, but it reserved the rights of the parties to come to court for injunctive relief: para. 26.
The issues addressed in this decision are as follows.
- Should equitable relief be denied because the plaintiffs do not come with clean hand?
- Should the non-competition prohibiting Ira was practising within a 5 km radius of RHDC be enforced?
- Was the test for an injunction met?
Sharma J. held that Ira’s allegations of impropriety against the Purchaser were minor and did not relate to obligation under the Associate Agreement. Therefore, even if did there were minor breaches by the plaintiff , these did not disentitle the plaintiff from equitable relief: paras.26-27.
Sharma J. reviewed the test for granting an injunction as set out in RJR-Macdonald Inc. v Canada (AG) 1994 CanLii 117 (SCC) (para.344) and R v. Canadian Broadcasting Corp., 2018 SCC 5 (CanLII) : at paras. 12 and 17 (“CBC”), being.
- is there is a serious issue to be tried, or in the case of enforcement of a non-competition clause, there is a strong prima facie case?
- will the moving party suffer irreparable harm if the injunction is not granted? and
- does the balance of convenience favours granting the injunction, based on an assessment of which of the parties will suffer the greater harm from the granting or refusal of the injunction pending the decision on the merits?
In the enforcement of non-competition clauses the first prong of the test requires demonstration of a “strong prima facie case”, because these clauses limit a person’s ability to work at their chosen occupation: para. 34.
Sharma J. at para.32, stated, that a strong prima facie case, means “that upon a preliminary review of the case, the application judge must be satisfied that there is a strong likelihood on the law and the evidence presented that, at trial, the applicant will be ultimately successful in proving the allegations set out in the originating notice.” See CBC, supra at para 17.
If a strong prima facie case is shown, the other prongs of the test are less important: para 34.At para.35, Sharma J. reviewed the common law legal principles regarding enforcement of restrictive covenants which can be summarises as:
- Covenants in an employment contract will be subject to stricter scrutiny as compared to ones which formed part of the consideration of a sale of a business. Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), [2009 1 SCR 157 (“Shafron”).
- An ambiguous restrictive covenant will be prima facie
- The principles to assess if a restrictive covenant is reasonable are set out in
Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344 (CanLII) at para 16:
Sharma J. went on to determine if the non-competition clause was enforceable in light of new legislation, namely, the Working for Workers Act,2021 S.O. 2021 C.35.(“WWA”) which added new sections to the Employment Standards Act, 2000. C.41.(“ESA”) . The WWA / ESA prohibits non-competition clauses in employment contracts, subject to certain exceptions – those who sell a business, and in the case of executives: para.41.
Sharma J. held that the WWA and ESA did not apply to void the non-competition clause in the 2020 Associate Agreement as the legislation came into force after the contract was made :para.44.Therefore, common law principles would apply to determine if the non-compete clause was enforceable as follows:
Sharma J found that the test for an interlocutory injunction was met by:
- The non-competition clause was not ambiguous. and
- A prima facie case had been made out based in part that Ira was directly involved in the negotiation of the Associate Agreement , including the non-competition clause, and reducing the radius from 10 to 5 km.
Sharma J. also noted that Ira’s role in the practice, was more than a regular employee. In addition, the Share Purchase Agreement indicated that Ira’s goodwill was part of the deal and that he would continue to work at the practice for 3 years: para.60.
Sharma J. then considered if the restrictive contract was linked to the sale of the assets or to an employment contract and referred to Payette v. Guay, 2013 SCC 45 and in particular to para.45. Sharma found that the non-compete clause flowed from the sale of the business and was not unreasonable: paras.63-64.
As whether or not the Purchaser would suffer irreparable harm, the Purchaser referred to a case where loss of goodwill associated with a dental practice constitutes irreparable harm:para.71.See Dr. Jack Newton Dentistry Professional Corporation v. Towell, 2005 CanLII 37351 (ON SC) at para.26-27.
Sharma J. noted that Ira had promised not to compete within a certain radius and then went ahead and did compete: para.76.As there was evidence that patients had moved to YVD and more had booked future appointments at YVD it looked as this was the beginning of a loss of goodwill. Sharma J. held that limiting the remedy to damages only would be unjust:para.78.
Sharma J. held that the balance of convenience favoured granting the injunction and that Ira must honour his non-competition agreement and not practice within a 5 km radius of RHDC, not solicit RHDC’s patients and return all patient information to the Purchaser.
There was a serious issue to be tried as to whether or not Ira was soliciting patients by informing the patients that he was moving to a new practice and providing patients with his personal contact particulars: para.96.
As a result, Sharma J. made the following orders:
- Ira is prohibited from carrying on or engaging in the practice of dentistry within a 5-kilometer radius of the plaintiffs’ business, namely, Regal Heights Dental Centre at 930 St. Clair Avenue West, until October 27, 2023.
- The defendants are prohibited from assisting or associating with Ira for the purpose of practicing dentistry within a 5-kilometer radius of RHDC.
- The defendants are prohibited from soliciting any patients of RHD to receive dental treatment other than at RHDC until October 27, 2023
- The defendants shall, within 24 hours, return all patient information of any patients of RHDC within their possession to the plaintiffs.