Courts across Canada have continuously debated whether professionals can use non-competition agreements to protect their practices, when hiring a junior. These decisions demonstrate that there is a balance that needs to be struck between protecting the business interests of employers who run a professional practice as well as protecting an employee's right to compete in the same market, while promoting public interest in ensuring that there is sufficient access to these services. A recent decision has demonstrated this tension, but ultimately upheld the non-competition agreement.
In Rhebergen v Creston Veterinary Clinic Ltd ("CVC") 2014 BCCA 97, the British Columbia Court of Appeal held that a clause in the Associate Agreement was not a conventional non-competition clause. It did not contain a prohibition against the employee competing and required a set payment, which made the clause a restraint of trade.
Dr. Rhebergen was hired as a recent veterinarian graduate to work as a junior at CVC, which operated in the small town of Creston British Columbia, having a population 13,000. The nearest veterinary practices were 60 kilometers away in the United States, and there were no practices within 100 kilometers radius in Canada. However, within 130 kilometers radius there were 13 practices in Canada. A substantial portion of the business came from eight dairy farms in the area. The parties entered into an "Associate Agreement" which included the following non-competition clause:
1. The Associate acknowledges and agrees that she will gain knowledge of and a close working relationship with the CVC's patients and clients which would injure CVC if made available to a competitor or used for competitive purposes.
2. The Associate covenants and agrees that in consideration of the investment in her training and the transfer of goodwill by CVC, if at the termination of this contract with CVC she sets up a veterinary practice in Creston, BC or within a twenty-five (25) mile radius in British Columbia of CVC's place of business in Creston, BC, she will pay CVC the following amounts:
If her practice is set up within one (1) year termination of this contract - $150,000.00;
If her practice is set up within two (2) years termination of this contract - $120,000.00;
If her practice is set up within three (3) years termination of this contract - $90,000.00.
Following was a standard injunctive relief clause.
The penalty amounts were calculated by CVC based on their experience in hiring, mentoring and training a former associate in addition to factoring in the goodwill of the business. CVC asserted that it would take three years to realize on its investment in training Dr. Rhebergen.
Fourteen months after signing the agreement, differences between Dr. Rhebergen and CVC arose. Since the agreement precluded Dr. Rhebergen from terminating the agreement, this prompted CVC to terminate her for cause. Shortly after, Dr. Rhebergen wanted to set up a portable veterinary clinic which would service the dairy farms in Creston, so she sought to strike the non-compete clause in the Associate Agreement.
In analyzing restrictive covenants the Courts have required the parties seeking to uphold the restraint to prove that the restraint has the following characteristics:
- It protects a legitimate proprietary interest of the employer;
- The restraint is reasonable between the parties in terms of:
- Temporal length;
- Spatial area covered;
- Nature of the activities prohibited; and
- Overall fairness;
- The terms of the restraint are clear, certain and not vague; and
- The restraint is reasonable in terms of the public interest with the onus on the party seeking to strike out the restraint.
The lower Court found that the clause was unenforceable because it was ambiguous and unreasonable due to the number of possible interpretations of the phrase "sets up practice" and ruled that the clause imposed a restraint of trade because it required the Dr. Rhebergen to pay a penalty in the event of breaching the agreement. Finally, it found the term of three years to be much too lengthy.
In a 2-1 decision, the British Columbia Court of Appeal overturned the lower court decision and ruled that the provisions were a reasonable restraint of trade. It was not ambiguous because the term "setting up practice" implied a degree of permanency that came from a continuous or regular administration of professional services. The Court also found that the amount that Dr. Rhebergen became obligated to pay if she breached the clause was not a penalty but rather reasonable compensation for costs incurred by CVC to mentor and train Dr. Rhebergen. The Court also looked at the equipment costs to the clinic and impact on the clinic's "goodwill and volume of business".
This decision reinforces the importance of carefully drafted restrictive covenant clauses. An employer must give careful consideration to the proprietary interests it seeks to protect and then have clauses drafted that protect that interest in a reasonable and fair manner. Simply inserting onerous non-compete or non-solicit "boilerplate" clauses into an employment agreement will not ensure that legitimate business interests are protected when the employment relationship ends. The lawyers at CCP are experienced in guiding employers through the process of determining how best to protect client and proprietary interests as they relate to new employees and drafting enforceable restrictive covenants to protect these interests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.