In our December newsletter, we wrote about the decision in MEDIchair LP v. DME Medequip Inc. where the Ontario Superior
Court of Justice held that a restrictive covenant was reasonable in
scope and enforceable against a former franchisee, despite the fact
that the franchisor had no immediate plans to re-franchise the
territory covered by the restrictive covenant. However, on appeal
by the franchisee, the Court of Appeal for Ontario reversed the
application judge's ruling and held that the restrictive
covenant was not enforceable.
The case concerned a franchisor operating a network of franchise
stores that sell and lease home medical equipment under the name
MEDIchair. The franchisee, DME Medequip Inc. (DME), owned and
operated the Peterborough store for approximately 20 years. In
2008, DME was acquired by two individuals through a corporation.
The franchise agreement contained a post-term restrictive covenant
preventing the franchisee and its principals from operating a
similar store for 18 months within a 30 mile radius.
In the years leading up to the expiry of the franchise
agreement, the MEDIchair franchise system was sold to a new
corporate owner, which also purchased a group of 24 Motions
Specialities stores. The Motions Specialties stores directly
competed with the MEDIchair franchises. In particular, a Motions
Specialties store in Peterborough competed with DME's
Subsequently, the franchisee became dissatisfied with the
MEDIchair franchise system. When the franchise agreement expired in
January 2015, the franchisee did not renew the agreement. The
franchisee de-identified the store as a MEDIchair franchise, but
continued to operate what was essentially the same business under
the name "Living Well Home Medical Equipment."
In the decision below, the Superior Court judge granted the
franchisor's application to enforce the restrictive covenant,
finding that the restrictive covenant was reasonable for the
benefit of the viability of the franchise system as a whole. The
judge did not find that the franchisor's apparent disinterest
in re-franchising the Peterborough area was a bar to enforcing the
covenant. The franchisee appealed.
The primary issue on appeal was whether the franchisor was
entitled to enforce the restrictive covenant when it had no
intention of opening another MEDIchair store within the protected
The Court of Appeal did not adopt the application judge's
reasoning that the viability of the franchise system as a whole
would be undermined if the franchisee were allowed to compete.
Rather, the Court of Appeal determined that, based on the
franchisor's evidence that it did not intend to operate in
Peterborough, the franchisor did not have a "legitimate or
proprietary interest to protect within the defined territorial
scope of the covenant."
In construing the reasonableness of the non-competition
covenant, the Court considered the parties' expectations at the
time that the covenant was bargained for. The Court explained that
"the clause was reasonable on the assumption and understanding
that MEDIchair would want to continue to operate in the protected
Peterborough area, but not if it did not."
The Court ultimately determined that the covenant was neither
generally unreasonable nor unenforceable, but was unreasonable as
between the parties in the particular circumstances of the case
because the franchisor no longer had a legitimate or proprietary
interest to protect within the territorial scope of the
This decision may cause franchisors to pause before seeking to
enforce a restrictive covenant covering a territory that they do
not plan to re-franchise. As a best practice, franchisors are
encouraged to document their commercial interests in the territory
and any future plans to re-franchise before potentially seeking to
enforce a covenant.
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.
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