Canada: Appellate Court Finds Non-Competition Clause In Employment Agreement To Be Unenforceable

In M & P Drug Mart Inc. v Norton, the Ontario Court of Appeal upheld the decision of an application judge which had found a non-competition clause in an employment agreement to be ambiguous and overly broad, and therefore unenforceable.

Background

In 2014, Mr. Norton, with the assistance of legal counsel, entered into an employment agreement for a pharmacist position with M & P Drug Mart Inc. following its acquisition of Mr. Norton's previous employer, Hometown IDA. The employment agreement, among other things, contained the following non-competition clause:

In 2020, Mr. Norton resigned and went to work as a pharmacist for another pharmacy, three kilometres away from M & P. M & P brought an application alleging breach of the non-competition clause.

The Application Judge's Decision

The application judge found the non-competition clause to be ambiguous and overly broad, and therefore unenforceable. Among other things, he "found the covenant ambiguous because it extended to prohibit Mr. Norton from being 'concerned', even 'indirectly', with an 'undertaking involving a business' that was 'similar' to Hometown IDA." In other words, it was unclear whether this clause prohibited Mr. Norton from working for example, in a non-pharmacist role, for a business that dispensed over-the-counter drugs, but not prescriptions.

The Court of Appeal's Decision

The Court of Appeal sought to answer the question, "Did the application judge err in finding the covenant unreasonable as between the parties?" It ultimately agreed with the decision of the application judge and dismissed the appeal.

In coming to this conclusion, the Court of Appeal made a number of determinations. First, the prohibition on non-compete agreements in employment contracts or other agreements found in the Working for Workers Act, 2021, did not apply in this case as the events occurred prior to that legislation coming into force. The rights of the parties were therefore governed by the common law.

Second, Mr. Norton sought to argue that the appeal was moot given the timeframe for the non-competition clause had expired by the time of the hearing. The Court of Appeal rejected this argument, stating if the restrictive covenant was found to have been breached between September 2020 and September 2021, the fact it had expired would not absolve Mr. Norton of any resulting liability.

The Court of Appeal then analyzed the non-competition clause in accordance with the common law framework. Specifically, the Court stated that a restrictive covenant "must be clear as to activity, time, and geography," and if the covenant is clear, it must "be assessed for reasonableness given the meaning ascribed to its terms." Here, the Court of Appeal found:

1. The covenant did not solely restrict Mr. Norton from working as a pharmacist in a pharmacy or in a store that contains a pharmacy. Rather, "the language 'carry on, or be engaged in, concerned with, or interested in, directly or indirectly' restricts all of those activities at undertakings that have non-pharmacy aspects to their business and therefore have non-pharmacy-related employee positions." Therefore there was no error in the decision of the application judge that the wording was ambiguous.
2. The non-competition clause was overly broad, and therefore "cannot be demonstrated to be reasonable." M & P was unable to show that the language of the covenant was not properly read to reach activities beyond working as a pharmacist. The covenant used broader language, and the Court of Appeal noted that "[it] is not empowered to rewrite the covenant 'to reflect its own view of what the parties' consensus ad idem might have been."

The Court of Appeal concluded "the covenant cannot be demonstrated to be reasonable," even though Mr. Norton freely agreed to it. It noted that "the question is one of legal consequences rather than business ethics."

Takeaway

Employers should take note of this decision which provides an example of what Ontario courts may consider unreasonable with respect to restrictive covenants in employment agreements.

Originally published 19 May 2022

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