Introduction
The Ontario Court of Appeal's recent decision in Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388 provides critical guidance for dentists contemplating buying or selling a practice and the lawyers who advise them. The decision reaffirms and clarifies the enforceability of restrictive covenants in practice sales while offering practical insights into their proper structuring.
The Transaction Context
The case arose from a typical dental practice transition: Dr. Cooke sold his Hamilton practice to Dr. Sims for $1.1 million, with an agreement to continue as an associate. The transaction included a five-year non-competition covenant within a 15-kilometre radius. When Dr. Cooke later attempted to practise just 3.3 kilometres away, litigation ensued.
Key Distinction: Practice Sales vs. Associate Agreements
The Court emphasized a crucial distinction that all dentists must understand: restrictive covenants in practice sales receive far more favourable treatment than those in associate agreements. This heightened enforcement stems from the commercial nature of practice sales, where protecting goodwill is paramount. The presumed equal bargaining power between vendor and purchaser, combined with the involvement of sophisticated advisors in the transaction, further supported enforcement. Perhaps most importantly, the Court recognized the direct connection between the non-competition covenant and the practice's value, given that the purpose of this restriction in a purchase and sale is to protect against a seller devaluing and derogating from their grant by their own actions.
Practical Guidance for Structuring Restrictive Covenants
1. Duration Considerations
The Court's analysis offers specific guidance for determining reasonable duration. Five-year terms are generally acceptable in practice sales, particularly when the duration reflects the time needed for patient relationship transitions. The Court recognized that it can take several visits for patients to build a trusting relationship with their dentist and that for those who see their dentist just once a year, it will take a long time for the relationship to build. Importantly, the Court also noted that the covenant's term need not align with any planned association period.
2. Geographic Scope
The decision provides clear parameters for territorial restrictions. The protected area need not precisely match the practice's current patient base; rather, a radius-based restriction is appropriate and enforceable. The Court confirmed that the territory can extend beyond current patient concentrations if reasonably related to the practice's market. Notably, a 15-kilometre radius received specific judicial approval in the dental context.
3. Protected Activities
The Court offered important clarification on the scope of prohibited activities. Restrictions can extend beyond direct clinical practice to protect against indirect competition or the exploitation of goodwill. The scope can appropriately include preventing the vendor from lending their name or reputation to competing practices, recognizing the broader nature of goodwill in professional practices.
Essential Takeaways
1.For Selling Dentists
When structuring a practice sale, vendors must recognize that the covenant's terms directly impact practice valuation. Post-sale associate arrangements don't limit covenant enforceability, and clear communication about future plans doesn't override written restrictions. The Court's decision emphasizes that selling dentists should carefully consider the long-term implications of restrictive covenants during the negotiations and before signing the sale agreement.
2. For Buying Dentists
Purchasers should focus on documenting the connection between practice value and restrictive covenants. Patient visit patterns should inform covenant duration decisions, and the geographic scope should align with market realities. This decision provides support for taking a comprehensive approach to protection, considering both direct and indirect competition risks.
3. For Lawyers
The drafting and implementation of restrictive covenants in dental practice sales demands meticulous attention to documentation, structure, and due diligence. Comprehensive documentation should explicitly reference valuation assumptions about restrictions while clearly establishing the parties' sophistication and access to counsel. Consider implementing standalone restrictive covenant agreements alongside primary purchase documentation for additional protection against attacks on the enforceability of these covenants.
When drafting these provisions, ensure prohibited activities are defined broadly enough to protect goodwill while maintaining enforceability. Clear radius-based geographic restrictions received judicial approval in this case in which the radius was precisely defined. Include explicit acknowledgments linking the covenant's terms to the purchase price and practice valuation.
Effective due diligence requires thorough review of practice valuations for assumptions about restrictions, careful documentation of the practice's actual service area, and consideration of including specific boundary descriptions or maps where appropriate.
Conclusion
Sims v. Cooke reinforces that well-structured restrictive covenants remain enforceable in dental practice sales. Success in drafting and enforcement is enhanced by careful attention to the commercial context, clear documentation of the covenant's relationship to practice value, and strategic consideration of patient relationship patterns. Both dentists and their advisors should view this decision as a roadmap for structuring practice transitions that protect legitimate business interests while ensuring enforceability.
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.
