Careful Drafting and Reasonable Limits Remain Key in Non-Compete Provisions
October 11, 2022
While the 2021 ESA amendments relating to non-competition agreements are likely to limit the circumstances in which such agreements can or will be used in the future, non-competition agreements that were in place prior to the ESA amendments remain unaffected. The legal enforceability of non-competition agreements that pre-date the ESA amendments continue to hinge on good legal drafting.
In a recent decision of the Ontario Court of Appeal, the court refused to enforce a non-competition agreement which purported to limit a pharmacist’s ability to work in a drug store even if they were employed in the non-pharmacy endeavours of a drug store.
The non-competition agreement in question provided as follows:
“The Employee agrees that during the Employee’s employment with the Company and during the one year period following the termination of the Employee’s employment with the Company, for any reason whatsoever, the Employee shall not carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to or competitive with the business within a fifteen (15) kilometre radius of the business located at [address].”
In reviewing this non-competition language, the court made the following observations:
“The starting point of the interpretive process are the words used. The covenant does not say that [the employee] may not work as a pharmacist in a pharmacy or in a store that contains a pharmacy. It forbids [the employee] to ‘carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertakings involving any business the same as, similar to or competitive with the [drug store]’. [The Company] agrees that ‘an undertaking involving any business’ includes one, such as a supermarket, that has a pharmacy as well as non-pharmacy departments. The language ‘carry on, or be engaged in, concerned with, or interested in, directly or indirectly’ restricts all those activities at undertakings that have non-pharmacy aspects to their business and therefore have non-pharmacy-related employee positions.”
In reaching its conclusions, the court reverted to the general rule; namely, that a non-competition agreement will be unenforceable for reasons of public policy unless the limits placed on competition in any such agreement are reasonable having regard not only to the type of activity being limited, but also the geographical scope and duration. In this instance, the court found that the language in the agreement, when properly read, was overly broad in that it sought to limit the pharmacist’s ability to engage in non-pharmacy related endeavours. Instead of re-writing the agreement to reflect more reasonable terms, the court simply declared the agreement unenforceable in its entirety.
This case serves as a reminder that tight drafting remains imperative to enforcement of non-competition covenants.
M&P Drug Mart Inc. v. Norton, 2022 ONCA 398