• Whether there is a proprietary interest worthy of protection;
• Whether the spatial (geographical) and temporal (time) aspects of the clause are reasonable; and
• Whether, in contrast, a non-solicitation clause would adequately protect the principal’s interests. As was noted, in most cases, this is the factor that defeats the enforceability of an otherwise reasonably drafted non-competition clause.

What is a non-solicitation clause?

Like a non-competition clause, a non-solicitation clause is a restraint on trade. Put simply, the non-solicitation clause prevents a departing associate from soliciting the patients of their former principal. In almost all circumstances, Courts hold this restraint on trade to be “reasonable”, and to be preferable to the more onerous non-competition clause. The conventional thinking is that in permitting the use of non-solicitation clauses, Courts will strike a balance between the principal’s interest in protecting their business interests, and the associate’s right to practice dentistry.

The non-solicitation clause must still be reasonable. A non-solicitation clause that is overly broad, or too far sweeping, will meet the same fate as a non-competition clause that overreaches, being that it will be deemed unenforceable. Non-solicitation clauses must be succinct, and must be properly temporally restrained. It is worth mentioning that Courts do not require geographical constraints on non-solicitation clauses, but only a temporal aspect.

So long as the clause does not attempt to prohibit solicitation for an undue period of time, then it will likely stand up to scrutiny by the Courts. For instance, a non-solicitation clause that attempted to prohibit solicitation for an unspecified term, would almost certainly be struck for being too broad. Similarly, a non-solicitation clause that prohibited solicitation for a period of 10 years would also likely be struck, for reaching too far. A properly drafted non-solicitation clause should define the exact activities of solicitation prohibited, and also the time frame of prohibition. An example would be:

(a) The associate agrees that she shall not, at any time during the term of this agreement, or within 36 months following the termination of this agreement, solicit, invite or encourage in any manner whatsoever, any patients of the practice to seek dental services elsewhere

(b) The associate agrees that she shall not, at any time during the term of this agreement or within 36 months following the termination of this agreement solicit, invite or encourage in any manner whatsoever, any employees, Associates or staff of the practice to work, be employed or retained as independent contractors elsewhere.

The reader will note that this clause prohibits the solicitation of patients, and also the solicitation of employees, staff, and associates. The rationale for prohibiting the solicitation of staff, associates, and employees is that absent such a clause, a departing associate could steal the identity of the practice. Most dentists will know that their support staff are typically the face of the business. Given that competition is allowed (remember, competition by an associate typically cannot be restrained through a non-competition clause), if a departing associate set-up a practice next door, and hired the staff members to come work for him or her, it would create confusion for patients. Hence, the Courts will enforce a clause that attempts to prevent this mischief.

Active Solicitation

Solicitation, by its very nature, requires an active component. The departing associate must take positive steps towards soliciting the patients in order to run afoul of a non-solicitation clause. For instance, stealing the patient list and sending out direct mailings to the patients on that list would likely constitute solicitation. The dawn of social media has provided new opportunities to covertly solicit. In a recent case we dealt with, the departing associate established a private FaceBook page for the new practice she was starting, and invited a number of the patients of the former principal to be friends. To the associate’s credit, this was one of the more creative solicitation campaigns we have seen.

Patients have the right to choose their treating dentist. If a long-standing associate, who has built solid relationships with patients, leaves and sets up shop across the street, it is highly likely that a number of patients will follow her across the street. This will occur without the departing associate ever taking any active steps to solicit.   This is an unfortunate risk, but one that likely cannot be prevented.

This results in a situation where, theoretically, an associate can open a new practice across the street, and wait for patients she has treated to filter in, so long as the patients are doing so of their own volition. Of course, the less time and less involved the associate was in the former principal’s practice, the less chance that patients will follow him or her. Where the associate has been with the practice long enough that patients are willing to leave with him or her, the greater the likelihood that the situation might show “exceptional circumstances”, and a non-competition clause might very well be enforced. Lying somewhere in between is the associate who has been with the practice for a reasonable amount of time, and who a relatively small percentage of patients have an allegiance to. In this situation, the Court will likely rely upon the public policy rationale for allowing competition in the marketplace.

Dilution of Non-solicitation clauses

Previously, it was difficult for a patient to find a departing associate, in the absence of a direct solicitation.  Patients would have to call the RCDSO, or look through the Yellow Pages and hope the associate was listed. In today’s marketplace, it is very easy to find out where a dentist is working through a simple Google search. Patients will not automatically know that an associate dentist has departed. Given that competition is generally allowed,  it is not possible to prohibit the former associate from launching their own website. If a patient considers an associate to be their dentist, then the next time they want to book an appointment, all they have to do is type the former associates name into their smart phone, and the new website and office address will appear. Without any active solicitation, the patient has now learned that the associate has a new practice, which is conveniently located right across the street.

Ultimately, if a patient wishes to follow a departing associate dentist, they will find them. This results in a possible dilution of the effectiveness of the non-solicitation clause, as it is much more difficult to protect the existing patient base.

Further, as noted above, with the advent of social media, it is also difficult to police solicitation. Associates who engage in solicitation campaigns have more opportunities to do so covertly.

It is conceivable that the pendulum will start to swing the other way, and we will see more and more cases where Courts are willing to respect the terms of a non-competition clause entered into by the parties. This may prove to be the only way to adequately protect the patient base of a principal. However, there is no indication as of now that the law is headed in that direction, and dentists must be sure to include a properly drafted non-solicitation clause in agreements with associates.

If you wish to have an associate agreement drafted, or have an associate agreement you wish to have reviewed, please contact Matthew Wilton at matthew@wiltonlaw.com, or Paul Martin at paul@wiltonlaw.com, or by phone at 416.860.9889.

*The foregoing is not intended to be legal advice and is provided for educational purposes only.  You should retain a lawyer to seek advice prior to taking any legal steps.

The prototype of a justifiable restraint on trade is the situation of the sale of a business, including its goodwill (patient base), where in order for the vendor to attract purchasers, the vendor may need to agree not to compete against his or her former business. This reasoning has been used to validate non-competition clauses used in the sale of businesses, such as dental practices. The rationale for upholding such a clause in an agreement of purchase is that the purchaser, in purchasing the goodwill of the dental practice, has a legitimate proprietary (“ownership”) interest in that goodwill, that can truly only be protected through a non-competition clause.

For instance, if a dentist bought a practice from another dentist, who owned the practice for 20 years, and the vendor-dentist was then allowed to set up a new practice across the street, the reality is that the majority of patients would start going across the street to seek treatment from the same dentist they have been seeing for years. Patients would simply think that the vendor-dentist had moved, and not that the practice was sold. Further, it is unlikely that they would care whether the business was sold, as patients are free to see the dentist of choice, and are not bound to any one practice.

The vendor-dentist would not need to actively solicit patients for this to happen, and a non-solicitation clause would therefore be inadequate. If the non-competition clause was not enforced, the purchasing dentist would not receive the goodwill they bargained for, but would rather be stuck in a situation where the practice they bought for a substantial sum is rendered nothing more than a start-up.

However, when a vendor-dentist is precluded from competing within a defined geographic zone, for a specified period, then it is much more likely that patients will continue to attend at the purchased practice, as they will not want to be inconvenienced by attending for treatment further away. This will allow the purchaser-dentist an opportunity to establish a relationship with his or her new patients.

Simply put, where a properly-worded  non-competition clause is used in an agreement of purchase, the vendor-dentist will be bound by the clause.

It is not uncommon for vendor dentists to remain as associates within the practice post-sale. In these circumstances, a non-competition clause contained in the vendor dentists’ associate agreement will almost always be upheld, as it is really a non-competition following the sale of a business.

The case law has routinely held that non-competition clauses will be upheld where “the nature of the relationship will likely cause customers (patients) to perceive an individual employee (associate) as the personification of the company or employer.” Without such a clause being enforceable, then theoretically, the vendor-associate could associate with the purchaser-principal for a short period of time, and then leave and open a competing practice across the street. This would deprive the purchaser of the very thing they purchased, being the goodwill (patients) of the practice.

 Our advice is to ensure that both the agreement of purchase, and the new associate agreement, contain mirror non-competition clauses.

 It should be noted that while the Courts will allow non-competition clauses in purchase agreements, those clauses must still be drafted properly. The spatial (geographical) and temporal (time) aspects of the clause must be properly restrained. If the purchaser insists on a non-competition clause that is too broad, then the purchaser runs the risk of the clause not being enforceable. This would have disastrous consequences for the dentist who has spent a significant sum of money to purchase the patient base of the vendor dentist.

If you wish to have non-competition agreement reviewed, please contact Matthew Wilton at matthew@wiltonlaw.com, or Paul Martin at paul@wiltonlaw.com, or by phone at 416.860.9889.

*The foregoing is not intended to be legal advice and is provided for educational purposes only.  You should retain a lawyer to seek advice prior to taking any legal steps.

We are also frequently contacted by Principal dentists with concerns that a former associate is in breach of the non-competition clause contained in their associate agreement. The Principal, wanting to protect their business at all costs, is often disappointed in the advice we give them concerning the enforceability of the non-competition clause.

The title of this post alludes to the difference that exists between perception and practice when it comes to the enforceability of non-competition clauses. On the one hand, Principals often believe that in having non-competition clauses in place, they are absolutely protected from possible attempts to compete by former associates (in other words, the associates are bound by iron shackles). On the other hand, in practice, courts routinely disregard the intentions of contracting parties, and will find ways to defeat restrictive covenants contained in otherwise binding agreements (rendering the clause a paper tiger – a clause that has teeth, but only on paper).

Non-Competition clauses

Non-competition clauses represent a drastic, and comprehensive, approach in attempting to protect business interests. Unfortunately, it is this very expansiveness that often leads to the courts deeming non-competition clauses invalid.

A typical example of a non-competition clause is as follows:

The associate shall not, either individually, or in partnership, or in conjunction with any other person or persons, corporation, partnership, syndicate, firm, association or any other entity, as an employee, Principal, agent, shareholder, officer, director or any other capacity whatsoever, directly or indirectly carry on or be engaged in or concerned with or interested in or advance, lend money to, guarantee the debts or obligations of, or permit his name to be used or employed by any person or persons, corporation, partnership, syndicate, firm, association or any other entity engaged in or concerned with or interested in the practice of dentistry:

1. within a 3 KM radius of the practice during the term of this agreement; and
2. within a 3 KM radius of the practice for a period of 36 months following the termination of this agreement.

Part (i) of the non-competition clause prohibits the associate from working within a 3 KM radius during the term of the agreement. Of note, clauses prohibiting competition during the course of the relationship are almost always deemed valid. The enforceability of non-competition clauses during the term of the relationship are viewed through a different set of lenses than non-competition clauses pertaining to post-contractual obligations.

We are noticing that there is a tightening in the market for full-time associates. This leads to a situation where many associates are working at two separate offices. Principals want to ensure that an associate does not work 3 days a week at their practice, and 2 days a week across the street. The potential harm this creates is that if patients begin to build a rapport with an associate at one practice, but are only available to see the associate on days they are scheduled at the other practice, then it will be of no concern to the patient if they go to one side of the street or the other. The law is clear that during the term of the agreement, associates owe duties of good faith and fidelity to their Principals. It is therefore deemed reasonable to impose a non-competition clause on an associate during the term of the agreement.

However, it is part (ii) of the clause that represents a challenge to Principals, and is often the source of much confusion and debate. The second part of the clause prohibits the employee or associate from working within a 3 km radius (known as the “spatial” or “geographical” aspect of the clause) for a period of 36 months (known as the “temporal” or “timing” aspect of the clause) after the termination of the agreement.

As a general proposition, and the default position typically taken by the Courts, clauses prohibiting competition after the termination of an agreement are enforceable only in “exceptional circumstances”, as they represent an unreasonable restraint on trade, which typically cannot be justified. The rationale being that competition is healthy for the marketplace, and individuals who have chosen a given career path should be able to pursue that career in the geographical area of their choosing.

The authoritative case dealing with the enforceability of non-competition clauses in the dentistry context is Lyons v. Multari, an Ontario Court of Appeal case. In Lyons v. Multari, the Court of Appeal enunciated the test to be applied when determining whether or not a non-competition clause should be upheld. Lyons was a case involving two oral surgeons in Windsor: Lyons, the Principal; and his Associate, Multari. Lyons had practiced in Windsor for 25 years. As with most oral surgeons, the source of Lyons’ patient base was referrals from GP Dentists. When he hired Multari, he implemented a rudimentary non-competition clause, which stated: “Protective Covenant. 3 yrs. –5 mi”. It is safe to say that Lyons did not have the assistance of legal counsel when he drafted the clause. Nevertheless, it was not the rudimentary nature of the clause that was its ultimate undoing.

Multari left the practice after only 17 months, and, 6 months later, set up his own practice 3.6 miles away. On its face, this action was a clear violation of the non-competition clause. Lyons sued for breach of contract. At trial, Lyons was successful and awarded damages in the amount of $70,000.00. The court held that Lyons had a proprietary interest in his referral base, which he had built up over time, and which was deserving of protection through a non-competition clause. Multari appealed the decision of the trial court.

The Court of Appeal summarized the relevant law and confirmed the following three-step analysis to be used in determining the validity of a non-competition clause:

1. Whether there is a proprietary (ownership) interest worthy of protection. The courts will not enforce non-competition clauses where the intention is simply to prevent a former associate from competing in the dental industry generally. The necessary proprietary interest in the dental context relates to the relationship between the Principal and his or her patients (the goodwill of the practice). In dentistry, there will almost always be a proprietary interest worthy of protection, whether it is an existing patient base, or a referral source. Hence, this first aspect of the analysis will almost always be satisfied in the dentistry context.
2. Whether the spatial (geographical) and temporal (time) aspects of the clause are reasonable. For instance, a dentist practicing in London, ON could not preclude a departing associate from practicing in “all of Ontario”, as this would be unreasonable. When looking at the reasonableness of the spatial scope, the size of the municipality, and the number of practices contained within the proposed zone, will be relevant. What is reasonable in a small town with 5 dentists, will not be reasonable in downtown Toronto. Generally, the larger the city, the smaller the geographical aspect of the clause should be. Similarly, the temporal aspect cannot be too long. A clause prohibiting competition for 10 years would almost definitely fail. Typically, these clauses should be kept to a maximum of 3 years. The shorter, the more reasonable.
3. Whether, instead of the non-competition clause, a non-solicitation clause would adequately protect the employer’s interests. Assuming that there is a proprietary interest worthy of protection, and the clause has been drafted reasonably in terms of the spatial and temporal aspects, the Court will then examine whether a non-solicitation clause is sufficient to protect the legitimate proprietary interest. In most cases, this is the factor that defeats the use of otherwise reasonably drafted non-competition clauses.

A non-solicitation covenant permits competition to a degree, but narrowly precludes a former associate from competing by soliciting business from or through the patients of the other Principal. Simply put, the non-solicitation clause allows competition, but controls the manner of the competition.

In Lyons, the Court of Appeal agreed with the Trial Judge that the referral base of Dr. Lyon’s was a proprietary interest worth protecting. The Court of Appeal also held that in terms of the spatial (5 miles) and temporal (3 years) aspects, the clause was reasonable. As with most cases, it was on the third element of the test that the clause failed. The Court of Appeal confirmed that only in “exceptional circumstances” will the nature of the employment justify a covenant prohibiting the employee not only from soliciting the Principal’s patients, but also from establishing a competing business.

In such circumstances, a Court will examine the exact nature of the interest that requires protection, and determine whether it can adequately be protected by a non-solicitation clause. In this case, the Court held that Dr. Lyon’s existing referral base could be protected by prohibiting Dr. Multari from soliciting from the existing referral dentists. Of interest, the Court noted that Dr. Lyons did not have a proprietary interest in all possible referring dentists within 5 miles of his office, and that Dr. Multari could not be stopped from competing for business from potential referral sources within the 5 mile zone, as this would constitute an unreasonable restraint on trade.

I expect in the course of reading this post, the reader has at some point asked: “Wait, if these clauses are generally unenforceable, then why do I always them in associate agreements?”

Notwithstanding the general prohibition on non-competition clauses, our advice is typically to add these clauses to associate agreements. The rationale for doing so has nothing to do with the law, and everything to do with human nature. A significant percentage of the population is moral and law-abiding. Most people do not wish to breach contracts, especially with colleagues, in a relatively close-knit industry. Nobody wants to burn bridges. Even fewer wish to be on the defending side of a lawsuit. If a non-competition clause is inserted in an associate agreement, then a large percentage of departing dentists will look at it, and abide by it. In this way, notwithstanding the likelihood that the clause is unenforceable, it nevertheless accomplishes the intended goal. Further, the facts of a particular case may support the upholding of the non-compete, as it may be the only true way to protect a proprietary interest. If the clause was left out of the agreement because it is generally unenforceable, then the former Principal will not be able to try and enforce it at all. It is better to have the clause in the agreement, and allow the associate to argue unenforceability, then to not be able to have the argument at all.

If you wish to have an associate agreement drafted, or have an associate agreement you wish to have reviewed, please contact Matthew Wilton at matthew@wiltonlaw.com, or Paul Martin at paul@wiltonlaw.com, or by phone at 416.860.9889.

*The foregoing is not intended to be legal advice and is provided for educational purposes only.  You should retain a lawyer to seek advice prior to taking any legal steps.