Can professionals use non-competition agreements to protect their practices when hiring and training a junior? This issue has been the subject of a great deal of debate in court decisions across Canada. In a surprising ruling, the B.C. Court of Appeal recently upheld an onerous non-competition agreement between two veterinarians.
I wrote about the trial court decision in Rhebergen v. Creston Veterinary Clinic last year. The B.C. Court had held that a three year non-competition agreement was unenforceable. This decision was recently overturned. The B.C. Court of Appeal has now ruled that the non-competition agreement in question was enforceable. It is worth looking at some of the key facts.
Factual Background and Key Clauses
Creston Veterinary Clinic (“CVC”) is located in Creston B.C. There are no other clinics within a 100 mile radius. Most of CVC’s business comes from servicing eight dairy farms in the Creston area.
CVC hired a newly graduated physician, Dr. Rhebergen, to train and work in the field of dairy medicine. The parties signed an employment contract with some key terms:
1. This was a three year contract, that could only be terminated for “cause” or under certain other conditions;
2. The contract provided that Dr. Rhebergen could not set up a veterinary practice within a twenty-five mile radius of CVC within three years of the end of her employment. If she were to breach this clause within a year of leaving CVC, she would have to pay $150,000. The amount would decline by $30,000 for each of the subsequent two years.
3. Dr. Rhebergen was being paid $65,000 per year. When differences arose some fourteen months later, Dr. Rhebergen brought a court application asking the B.C. court to rule that the clause was unenforceable.
Trial Court Ruling:
As I discussed in May 2013, the trial court held that the clause was unenforceable. It ruled that that the clause was vague and uncertain. Could Dr. Rhebergen set up a practice 30 miles away but still service those eight dairies? What if she was set up 50 miles away and was serving two of the dairies in question with most of her work from other sources? Would this be a violation? At what point would the damages payment kick in?
The trial court also ruled that the non-competition clause was a restraint of trade clause and was unenforceable because it was unreasonable. It was too long (three years) and provided for a payment of a very large sum of damages in the event of a breach, without any proof of actual damage caused. The trial court judge held that a payment of $120,000 for setting up a practice within a 25-mile radius was a “penalty” clause rather than a genuine pre-estimate of liquidated damages to be incurred.
All of this seemed quite logical to me in reviewing the decision last year.
Court of Appeal Ruling:
The B.C. Court of Appeal overturned the trial ruling in a two to one majority decision.
The Court of Appeal agreed that this clause was a “restraint of trade” clause. However, it held that the clause was a reasonable one.
The Court of Appeal accepted the argument that the damages clause was a reasonable calculation of the cost of “mentoring, training and equipment costs to the clinic” if Dr. Rhebergen were to leave before the conclusion of the three year period. The Court of Appeal also looked at the impact on the clinic’s “goodwill and volume of business.” The court concluded that this clause was not a penalty and that the only question was whether, overall, the clause was reasonable.
The court seems to have blended in costs of mentoring and training – that the clinic would have had during the three years of the agreement as a factor in assessing a possible breach of the agreement even after the end of the three year period.
The majority concluded that the clause was not ambiguous. It applied a far reaching definition and held that Dr. Rhebergen would be barred from serving the eight dairy farms that are within a twenty-five mile radius of Creston. If she were to “provide…services on a regular or continuous basis…” to those eight dairies, regardless of where she was actually based, this would constitute a breach of the agreement and trigger the payment.
The dissenting appellate court judge held that the clause was unenforceable since it was uncertain. It was unclear at what point Dr. Rhebergen would have been taken to have “established” a practice and at what point the entire $150,000 damages clause would kick in.
The Court of Appeal accepted the underlying premise that CVC was entitled to protect its business with this type of three year agreement. In doing so, the Court of Appeal must be taken to have viewed this type of arrangement as more of an business contract than an employment relationship. CVC agrees to train, mentor and develop a new veterinarian – but in exchange it is largely insulated from competition for three years after the initial three year period. Presumably, the majority of the court felt that the amounts set out as damages for breach would be reasonable business costs of competing in the in specific area. Perhaps the majority felt that the $150,000 or $90,000 payment was more like a licence to compete – after having received all of the training and mentoring in the field from CVC.
While there is something to be said for this type of analysis, there are some other compelling factors that come into play. Dr. Rhebergen was only earning $65,000 and was bound to work for three years in an area in which CVC had a virtual monopoly. To continue working in her chosen field (dairy medicine) in the same area, Dr. Rhebergen would have to pay an amount close to two and a half year’s salary. Is it really in the public interest to assist professionals, whether veterinarians, lawyers or dentists, in their efforts to protect lengthy geographic monopolies over the provision of professional services? In this case, Dr. Rhebergen received training and mentoring from CVC during the initial fourteen month period but, presumably, CVC earned money as a result of her work as well. It seems far from clear to me that the costs of training, mentoring etc., should be factored in to the reasonableness of the post-employment non-competition provision.
While it would seem reasonable to allow CVC to protect its client base from competition from a newly trained competitor, a much shorter time period ought to have been adequate. This provision would require Dr. Rhebergen to pay one and half year’s salary in exchange for setting up a vet practice three years after having left CVC. That does not seem consistent with much of the established law across Canada on “reasonableness.” Reasonableness should be measured between the parties and as it relates to the public interest. It seems like quite a stretch on reasonableness to say that CVC requires three years of non-competition to protect its legitimate proprietary interests from a newly graduated vet.
It is unclear to me whether Dr. Rhebergen intends to ask the Supreme Court of Canada to hear this case. The Supreme Court has adjudicated a number of non-competition cases and will sometimes agree to hear these cases where there is a split court of appeal and an interesting theoretical issue that raises concerns of national importance. This seems like the type of case that would meet those criteria.
Assuming that the case is not heard by the Supreme Court of Canada, the decision in Rhebergen v. Creston Veterinary Clinic will stand as a decision that further clouds the judicial waters in assessing non-competition agreements. Moreover, it may give employers renewed hope that they can enforce these agreements by using reasonable damages clauses in their restrictive covenant agreements.