How Enforceable Are Your Non-Competition Covenants in Canada?
Most franchise agreements include a non-competition covenant preventing a franchisee from competing with the franchisor during the term, and in many cases after the term of the agreement. Ontario courts have generally enforced non-competition covenants, acknowledging the potential harm to a franchisor’s goodwill, and the integrity of the franchisor’s system, in circumstances where non-competition covenants that are reasonable in scope and time are not enforced.
Interestingly, the case of MEDIchair LP v DME Medequip Inc. provides an example of circumstances under which an Ontario court will not enforce a non-competition covenant. The Ontario Court of Appeal refused to enforce the non-competition covenant on the grounds that the franchisor had no intention of opening another franchise store in the protected geographic area. The court cautioned that non-competition covenants can serve only to protect “the legitimate interest of the franchisor” and cannot extend beyond that. The typical approach and considerations were not warranted in circumstances where the franchisor did not intend to operate in the relevant region post-termination – and thereby essentially concluding that the franchisor has no legitimate interest to protect.