Ontario Superior Court Upholds Broad Non-Competition Clause Against Former Aphria CEO
By Matt Maurer and Breanna Young
Based on the interpretation given to a non-competition agreement in a recent decision of the Ontario Superior Court of Justice, cannabis industry executives who are subject to non-competition agreements may want to think long and hard before diving into their next cannabis-related enterprise.
The case at issue dealt with Aphria Inc. (“Aphria”) and its former Chief Executive Officer Jon-Paul Fuller (“Fuller”). The facts below are taken directly from the decision of Justice Pattillo, a copy of which can be found here.
Aphria was founded by Fuller, Cole Cacciavillani (“Cacciavillani”) and John Carvini (“Carvini”), through its predecessor company Pure National Wellness Inc (“PNW”). The founders’ share interest in PNW was 20/40/40 respectively. Fuller, who was appointed CEO of PNW, was responsible for obtaining licenses under the Marijuana for Medical Purposes Regulations (“MMPR”).
After two years, PNW began working towards becoming a public company on the TSX Venture Exchange and, as a result, Fuller was advised by Cacciavillani and Carvini that he was no longer going to be involved in the company going forward.
As part of his exit package, Fuller negotiated a share purchase agreement, a consulting agreement and a non-competition agreement. The non-competition agreement stipulated that, for a period of two years, Fuller was not to either directly or indirectly engage in any capacity in any endeavor, activity or business in all or any part of the “Territory”, which is in competition with Aprhia’s business (which was defined as consisting of the cultivation, production, distribution and sale of medical marijuana as licensed by Health Canada under the MMPR).
On December 6, 2017, Fuller attempted to execute the stock options he negotiated along with his exit package however, his rights under this agreement had previously expired. Fuller brought an Application to the Ontario Superior Court of Justice seeking damages allegedly sustained as a result of Aphria’s refusal to permit Fuller to exercise his 200,000 options. In defending the Application, Aphria raised the issue of Fuller’s alleged breach of the non-competition agreement.
Specifically, Aphria learned that Fuller had been charged with illegal production of cannabis and possession for the purposes of trafficking in or around September 2016. CAFR Corp. (“CAFR”), a corporation of which Fuller was the sole director and president, owned a property in Leamington, Ontario, which contained a greenhouse facility. The lease between CAFR and the tenant, Gary Parent (“Parent”) provided for the lease of two acres of greenhouse for a term of one year at a monthly rate of $15,000. The lease had subsequent renewals in the absence of 30 days written notice from the tenant. Parent paid a $30,000 deport upon signing the lease.
The lease contained a preamble which stated that the lease of the premises was “to produce dried marijuana for medical purposes pursuant to the Marijuana Medical Access Regulations.” It also contained a clause stating that “the parties acknowledge that the Landlord (CAFR) has no interest in the plants or products produced by the Tenant (Parent) and is solely leasing space to the Tenant and is not involved in any way with the said plants or products or the Tenant in any way other than Landlord Tenant.”
Although Justice Pattillo held that Aphria was well within its legal rights to refuse to allow Fuller to exercise his options, he went on to consider the validity of the non-competition clause within the context of Fuller’s request for relief from forfeiture. Relief from forfeiture is a purely discretionary remedy which allows the court to protect a person against the loss of an interest or right because of a failure to perform a covenant or condition in an agreement.
Justice Pattillo held that, despite the above language set out in the lease, the phrase “in any capacity whatsoever” from the non-competition agreement did encompass being a landlord. Justice Pattillo went on to hold that Parent is in the same business as Aphria, based on the wording in the agreement.
Non-competition agreements are often struck down if the Court determines that they are too broad either in temporal or geographic scope. Interestingly, Justice Pattillo went on to hold that the geographic scope was not too broad, despite the fact that it covered all of North America, given its limited temporal scope and the fact that the non-competition agreement was signed in connection with the sale of Fuller’s shares. The Court considered Fuller’s knowledge and experience in the Canadian licensing requirements as further evidence in upholding the non-competition agreement as this expertise would be valuable to any company.
As a result, Justice Pattillo held that Fuller was not entitled to relief from forfeiture because his breach of the non-competition agreement denied him of this equitable relief as he did not come to court with “clean hands”, which is a requirement of a litigant who seeks equitable relief from the Court.
This recent decision should serve as a caution to CEOs and other cannabis executives who are bound by non-competition agreements to properly consider their positions before diving into their next venture. Prudent executives-to-be will also have the foresight to aggressively negotiate their non-competition agreements prior to joining a company to protect their freedom to work elsewhere down the road, especially during what appears to be the coming of turbulent times in the cannabis industry.
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