Tuesday, August 7, 2012

Enforcing Restrictive Covenants - Altus Group Limited v. Yeoman

I've commented before that, in the cases where an employer sues its former employees for unfairly competing, it is often a make or break issue whether or not the employees walked away with proprietary confidential information of the old employer.

A new case, Altus Group Limited v. Yeoman, highlights this.

Altus Group is involved in, among other things, Realty Tax consultation.  In November 2011, the employment of its CEO, Gary Yeoman, was terminated.  Gary's sons, who also worked for Altus, resigned shortly thereafter, as well as several other employees, and they have since established Yeoman & Company Paralegal Professional Corporation (YPC), which directly competes with Altus' realty tax business.  They have poached 48 of Altus' clients thus far.

Altus argues that it has restrictive covenants - non-solicitation and non-competition agreements - binding the employees, and that they are in breach of those covenants, and so it moved for an injunction to shut them down.

The employees are challenging the enforceability of the restrictive covenants, on a number of bases.  They also argue that Altus knew about and even supported their initial start-up efforts, until YPC started attracting more of Altus' employees.  (Shades of the Dent Wizard case I discussed last year.)

Altus also believes that one of the defecting employees brought confidential information with him, and wanted an order appointing a forensic investigator to look into it.  The employee's laptop was re-imaged before being returned, which suggests to Altus that the purpose was to conceal data transfers.

The Court declined to grant either order, finding that the 'irreparable harm' requirement for an interlocutory injunction wasn't met to enforce the restrictive covenants, and that the evidence of stealing confidential data was insufficient to warrant a forensic investigator.

The Law

There's some interesting discussion about the test for interlocutory injunctions.  (For lay readers, an "interlocutory injunction" means an order to do something or refrain from doing something during the course of proceedings.  Essentially, where you need relief and simply can't wait for a full trial, you ask the Court to grant you interim relief until the matters are finally decided.)

Traditionally, the test is three-fold.  To obtain an injunction, you need to establish (1) a serious issue to be tried; (2) that you will suffer 'irreparable harm' if the injunction is not granted; and (3) that the balance of convenience favours granting the injunction (i.e. that the harm to you of not granting you the injunction is more serious than the harm to the other party of granting it).

But there has been some evolution in recent years, and it isn't completely settled.  It harkens to the difference between a "serious issue to be tried" and a "strong prima facie case".  The former requires a motions judge to say only that the case doesn't look frivolous - the plaintiff appears to be raising a case that is capable of succeeding.  The latter is a much higher standard, requiring the Court to say that the plaintiff has led a case strong enough that it is likely to win the case.  It used to be argued (until the Supreme Court dealt with it in 1994 in RJR MacDonald) that a "strong prima facie case" was required for an injunction to be granted.  The Supreme Court found in RJR MacDonald that, in general, only a "serious issue to be tried" is required.

But that wasn't the end of the matter.  In some Provinces, and in some cases, Courts over time have looked at certain cases as being outside of the framework of RJR MacDonald.  Where a mandatory injunction is sought (requiring some positive act, rather than just restraining from a given act), the Courts may find that a "strong prima facie case" is required.  (This is a difficult distinction.  Many orders cannot meaningfully be defined in these terms, and once you're at the point of litigation, it usually means that the status quo is already changed.  For example, when you have an employee who has breached a non-solicitation agreement and proceeded to enter into major contracts with clients of the employer, does an order requiring him to terminate those contracts require positive action, or merely restrain him from acts?)

Some Courts have held a plaintiff to the "strong prima facie case" standard where there are no material facts in dispute.  This makes a certain amount of sense, making it akin to a motion for summary judgment.  The logic is that the Court is able to fully decide the issue without needing a trial.  (Of course, without material facts in dispute, it doesn't make sense that the standards would be different.  If I'm the plaintiff, and the defendant agrees with me on all the material facts, and the judge still isn't satisfied that it's likely that I'll win, it doesn't make sense to go on to say that nonetheless there is a serious issue to be tried.)

Some Courts have required a "strong prima facie case" where granting the order will effectively render the litigation moot.  Imagine a dispute arising as to an event in the near future.  Let's say that we're approaching the Olympics, and I've succeeded in Olympic qualifying rounds, so I should be going to London.  At the 11th hour, my sport's Canadian association says to me "You don't meet the criteria to represent your country in this sport."  (Suppose it's a citizenship issue, or a disagreement as to the interpretation of the qualifying criteria.  Some sports associations don't strictly require citizenship, but sometimes have looser requirements including residency or contribution to the sport domestically, the interpretation of which might be argued about.)  So I sue them, and bring a motion seeking an interlocutory injunction that they reinstate me.  If the motion is granted, the dispute is over - they have to send me to the Olympics, and I've won.  In such a case, the Courts may require me to prove a 'strong prima facie case'.

So the standard to be applied has been increasingly loose over the years, but now there's a new hiccup:  Some Courts are now beginning to say that, where you have a strong prima facie case, you may not need to prove irreparable harm or balance of convenience.  If the Court is saying "I expect that you will succeed", it makes more sense to just grant the relief.

To my mind, there's a major theoretical problem with that argument:  Injunctive relief of this nature is in the nature of 'equitable' relief, which is only available where common law remedies are inadequate.  In other words, at the end of a trial, I can only force you to comply with the terms of our contract if my loss by your breach could not be compensated by payment of money.  Let's use the example of a housing purchase - I'm buying your house, and you refuse to close.  I *really* like your house.  Its architecture, location, and character are precisely what I'm looking for, and there's no other house that suits my needs quite like it anywhere.  In this case, I might be able to force you to close.  However, these cases are quite rare, because the simple truth is that houses are increasingly mass-produced.  If another similar house in the same neighbourhood is up for sale, but for a higher price, it's open to me to just buy that house instead and go after you for the extra cash.  Because that option is available to me, I can't compel you to close.  If we go to the end of the trial, and I succeed in proving that you breached the contract and it will cost me an extra $50,000 to get an equivalent house now, the only remedy available to me is the $50,000.  To some extent, the "irreparable harm" requirement imports that principle, and if you ignore the irreparable harm, then at the interlocutory injunction stage you could simply say "strong prima facie case; therefore close the transaction", thereby awarding me a remedy to which I would never otherwise be entitled.

However, the law in Ontario seems to be leaning towards shades of grey - essentially that, the stronger the plaintiff's apparent case, the less important the irreparable harm and the balance of convenience.  That might make sense, provided they never become altogether meaningless.


In this case, the motion judge found that there was a serious issue to be tried, but the evidence was short of establishing a strong prima facie case, and there was no irreparable harm established.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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