Last week, a decision was released in Measuremax v. Nelsons. There isn't too much factual detail, but it's an instance of an employer having obtained an injunction without notice. When such an injunction is obtained, it is only for a short period of time and needs to come before the Court for a full hearing as to whether or not to extend it.
Mr. Nelsons worked for Measuremax for several years as a technical information supplier to salespeople. Nelsons resigned on six weeks' notice, and was sent packing promptly. Measuremax then became concerned, and came to believe, that he had started conducting competing business while still working for Measuremax, including issuing a client a $15,000 invoice for work he had completed while employed by Measuremax. There were also allegations that Nelsons was using confidential information to compete.
On the basis of these allegations, Measuremax obtained an injunction. However, there were apparently innocent explanations for at least some of their evidence, and the motion judge here accepts that no such $15,000 invoice was issued and that Nelsons' work while employed at Measuremax was for Measuremax. Furthermore, the alleged proprietary information related to bids for contracts with government agencies, and accordingly is public record.
With no non-competition or non-solicitation clause, and no obvious basis for finding fiduciary duties, the employer failed to convince the Court to extend the injunction, failing the test on several fronts. No irreparable harm was established, and the balance of convenience favoured "the former employee who is entitled to earn a living". Furthermore, bringing the initial motion without notice couldn't be justified - under such circumstances, you need to show either that you have reason to believe that giving notice will interfere with the relief you're seeking (for example, if you're bringing a motion to seize and search a party's computer, and you expect the party to delete the incriminating data if they have notice), or that the matter is so urgent that the delay associated with proper notice will cause irreparable harm, and in that case it's still expected that the moving party will give informal notice.
*****
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.
Showing posts with label interlocutory injunctions. Show all posts
Showing posts with label interlocutory injunctions. Show all posts
Tuesday, August 14, 2012
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.
Application
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.
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.
Application
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.
Thursday, May 10, 2012
Employees Quitting and Competing
Every so often, a case comes up involving an employee who departs from employment and immediately starts a new business, taking the old employers customers and sometimes even employees.
There is nothing inherently wrong with this, unless there is a contractual non-solicitation/non-competition clause (though these are often difficult to enforce) or common law fiduciary obligations.
Frequently, the employer will go to Court seeking an injunction preventing the employee from competing or soliciting customers. A common feature of these cases, however, and one which makes the employee much less likely to succeed, is the misappropriation of proprietary information. There's nothing wrong with an employee walking away, but when the employee walks away with the employer's files, that's a problem. This is particularly problematic in the digital age, where copies of large numbers of files can be made with a few keystrokes.
In the recent case of Corona Packaging Inc. v. Singh, departing employees made exactly this mistake. Two employees left Corona (Cascioli in June 2011 and Singh in March 2012). Singh indicated that he was planning to return to India. However, in April 2012 a representative of Corona saw Singh and Cascioli at a trade show representing a new competitor company (which had incorporated in July 2011), Aura Packaging. This made Corona suspicious, so they called in forensic IT specialists.
It's pretty impressive what these forensic IT specialists can do. If you do something on your computer - use a program, delete a program, access data, copy data, upload data to an external device, etc. - they can figure out with astonishing detail what you actually did.
In this case, they looked at Singh's old workstation and determined that, the day before he left, he connected an external device (likely a BlackBerry) and copied 8,465 files to it, including proprietary information of Corona. The data included "all of its products technical specifications, the Corona budget setting forth confidential information including price lists, gross profit margins, machine cycle times, and input costs; the "Pre-Form" products' catalogue of Corona which is akin to the blue print for the final bottle products, with all the specifications created by Corona for such products; "Bottle Drawings" which include the final form bottle specifications; the Price List Notification which includes the proprietary formula utilized by Corona to determine its price list; product-related documents such as quality control testing, sample lists and packaging layouts; work place policies; confidential customer information including customer-owned mould specifications; and financial and administrative documents."
Sounds pretty much like Singh cleaned them out, no?
I retain a healthy dose of scepticism. Before I go into the details of why, let me explain that this motion was brought on an urgent basis. The defendants were given notice of the motion, and two of them had lawyers show up, but they were not given an opportunity to prepare responding materials. So all of the evidence before the Court was the evidence led by Corona. (Under these circumstances, if the injunction is granted, it can only be for ten days, subject to continuation following a hearing on appropriate notice.)
I'm no tech expert, but I know a thing or two about computers, and a lot about lawyers. You can have thousands of files with no usable data, or a single file with a huge amount of material data. The actual number of files transferred seems huge, but the number is essentially meaningless. I couldn't begin to estimate how many files might be transferred in an ordinary automated synchronization process. Still, a lawyer will throw in the total number of files because it sounds good. (Law is still, in many ways, in the 'old school', where people think of a 'file' as being an assortment of data inside a physical folder. A thousand files takes several filing cabinets, would include huge amounts of data, and represent years of work. In the digital world, a simple program might have hundreds or even thousands of files associated with it, and barely made a dent in the storage space of a small USB key.)
Hansford, Corona's IT specialist, called Singh, and Singh "admitted that he had taken data files from Corona". Singh asked if he could delete the data, and Hansford said that it was very difficult to permanently delete such data.
This is true. Especially once data has begun to be disseminated into a new server, new databases, etc., it is immensely difficult to trace it through a system. I was once involved in litigation similar to this where we had obtained an order that all the confidential data be destroyed, and years later, despite what the Court found to be good faith efforts to comply, we were still seeing reports generated by the defendant's system including excerpts from the confidential data in question.
Nonetheless with Singh's permission Hansford remotely logged into Aura's servers and deleted everything that he could find from Corona.
Not good enough, however: The Court still gave Corona the injunction it was seeking. There are three elements to awarding such an injunction: There must be a 'serious issue to be tried', evidence that the plaintiff will suffer 'irreparable harm' - harm that can't be remedied just by an award of damages - in the absence of the injunction, and the balance of convenience must favour the injunction.
Serious issue to be tried: "The evidence suggests that Messrs. Singh and Cascioli are in breach of their employment contractual obligations and common law duty of confidence to their former employer not to disclose or use trade secrets and confidential information. Arguably, they are also in breach of a restrictive covenant in their contractual relationship with Corona to not compete with Corona for a three-year period following upon leaving their employment with Corona."
Irreparable harm: The Court concluded that the misappropriation of the customer data would result in "permanent market loss" and "irrevocable damage to the business".
Balance of convenience: Aura is a relative startup, by contrast to Corona's significant long-term investment in developing a business base. So the harm to Aura by preventing competition is less than the harm to Corona of permitting competition.
The effect of the apparent deletion of the data isn't much discussed, but it doesn't appear to have helped Aura that they were halfway through a contract to produce a million bottles for Corona's biggest customer - the Court concluded that they could not have obtained this contract without the misappropriated data.
My Thoughts
This is a close case. Having misappropriated data definitely hurts Aura, yet it has since been ostensibly deleted. The thoroughness and effectiveness of the deletion is questionable, perhaps, but the efforts were undertaken by Corona's own IT specialist. So I would question the appropriateness of granting an injunction based on the likely impact of continued use of misappropriated data. That being said, where they have already gained market share through use of the data - i.e. a major contract from Corona's biggest customer - it may make some sense to require Aura to step away from that customer. However, aside from this potential loss in market share (which may have at least been mitigated by the deletion of the confidential data), it appears that the only loss which may be suffered by Corona is the ostensible loss of this contract, and by no means would that harm be 'irreparable'. The judge even queried Aura as to whether or not it would be prepared to complete the current contract but pay the profits into escrow pending determination of the issues in dispute. Aura declined to consider such an agreement, and probably correctly so. If disposition of the profits from that particular contract were the only unresolved issue on this motion, then granting an injunction would be wholly unnecessary and inappropriate - there are orders available for a defendant to preserve assets pending disposition of a claim, but they are available under only very specific circumstances. In general, a plaintiff sues a defendant, and only gets to chase the defendant's assets after obtaining judgment.
I'm also concerned by the reference to the restrictive covenants. On a motion of this nature, there is no reason why they could not be considered thoroughly, determining whether or not their terms ought to be upheld. The effect they had on the ultimate decision is unclear; in my humble opinion they ought to have been discussed thoroughly or not at all.
Furthermore, this motion has all the earmarks of a motion without notice. (In fact, the parties received notice, but not nearly sufficient notice to satisfy the rules for a motion made on notice, and thus I suspect that it should have borne essentially the same scrutiny as an ex parte motion.) There is no discussion whatsoever of the 'urgent basis' on which the motion was made, and whether or not it was appropriate.
For a good discussion of the circumstances required for motions without notice, see Robert Half Canada Inc. v. Jeewan. In that case, the Court notes that the first enquiry to be made is: "Why did you not give notice?" If the answer doesn't reveal "extraordinary urgency", the motion must be refused.
There are two categories of "extraordinary urgency":
(1) There are circumstances where there is reason to believe that, if given notice, the affected parties will act to frustrate the proceedings. (For example, if I'm concerned that a person is going to move their assets to another jurisdiction to frustrate my interests, and I'm bringing a motion for the preservation of property, I might justifiably be worried that they're just going to make the transfer immediately upon receiving notice of the motion.) Anton Piller orders - essentially private 'search warrants' - traditionally fall into this class. True that an Anton Piller order was sought in this case, but it isn't much discussed, and given that Corona's IT people had already been given access to Aura's servers prior to the hearing, it doesn't seem like it would have been a compelling argument. In any event, the fact that short notice was given completely would completely undermine the strength of such an argument.
(2) In some cases the circumstances are of such exigency that any delay will defeat the plaintiff's claims. "This is a distinctly rare circumstance." This would clearly be the argued basis in this instance - the Courts will often insist on some form of notice, even if it is just a phone call to opposing counsel to notify them, and this would be why the plaintiff did put the defendants on notice of the motion.
Robert Half was also a non-competition case, and the Court noted that while loss of a competitive position in the marketplace may certainly ground an interlocutory injunction, it is another matter to justify an ex parte injunction. In such a case, it must be established that "irreparable harm" would be established simply by virtue of the requirement to give appropriate notice.
The misappropriation of confidential information may have initially justified a motion without notice, but once Corona had an opportunity to destroy the confidential information on Aura's servers, it's unclear that there was continuing urgency to justify a motion without notice.
*****
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.
There is nothing inherently wrong with this, unless there is a contractual non-solicitation/non-competition clause (though these are often difficult to enforce) or common law fiduciary obligations.
Frequently, the employer will go to Court seeking an injunction preventing the employee from competing or soliciting customers. A common feature of these cases, however, and one which makes the employee much less likely to succeed, is the misappropriation of proprietary information. There's nothing wrong with an employee walking away, but when the employee walks away with the employer's files, that's a problem. This is particularly problematic in the digital age, where copies of large numbers of files can be made with a few keystrokes.
In the recent case of Corona Packaging Inc. v. Singh, departing employees made exactly this mistake. Two employees left Corona (Cascioli in June 2011 and Singh in March 2012). Singh indicated that he was planning to return to India. However, in April 2012 a representative of Corona saw Singh and Cascioli at a trade show representing a new competitor company (which had incorporated in July 2011), Aura Packaging. This made Corona suspicious, so they called in forensic IT specialists.
It's pretty impressive what these forensic IT specialists can do. If you do something on your computer - use a program, delete a program, access data, copy data, upload data to an external device, etc. - they can figure out with astonishing detail what you actually did.
In this case, they looked at Singh's old workstation and determined that, the day before he left, he connected an external device (likely a BlackBerry) and copied 8,465 files to it, including proprietary information of Corona. The data included "all of its products technical specifications, the Corona budget setting forth confidential information including price lists, gross profit margins, machine cycle times, and input costs; the "Pre-Form" products' catalogue of Corona which is akin to the blue print for the final bottle products, with all the specifications created by Corona for such products; "Bottle Drawings" which include the final form bottle specifications; the Price List Notification which includes the proprietary formula utilized by Corona to determine its price list; product-related documents such as quality control testing, sample lists and packaging layouts; work place policies; confidential customer information including customer-owned mould specifications; and financial and administrative documents."
Sounds pretty much like Singh cleaned them out, no?
I retain a healthy dose of scepticism. Before I go into the details of why, let me explain that this motion was brought on an urgent basis. The defendants were given notice of the motion, and two of them had lawyers show up, but they were not given an opportunity to prepare responding materials. So all of the evidence before the Court was the evidence led by Corona. (Under these circumstances, if the injunction is granted, it can only be for ten days, subject to continuation following a hearing on appropriate notice.)
I'm no tech expert, but I know a thing or two about computers, and a lot about lawyers. You can have thousands of files with no usable data, or a single file with a huge amount of material data. The actual number of files transferred seems huge, but the number is essentially meaningless. I couldn't begin to estimate how many files might be transferred in an ordinary automated synchronization process. Still, a lawyer will throw in the total number of files because it sounds good. (Law is still, in many ways, in the 'old school', where people think of a 'file' as being an assortment of data inside a physical folder. A thousand files takes several filing cabinets, would include huge amounts of data, and represent years of work. In the digital world, a simple program might have hundreds or even thousands of files associated with it, and barely made a dent in the storage space of a small USB key.)
Hansford, Corona's IT specialist, called Singh, and Singh "admitted that he had taken data files from Corona". Singh asked if he could delete the data, and Hansford said that it was very difficult to permanently delete such data.
This is true. Especially once data has begun to be disseminated into a new server, new databases, etc., it is immensely difficult to trace it through a system. I was once involved in litigation similar to this where we had obtained an order that all the confidential data be destroyed, and years later, despite what the Court found to be good faith efforts to comply, we were still seeing reports generated by the defendant's system including excerpts from the confidential data in question.
Nonetheless with Singh's permission Hansford remotely logged into Aura's servers and deleted everything that he could find from Corona.
Not good enough, however: The Court still gave Corona the injunction it was seeking. There are three elements to awarding such an injunction: There must be a 'serious issue to be tried', evidence that the plaintiff will suffer 'irreparable harm' - harm that can't be remedied just by an award of damages - in the absence of the injunction, and the balance of convenience must favour the injunction.
Serious issue to be tried: "The evidence suggests that Messrs. Singh and Cascioli are in breach of their employment contractual obligations and common law duty of confidence to their former employer not to disclose or use trade secrets and confidential information. Arguably, they are also in breach of a restrictive covenant in their contractual relationship with Corona to not compete with Corona for a three-year period following upon leaving their employment with Corona."
Irreparable harm: The Court concluded that the misappropriation of the customer data would result in "permanent market loss" and "irrevocable damage to the business".
Balance of convenience: Aura is a relative startup, by contrast to Corona's significant long-term investment in developing a business base. So the harm to Aura by preventing competition is less than the harm to Corona of permitting competition.
The effect of the apparent deletion of the data isn't much discussed, but it doesn't appear to have helped Aura that they were halfway through a contract to produce a million bottles for Corona's biggest customer - the Court concluded that they could not have obtained this contract without the misappropriated data.
My Thoughts
This is a close case. Having misappropriated data definitely hurts Aura, yet it has since been ostensibly deleted. The thoroughness and effectiveness of the deletion is questionable, perhaps, but the efforts were undertaken by Corona's own IT specialist. So I would question the appropriateness of granting an injunction based on the likely impact of continued use of misappropriated data. That being said, where they have already gained market share through use of the data - i.e. a major contract from Corona's biggest customer - it may make some sense to require Aura to step away from that customer. However, aside from this potential loss in market share (which may have at least been mitigated by the deletion of the confidential data), it appears that the only loss which may be suffered by Corona is the ostensible loss of this contract, and by no means would that harm be 'irreparable'. The judge even queried Aura as to whether or not it would be prepared to complete the current contract but pay the profits into escrow pending determination of the issues in dispute. Aura declined to consider such an agreement, and probably correctly so. If disposition of the profits from that particular contract were the only unresolved issue on this motion, then granting an injunction would be wholly unnecessary and inappropriate - there are orders available for a defendant to preserve assets pending disposition of a claim, but they are available under only very specific circumstances. In general, a plaintiff sues a defendant, and only gets to chase the defendant's assets after obtaining judgment.
I'm also concerned by the reference to the restrictive covenants. On a motion of this nature, there is no reason why they could not be considered thoroughly, determining whether or not their terms ought to be upheld. The effect they had on the ultimate decision is unclear; in my humble opinion they ought to have been discussed thoroughly or not at all.
Furthermore, this motion has all the earmarks of a motion without notice. (In fact, the parties received notice, but not nearly sufficient notice to satisfy the rules for a motion made on notice, and thus I suspect that it should have borne essentially the same scrutiny as an ex parte motion.) There is no discussion whatsoever of the 'urgent basis' on which the motion was made, and whether or not it was appropriate.
For a good discussion of the circumstances required for motions without notice, see Robert Half Canada Inc. v. Jeewan. In that case, the Court notes that the first enquiry to be made is: "Why did you not give notice?" If the answer doesn't reveal "extraordinary urgency", the motion must be refused.
There are two categories of "extraordinary urgency":
(1) There are circumstances where there is reason to believe that, if given notice, the affected parties will act to frustrate the proceedings. (For example, if I'm concerned that a person is going to move their assets to another jurisdiction to frustrate my interests, and I'm bringing a motion for the preservation of property, I might justifiably be worried that they're just going to make the transfer immediately upon receiving notice of the motion.) Anton Piller orders - essentially private 'search warrants' - traditionally fall into this class. True that an Anton Piller order was sought in this case, but it isn't much discussed, and given that Corona's IT people had already been given access to Aura's servers prior to the hearing, it doesn't seem like it would have been a compelling argument. In any event, the fact that short notice was given completely would completely undermine the strength of such an argument.
(2) In some cases the circumstances are of such exigency that any delay will defeat the plaintiff's claims. "This is a distinctly rare circumstance." This would clearly be the argued basis in this instance - the Courts will often insist on some form of notice, even if it is just a phone call to opposing counsel to notify them, and this would be why the plaintiff did put the defendants on notice of the motion.
Robert Half was also a non-competition case, and the Court noted that while loss of a competitive position in the marketplace may certainly ground an interlocutory injunction, it is another matter to justify an ex parte injunction. In such a case, it must be established that "irreparable harm" would be established simply by virtue of the requirement to give appropriate notice.
The misappropriation of confidential information may have initially justified a motion without notice, but once Corona had an opportunity to destroy the confidential information on Aura's servers, it's unclear that there was continuing urgency to justify a motion without notice.
*****
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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