While I have seen it argued that the Bowes v. Goss Power Products Ltd. case pushes employment law further into its own unique species of contract (i.e. one in which the vulnerable employee needs to be protected), I have argued the contrary, that it reconciles much of employment law with the general principles of contract law.
It is an implied term of every employment contract that the employer will not terminate the employment relationship without just cause except on reasonable notice. That's actual notice. Most employers choose to breach this, and to be liable for damages for their failure to do so (i.e. pay in lieu of notice). The obligation to pay arises by virtue of the breach of contract.
However, the implied term can be modified by an express contractual term. This is what happened in Bowes. The employer reserved the right to terminate on a certain amount of notice or pay in lieu, and when it terminated without actual notice, the pay in lieu provisions of the contract were enforced. The obligation to pay arises by virtue of the contract itself, and isn't subject to other principles of damages. What Goss Power thought was a right to terminate the contract without actual notice turned out to also be a contractual obligation to pay.
But that right to terminate without actual notice may have other impacts in a few other areas. Whether or not a contract has actually been breached is going to have consequences.
In this post, I'd like to consider the interrelationship with the proposition set out by the Alberta Court of Appeal in Globex Foreign Exchange Corporation v. Kelcher. Globex dismissed Mr. Kelcher without notice, and then attempted to enforce restrictive covenants against him. The majority of the Alberta Court of Appeal, citing the principle from General Billposting Co. v. Atkinson, concluded that the wrongful dismissal meant that Globex was no longer entitled to rely on the restrictive covenants.
What if somebody in Kelcher's position wasn't entitled to actual notice? What if an employee with a termination clause like Mr. Bowes, as well as an otherwise-enforceable restrictive covenant, was fired on pay in lieu of notice?
By structuring the contract in such a way that the employer can pay the employee to go away without breaching the contract at all, the employer would be protecting itself from liabilities or losses of rights incidental to repudiating the contract, including - most likely - application of the General Billposting principle.
Also, it would be much harder for an employee to make a claim for moral damages, bad faith damages, aggravated damages, etc., without an actual breach of contract to point to.
All that being said, it's quite difficult to implement restrictive covenants in such a way that they will be upheld by the Court. An employer hoping to rely on a restrictive covenant really needs to have a competent lawyer involved right from the recruitment stage. I would encourage Ontario employers to contact me for assistance in drafting employment contracts.
*****
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 restrictive covenants. Show all posts
Showing posts with label restrictive covenants. Show all posts
Friday, August 17, 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.
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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.
Wednesday, March 21, 2012
Ontario Court of Appeal Rejects Restrictive Covenants
An interesting new case from the Ontario Court of Appeal was just released: Veolia ES Industrial Services Inc. v. Brule.
Brule founded Veolia, a company which engages in "inspecting, cleaning and rehabilitating sewers". In 1999, he sold it, and agreed as part of the sale to continue as Veolia's president for five years. This included a non-competition clause which carried for five years beyond the end of the contract. Four years in, they renegotiated the contract, and agreed to a new three year contract term starting January 1, 2004, with new restrictive covenants to become effective for two years starting January 1, 2007. (The new contract completely and expressly superceded the terms of the old contract.)
The contract also included early termination language, permitting Brule to quit on 180 days' notice. He did so, giving notice in July 2004, ending January 2005.
Brule went on to start a new company, Clean Water Works, originally intended to rehabilitate water mains (which did not compete with Veolia). However, in fall 2005, Clean Water Works needed more business, and so tendered for sewer work with the City of Ottawa. Clean Water Works won the tender process; Veolia was the next lowest bid.
Veolia brought an action seeking damages for breach of the non-comp clause and breach of fiduciary duties.
There was a problem with the language of the clause, however: The clause specified that it became effective January 1, 2007. The trial judge concluded that the intention of the parties was obviously to have a non-competition clause effective for two years following the end of employment, and interpreted the contract accordingly, finding that Brule breached it.
The Court of Appeal disagreed.
The specified 2007 date was not accidental - the evidence was clear that the intention was that, if the employment relationship extended beyond the anticipated three years, the non-comp would still not extend beyond December 31, 2008. Veolia's own representative acknowledged that Brule would not have signed the contract otherwise.
In other words, the trial judge's interpretation of the contract was one that the parties had quite expressly drafted to avoid, and was therefore an error. The Court of Appeal found that the language of the contract had to be left as it was, that the trial judge's "blue pencil" severance of the 2007 date was wrong, and that the language of the restrictive covenant was therefore unreasonable under the circumstances (and in any event wouldn't have barred Brule from competing in 2005).
As to the alleged breach of fiduciary duty, Brule had a common law duty not to compete unfairly. However, the only unfairness of the competition that Veolia could point to was that Brule had retained a binder of Veolia's public tenders...but the evidence was that this binder was not used in the Ottawa tender, and therefore could not have made the competition unfair. Besides, the tenders themselves were public record.
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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.
Brule founded Veolia, a company which engages in "inspecting, cleaning and rehabilitating sewers". In 1999, he sold it, and agreed as part of the sale to continue as Veolia's president for five years. This included a non-competition clause which carried for five years beyond the end of the contract. Four years in, they renegotiated the contract, and agreed to a new three year contract term starting January 1, 2004, with new restrictive covenants to become effective for two years starting January 1, 2007. (The new contract completely and expressly superceded the terms of the old contract.)
The contract also included early termination language, permitting Brule to quit on 180 days' notice. He did so, giving notice in July 2004, ending January 2005.
Brule went on to start a new company, Clean Water Works, originally intended to rehabilitate water mains (which did not compete with Veolia). However, in fall 2005, Clean Water Works needed more business, and so tendered for sewer work with the City of Ottawa. Clean Water Works won the tender process; Veolia was the next lowest bid.
Veolia brought an action seeking damages for breach of the non-comp clause and breach of fiduciary duties.
There was a problem with the language of the clause, however: The clause specified that it became effective January 1, 2007. The trial judge concluded that the intention of the parties was obviously to have a non-competition clause effective for two years following the end of employment, and interpreted the contract accordingly, finding that Brule breached it.
The Court of Appeal disagreed.
The specified 2007 date was not accidental - the evidence was clear that the intention was that, if the employment relationship extended beyond the anticipated three years, the non-comp would still not extend beyond December 31, 2008. Veolia's own representative acknowledged that Brule would not have signed the contract otherwise.
In other words, the trial judge's interpretation of the contract was one that the parties had quite expressly drafted to avoid, and was therefore an error. The Court of Appeal found that the language of the contract had to be left as it was, that the trial judge's "blue pencil" severance of the 2007 date was wrong, and that the language of the restrictive covenant was therefore unreasonable under the circumstances (and in any event wouldn't have barred Brule from competing in 2005).
As to the alleged breach of fiduciary duty, Brule had a common law duty not to compete unfairly. However, the only unfairness of the competition that Veolia could point to was that Brule had retained a binder of Veolia's public tenders...but the evidence was that this binder was not used in the Ottawa tender, and therefore could not have made the competition unfair. Besides, the tenders themselves were public record.
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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.
Friday, February 10, 2012
Wrongful Dismissal and Restrictive Covenants
Here's an interesting decision from the Alberta Court of Appeal, released last August: Globex Foreign Exchange Corporation v. Kelcher, which discusses, among other things, the effects of wrongful dismissal upon restrictive covenants. So suppose I sign an agreement that I will not solicit clients of my employer within two years after the end of my employment, and then my employer eventually fires me without cause and without notice. What happens to that non-solicitation agreement?
I think it's important to highlight, at the outset, the definition of "wrongful dismissal": You've seen me refer to Love v. Acuity Investments on a couple of occasions before to note that an employer's actual obligation on termination is to provide actual notice, and that firing without notice but providing pay in lieu is still a breach of contract; the pay in lieu is an attempt to compensate the employee for the breach.
The Alberta Court of Appeal similarly references Love v. Acuity Investments, with the result that we can safely understand that, when they're talking about "wrongful dismissal", they're talking about just about any termination without actual notice.
The conclusion the Court comes to is this: An employer who wrongfully dismisses an employee is not entitled to rely on restrictive covenants. They have repudiated the contract, and are not entitled to continue to hold the employee to his obligations thereunder.
There doesn't appear to be much jurisprudence on the point. A similar, but not quite the same, argument has been raised in respect of termination clauses: Some have argued that a failure by the employer to honour its contractual obligations means that it cannot rely on contractual language limiting pay in lieu of notice. The general conclusion is that this argument must fail: When you're fired without notice, but you're only entitled to a certain amount of notice, your employer's liability is still going to be limited to the notice that they should have provided you if they had complied with the contract.
But restrictive covenants are different. Termination clauses are about obligations of the employer (even though they usually work to the employer's benefit by contrast to common law), whereas restrictive covenants relate to obligations of the employee. So the jurisprudence on termination clauses essentially says: Employer, you breached the contract, so now you have to compensate the other party on the basis of what your contractual obligations were. For this restrictive covenant case, the logic runs much differently: Employer, you repudiated the contract, so now you are not entitled to expect the employee to continue to perform his obligations under it.
Pretty simple when you think about it that way.
The Alberta Court of Appeal relied on a rather old British case - General Billposting v. Atkinson - from 1909, which involved an employer trying to rely on a restrictive covenant after firing an employee with insufficient notice. The House of Lords concluded that the employee was relieved of obligations under the restrictive covenant by the breach of the contract. The case has been cited favourably by the Supreme Court of Canada in the past, but not in a restrictive covenant context.
The logic underlying this case isn't automatic, however: Not every breach of contract will relieve the other party of ongoing responsibilities, nor are all collateral covenant terminated even by a fundamental breach. There is a strong dissent in this case, pointing out that some covenants are clearly indicated to survive the end of an agreement, and that the body of Canadian case law suggests that - notwithstanding a breach of other contractual duties - these will survive. (The dissenting judge, Justice Slatter, points out that the employee is not relieved either of other obligations - for example, it's probably uncontroversial that it would still be wrong for him to misuse confidential information of the employer.)
My Thoughts
This is a close one. Justice Slatter has some very good points - it's hard to deny his logic. (He is also quite critical of some Ontario law jurisprudence on "fresh consideration", and as much as I think the fresh consideration doctrine in Ontario is useful law, his criticisms of it as being "artificial" are not unfounded.)
The majority points out several good reasons why an employer who dismisses without notice should not be entitled to rely on the restrictive covenant, yet they aren't necessarily persuasive on a closer look. The first two are from other British jurisprudence; the third is an addition of their own.
(1) Otherwise an employer could hire a potential competitor and dismiss them shortly thereafter just for the benefit of the restrictive covenant. This is true, and concerning, but not solved by the majority's approach here. The unfairness is not caused by the wrongfulness of the termination. Particularly if the employer used a well-drafted employment agreement with a good termination clause, the employment could be terminated shortly thereafter with very minimal responsibilities, without actually breaching the contract. Thus, the majority's solution...isn't a solution. Justice Slatter argues that enforcing a restrictive covenant in such a case would be unconscionable, which seems like a cleaner way of dealing with the problem.
(2) Enforcing a restrictive covenant in the face of a wrongful termination negates the consideration for the acceptance of the restrictive covenant. This one doesn't seem right: If I accepted a job with a restrictive covenant attached, the consideration was "the job", not "continued employment". If I performed services and received remuneration under the contract of employment, it's hard to say that, just because it's terminated without appropriate notice, the original contract is now devoid of consideration. The principle is framed separately as suggesting that the premature termination of the contract will deny the employee the "extra amount of remuneration" for having agreed to the restrictive covenant. Still seems wrong. Contracts are whole entities. You don't need separate consideration for each and every covenant in a contract. If there were, it isn't necessarily true that the employee would be denied it. ("Okay, I'll agree to the restrictive covenant, but in that case I'll want a premium on my wage rate throughout the employment.") Even if the consideration were tied to the termination of employment...well, let's run with this for a second.
Let's clear out the rest of the contractual terms, and discuss only contractual notice of termination and the restrictive covenant. Suppose I have a contract that entitles me to 3 months notice of termination, with no restrictive covenants. You're my employer, and you ask me to agree to a non-competition agreement for one year after the end of my employment. I answer, "Well, it will be harder for me to find a new job in a different field. I'll tell you what, I'll agree to the non-comp if you extend my contractual notice period to 9 months." We agree on those terms, and you later fire me without actual notice.
Okay, so I've lost the benefit of the extension of the notice period, right? No, still wrong. Because in fact, I am still entitled to a remedy for that breach, now being three times what it would have been but for my agreement to the restrictive covenant. That still smells like consideration to me.
(3) Mitigation. This is actually a good point, and the first thought that came into my head. The duty to mitigate by finding new employment, triggered by the wrongful dismissal, is in conflict with a restrictive covenant which limits the prospects of new employment. To wipe restrictive covenants off the plate where the duty to mitigate is triggered...well, it's a nice clean solution.
But it isn't the only solution. Indeed, where an employee is prevented from working in his/her field for a period of time, it would make more sense to argue that the duty to mitigate should be largely lifted through the running of the restrictive covenant.
Let's put these beside some of the legitimate concerns raised by Justice Slatter, namely that an employer can, without blameworthy conduct, fail to provide the necessary notice - for example, in a scenario where the notice provided falls slightly short of the notice period a court finds, or where the assessment at the time of "just cause" falls slightly short of the threshold at trial. It does indeed seem unjust to deny an employer of the benefit of such a clause under such circumstances.
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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.
I think it's important to highlight, at the outset, the definition of "wrongful dismissal": You've seen me refer to Love v. Acuity Investments on a couple of occasions before to note that an employer's actual obligation on termination is to provide actual notice, and that firing without notice but providing pay in lieu is still a breach of contract; the pay in lieu is an attempt to compensate the employee for the breach.
The Alberta Court of Appeal similarly references Love v. Acuity Investments, with the result that we can safely understand that, when they're talking about "wrongful dismissal", they're talking about just about any termination without actual notice.
The conclusion the Court comes to is this: An employer who wrongfully dismisses an employee is not entitled to rely on restrictive covenants. They have repudiated the contract, and are not entitled to continue to hold the employee to his obligations thereunder.
There doesn't appear to be much jurisprudence on the point. A similar, but not quite the same, argument has been raised in respect of termination clauses: Some have argued that a failure by the employer to honour its contractual obligations means that it cannot rely on contractual language limiting pay in lieu of notice. The general conclusion is that this argument must fail: When you're fired without notice, but you're only entitled to a certain amount of notice, your employer's liability is still going to be limited to the notice that they should have provided you if they had complied with the contract.
But restrictive covenants are different. Termination clauses are about obligations of the employer (even though they usually work to the employer's benefit by contrast to common law), whereas restrictive covenants relate to obligations of the employee. So the jurisprudence on termination clauses essentially says: Employer, you breached the contract, so now you have to compensate the other party on the basis of what your contractual obligations were. For this restrictive covenant case, the logic runs much differently: Employer, you repudiated the contract, so now you are not entitled to expect the employee to continue to perform his obligations under it.
Pretty simple when you think about it that way.
The Alberta Court of Appeal relied on a rather old British case - General Billposting v. Atkinson - from 1909, which involved an employer trying to rely on a restrictive covenant after firing an employee with insufficient notice. The House of Lords concluded that the employee was relieved of obligations under the restrictive covenant by the breach of the contract. The case has been cited favourably by the Supreme Court of Canada in the past, but not in a restrictive covenant context.
The logic underlying this case isn't automatic, however: Not every breach of contract will relieve the other party of ongoing responsibilities, nor are all collateral covenant terminated even by a fundamental breach. There is a strong dissent in this case, pointing out that some covenants are clearly indicated to survive the end of an agreement, and that the body of Canadian case law suggests that - notwithstanding a breach of other contractual duties - these will survive. (The dissenting judge, Justice Slatter, points out that the employee is not relieved either of other obligations - for example, it's probably uncontroversial that it would still be wrong for him to misuse confidential information of the employer.)
My Thoughts
This is a close one. Justice Slatter has some very good points - it's hard to deny his logic. (He is also quite critical of some Ontario law jurisprudence on "fresh consideration", and as much as I think the fresh consideration doctrine in Ontario is useful law, his criticisms of it as being "artificial" are not unfounded.)
The majority points out several good reasons why an employer who dismisses without notice should not be entitled to rely on the restrictive covenant, yet they aren't necessarily persuasive on a closer look. The first two are from other British jurisprudence; the third is an addition of their own.
(1) Otherwise an employer could hire a potential competitor and dismiss them shortly thereafter just for the benefit of the restrictive covenant. This is true, and concerning, but not solved by the majority's approach here. The unfairness is not caused by the wrongfulness of the termination. Particularly if the employer used a well-drafted employment agreement with a good termination clause, the employment could be terminated shortly thereafter with very minimal responsibilities, without actually breaching the contract. Thus, the majority's solution...isn't a solution. Justice Slatter argues that enforcing a restrictive covenant in such a case would be unconscionable, which seems like a cleaner way of dealing with the problem.
(2) Enforcing a restrictive covenant in the face of a wrongful termination negates the consideration for the acceptance of the restrictive covenant. This one doesn't seem right: If I accepted a job with a restrictive covenant attached, the consideration was "the job", not "continued employment". If I performed services and received remuneration under the contract of employment, it's hard to say that, just because it's terminated without appropriate notice, the original contract is now devoid of consideration. The principle is framed separately as suggesting that the premature termination of the contract will deny the employee the "extra amount of remuneration" for having agreed to the restrictive covenant. Still seems wrong. Contracts are whole entities. You don't need separate consideration for each and every covenant in a contract. If there were, it isn't necessarily true that the employee would be denied it. ("Okay, I'll agree to the restrictive covenant, but in that case I'll want a premium on my wage rate throughout the employment.") Even if the consideration were tied to the termination of employment...well, let's run with this for a second.
Let's clear out the rest of the contractual terms, and discuss only contractual notice of termination and the restrictive covenant. Suppose I have a contract that entitles me to 3 months notice of termination, with no restrictive covenants. You're my employer, and you ask me to agree to a non-competition agreement for one year after the end of my employment. I answer, "Well, it will be harder for me to find a new job in a different field. I'll tell you what, I'll agree to the non-comp if you extend my contractual notice period to 9 months." We agree on those terms, and you later fire me without actual notice.
Okay, so I've lost the benefit of the extension of the notice period, right? No, still wrong. Because in fact, I am still entitled to a remedy for that breach, now being three times what it would have been but for my agreement to the restrictive covenant. That still smells like consideration to me.
(3) Mitigation. This is actually a good point, and the first thought that came into my head. The duty to mitigate by finding new employment, triggered by the wrongful dismissal, is in conflict with a restrictive covenant which limits the prospects of new employment. To wipe restrictive covenants off the plate where the duty to mitigate is triggered...well, it's a nice clean solution.
But it isn't the only solution. Indeed, where an employee is prevented from working in his/her field for a period of time, it would make more sense to argue that the duty to mitigate should be largely lifted through the running of the restrictive covenant.
Let's put these beside some of the legitimate concerns raised by Justice Slatter, namely that an employer can, without blameworthy conduct, fail to provide the necessary notice - for example, in a scenario where the notice provided falls slightly short of the notice period a court finds, or where the assessment at the time of "just cause" falls slightly short of the threshold at trial. It does indeed seem unjust to deny an employer of the benefit of such a clause under such circumstances.
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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.
Wednesday, October 5, 2011
Dance Instructor found not to be a "Key Employee"
I've occasionally discussed restrictive covenants before; what I haven't covered in much detail is the route that employers can occasionally go to prevent unfair competition by former employees who haven't signed restrictive covenants.
At common law, there is a concept of fiduciary duties, which is an obligation on one person to put another's interests ahead of his own. Professionals often owe their clients fiduciary obligations, and occasionally you get case law where a professional abused information received in confidence to their own advantage.
In the employment context, "key employees" may be considered to be fiduciaries of their employer, and are not permitted to use confidential information they acquired in their employment to unfairly compete with the former employer. A "key employee" is defined by the following non-exhaustive list:
At common law, there is a concept of fiduciary duties, which is an obligation on one person to put another's interests ahead of his own. Professionals often owe their clients fiduciary obligations, and occasionally you get case law where a professional abused information received in confidence to their own advantage.
In the employment context, "key employees" may be considered to be fiduciaries of their employer, and are not permitted to use confidential information they acquired in their employment to unfairly compete with the former employer. A "key employee" is defined by the following non-exhaustive list:
- An integral and indispensable component of the management team that is responsible for guiding the business affairs of the employer;
- Necessarily involved in the decision-making process; and
- Therefore, has broad access to confidential information that if disclosed would significantly impair the competitive advantages the former employer enjoyed.
Absent a restrictive covenant or fiduciary obligations, former employees are free to compete with former employers, including bringing to a new business the skills and knowledge acquired while serving the former employer. But restrictive covenants can limit that (if enforceable, which is not easy), and fiduciary obligations do as well in very similar ways.
In the recent case of Laplante v. Hennessy-Craibe, Laplante operated a dance studio in Cornwall and had employed Hennessy-Craibe as a dance instructor until she left to start her own studio. It appears that several students went with her. Laplante then sued and sought an interlocutory injunction preventing Hennessy-Craibe from soliciting current and former students.
This is surprisingly similar to Gatreau v. Arvelo (2004), also involving a defecting dance instructor, in this case from an employer in Brockville. I suppose Eastern Ontario must have a competitive industry for dance instruction. Similarly, in that case, the plaintiff alleged that the instructor was a fiduciary, but the judge rejected it.
In Laplante, even without referring to Gatreau, Justice Quigley came to the same conclusion: He did not see a serious issue to be tried, and felt that even if a trial judge ultimately found Hennessy-Craibe to be a fiduciary, Laplante could be compensated through an award of damages; therefore, he declined to award the injunction sought.
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There is also previous jurisprudence considering whether or not written restrictive covenants can be enforced against athletic instructors. Of course, every case is unique on its facts and the specific language of these clauses, but Courts have gone both ways when determining whether or not an athletic school is protecting 'legitimate proprietary interests' with restrictive covenants:
In Gold in the Net Hockey School Inc. v. Netpower Inc., a 2007 Alberta case, the Court found that a non-competition clause did not protect a hockey school's legitimate proprietary interests.
In Moffatt v. Sanchez, a 2004 Ontario decision involving a Tae Kwon Do academy, a non-competition clause was enforced against the former head instructor.
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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.
Saturday, September 17, 2011
Back to Basics: Is this contract enforceable?
Having yesterday posted about why you should use an employment contract, it's worth noting that there are a lot of ways to go wrong when drafting or executing an employment contract. In addition to making sure that the terms of restrictive covenants are enforceable, there are issues that can invalidate termination clauses or even entire written contracts. This is not an exhaustive treatment of the subject, but just some of the red flags.
(1) Lack of Consideration
In law, a contract requires "consideration" - something of value flowing from each party in exchange for the promises of the other. Now, you might think that, in an employment relationship, consideration is easy. The employee gives the employer his labour; the employer reciprocates by giving the employee a paying job.
Not so much.
Oh yes, in theory, that's fine. The challenge arises, however, when the employee already has the job, whether they've just recently created an oral contract or the employee has been there for 20+ years. Because when the employer puts a contract to an existing employee, unless there is "fresh consideration" in the contract - something they're getting now that they weren't getting before - even the signed contract is, in law, just a meaningless piece of paper for lack of consideration.
It's quite common for a written contract to be put to an employee after they've already started in the job, and accordingly to be of no force and effect. However, the difficulties are more onerous than that: even having the employee sign on day 1 or earlier doesn't necessarily get you around the consideration problem. An agreement that is capable of forming a contract (i.e. with consideration and sufficient certainty as to its terms) is formed simply by offer and acceptance. So there are cases, such as Alishah v. 1582557 Ontario Ltd., in which the employer offered a position, the employee accepted it, and the contract that was subsequently, though still before the start date, put to the employee and was signed was unenforceable. (In that case, Alishah had quit his previous job after getting the job offer but before getting the contract. That kind of reliance isn't strictly necessary, but is strong evidence of the existence of a contract.)
What about the employer argument that "Well, I didn't fire the person, as I would have had he refused to sign the contract." Isn't that consideration? The Ontario Court of Appeal has wrestled with this question a few times. In the 2001 Techform decision, the Court found that, where the employer has at least tacitly promised to forbear from exercising its right to terminate the employee for a reasonable period of time, that constitutes consideration. However, in the subsequent Hobbs v. TDI Canada Ltd. and Braiden v. La-Z-Boy Canada Limited cases, the Court construed that decision very narrowly. It isn't enough that, in hindsight, the employer didn't fire the employee for a time after the signing of the contract, but rather it is necessary that the employer make a promise in advance not to fire for a reasonable period of time.
So what should an employer do? With new hires, never communicate an offer without making it clear that the offer is subject to them accepting the terms of the written contract. The best way is to make sure that the offer is in writing, with the contractual terms appended. It's okay to call and say "We're sending you an offer with a written contract." It is not okay to call and say "The job's yours if you want it" and then to unexpectedly send them the contract afterward.
With existing employees, give them something. It doesn't have to be much - a small raise, a token signing bonus, even a peppercorn would do. That said, it is theoretically possible that, with nominal consideration depriving the employee of substantial rights, there may be an argument to be made that the contract is 'unconscionable'.
(2) Statutory Non-Compliance
If the termination clause does not adhere to the minimums under the Employment Standards Act, 2000 (again, speaking of Provincially-regulated businesses in Ontario), it is void. If it's going to be a fixed amount of notice that doesn't change over time, it has to match or exceed the highest statutory minimum that might arise (i.e. 8 weeks). If there's a formula, it has to match or exceed the statutory minimum in every instance.
Indeed, I think it's best to key the language to the statute directly, but even then you have to be careful: In the British Columbia case of Waddell v. CINTAS Corporation, the employee had started employment in Ontario and his contract tied his entitlements to the Ontario ESA...then he transferred to B.C., where he worked until the termination of his employment. The B.C. minimum entitlements are defined slightly differently from Ontario's and in some instances may be greater. Thus, keying the entitlements of a now-B.C. employee to Ontario's statutory minimums had the result that the provision was void.
Conversely, in another B.C. case, Boule v. Ericatel Ltd., language keying the entitlement to "the applicable provincial law" was found too vague to be enforceable. These are tricky, which is why it's very prudent to hire a lawyer with employment law expertise to draft your employment contracts.
(3) The "Substratum" Argument
This is a less common issue (and becoming less so), but far easier to deal with. Picture this classic scenario, where a person who started off in the mail room rose through the ranks to eventually become an executive. Now imagine that, when starting in the mail room, he signed a contract with minimalistic entitlements. The substratum argument is that the character of the employment has changed so much over the course of the relationship that the parties can no longer be held to the original contract; the parties could not have reasonably expected when signing the contract for a mail room assistant that it would apply to an executive.
But, as I said, it's easy to deal with: Every time a person gets promoted, they should sign a new contract. It should be made into a practice. Of course, keep in mind the tips above about fresh consideration, but it shouldn't be too difficult since the promotion (and raise that would usually accompany it) would constitute fresh consideration.
(1) Lack of Consideration
In law, a contract requires "consideration" - something of value flowing from each party in exchange for the promises of the other. Now, you might think that, in an employment relationship, consideration is easy. The employee gives the employer his labour; the employer reciprocates by giving the employee a paying job.
Not so much.
Oh yes, in theory, that's fine. The challenge arises, however, when the employee already has the job, whether they've just recently created an oral contract or the employee has been there for 20+ years. Because when the employer puts a contract to an existing employee, unless there is "fresh consideration" in the contract - something they're getting now that they weren't getting before - even the signed contract is, in law, just a meaningless piece of paper for lack of consideration.
It's quite common for a written contract to be put to an employee after they've already started in the job, and accordingly to be of no force and effect. However, the difficulties are more onerous than that: even having the employee sign on day 1 or earlier doesn't necessarily get you around the consideration problem. An agreement that is capable of forming a contract (i.e. with consideration and sufficient certainty as to its terms) is formed simply by offer and acceptance. So there are cases, such as Alishah v. 1582557 Ontario Ltd., in which the employer offered a position, the employee accepted it, and the contract that was subsequently, though still before the start date, put to the employee and was signed was unenforceable. (In that case, Alishah had quit his previous job after getting the job offer but before getting the contract. That kind of reliance isn't strictly necessary, but is strong evidence of the existence of a contract.)
What about the employer argument that "Well, I didn't fire the person, as I would have had he refused to sign the contract." Isn't that consideration? The Ontario Court of Appeal has wrestled with this question a few times. In the 2001 Techform decision, the Court found that, where the employer has at least tacitly promised to forbear from exercising its right to terminate the employee for a reasonable period of time, that constitutes consideration. However, in the subsequent Hobbs v. TDI Canada Ltd. and Braiden v. La-Z-Boy Canada Limited cases, the Court construed that decision very narrowly. It isn't enough that, in hindsight, the employer didn't fire the employee for a time after the signing of the contract, but rather it is necessary that the employer make a promise in advance not to fire for a reasonable period of time.
So what should an employer do? With new hires, never communicate an offer without making it clear that the offer is subject to them accepting the terms of the written contract. The best way is to make sure that the offer is in writing, with the contractual terms appended. It's okay to call and say "We're sending you an offer with a written contract." It is not okay to call and say "The job's yours if you want it" and then to unexpectedly send them the contract afterward.
With existing employees, give them something. It doesn't have to be much - a small raise, a token signing bonus, even a peppercorn would do. That said, it is theoretically possible that, with nominal consideration depriving the employee of substantial rights, there may be an argument to be made that the contract is 'unconscionable'.
(2) Statutory Non-Compliance
If the termination clause does not adhere to the minimums under the Employment Standards Act, 2000 (again, speaking of Provincially-regulated businesses in Ontario), it is void. If it's going to be a fixed amount of notice that doesn't change over time, it has to match or exceed the highest statutory minimum that might arise (i.e. 8 weeks). If there's a formula, it has to match or exceed the statutory minimum in every instance.
Indeed, I think it's best to key the language to the statute directly, but even then you have to be careful: In the British Columbia case of Waddell v. CINTAS Corporation, the employee had started employment in Ontario and his contract tied his entitlements to the Ontario ESA...then he transferred to B.C., where he worked until the termination of his employment. The B.C. minimum entitlements are defined slightly differently from Ontario's and in some instances may be greater. Thus, keying the entitlements of a now-B.C. employee to Ontario's statutory minimums had the result that the provision was void.
Conversely, in another B.C. case, Boule v. Ericatel Ltd., language keying the entitlement to "the applicable provincial law" was found too vague to be enforceable. These are tricky, which is why it's very prudent to hire a lawyer with employment law expertise to draft your employment contracts.
(3) The "Substratum" Argument
This is a less common issue (and becoming less so), but far easier to deal with. Picture this classic scenario, where a person who started off in the mail room rose through the ranks to eventually become an executive. Now imagine that, when starting in the mail room, he signed a contract with minimalistic entitlements. The substratum argument is that the character of the employment has changed so much over the course of the relationship that the parties can no longer be held to the original contract; the parties could not have reasonably expected when signing the contract for a mail room assistant that it would apply to an executive.
But, as I said, it's easy to deal with: Every time a person gets promoted, they should sign a new contract. It should be made into a practice. Of course, keep in mind the tips above about fresh consideration, but it shouldn't be too difficult since the promotion (and raise that would usually accompany it) would constitute fresh consideration.
*****
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.
Friday, September 16, 2011
Back to Basics: Why should we use an employment contract?
Most sophisticated employers use (or should use) written contracts for their employees. The advantages are myriad, in terms of setting out expectations for how the employment relationship should move forward, including remuneration, yet the most significant advantages arise upon termination of the employment relationship.
Termination by the Employee
This is a minor point, but not unimportant. Many employees wrongly think that 2 weeks notice of resignation is just a courtesy. Only in certain narrow circumstances is it statutorily required in Ontario, but under common law an employee must give "reasonable notice" of resignation. That's contextually based, and not the subject of much case law, but it's safe to say that 2 weeks isn't always the magic number. (If you have a great deal of responsibility, and you expect the employer to need time to assign your duties elsewhere, you might consider giving more notice.)
So the advantages of having a clause addressing this in the contract are two-fold: Firstly, it tells the employee in no uncertain terms that they are, in fact, required to give notice, rebutting the myth that they can leave at will if they want to. Secondly, it determines how much notice is required. If the employer thinks that 4 weeks is necessary to make the transition, 4 weeks notice can be required. Or longer, in the right case. Employees seldom feel very empowered to negotiate the terms of an employment contract, and even less so as regards termination clauses. (See this earlier entry regarding negotiating termination clauses.)
That being said, insisting on too much notice may send the wrong message to the employee. I have seen contracts requiring employees to give three months of notice, but in one of those contexts (being a contract that was being put to me personally by a prospective employer) it was coupled with other red flags that told me that the firm was having difficulties with employee retention, which factored significantly into me not accepting the offer.
Termination by the Employer
This is, by a large margin, the most common issue to arise from employment contracts. As I discussed in detail in this recent entry, when terminating an employment relationship without just cause, an employer is likewise obligated to give notice or pay in lieu thereof. There's the statutory minimum, which creates a floor for most employees, yet the implied term requiring an employer to give "reasonable notice" usually makes for much more significant liabilities.
So, once again, there are two advantages to the termination clause: It can be used to reduce liabilities to as low as the statutory minimum, and it also provides some degree of certainty. Calculating "reasonable notice" is not an exact science, and an employer shouldn't be surprised if the employee's lawyer is demanding a significantly higher amount of money than the employer's own lawyer opines they should need to pay. Just negotiating a settlement is going to drive up legal fees, and it gets even more expensive if it has to go to litigation.
As well, there are related advantages in terms of limiting the employer's responsibilities. When setting out the terms of the remuneration package in the written contract, Courts have held in some circumstances that terms requiring 'active employment' as of certain dates for bonus eligibility can be enforceable.
Post-Employment Obligations
A written contract at the outset of employment is really the best time to set out any restrictive covenants. If you're going to require non-solicitation or non-competition clauses, that's the place for them. Of course, there are certain requirements for restrictive covenants to be enforceable (which I previously discussed here).
Tomorrow, how to make a written employment contract binding.
*****
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.
Termination by the Employee
This is a minor point, but not unimportant. Many employees wrongly think that 2 weeks notice of resignation is just a courtesy. Only in certain narrow circumstances is it statutorily required in Ontario, but under common law an employee must give "reasonable notice" of resignation. That's contextually based, and not the subject of much case law, but it's safe to say that 2 weeks isn't always the magic number. (If you have a great deal of responsibility, and you expect the employer to need time to assign your duties elsewhere, you might consider giving more notice.)
So the advantages of having a clause addressing this in the contract are two-fold: Firstly, it tells the employee in no uncertain terms that they are, in fact, required to give notice, rebutting the myth that they can leave at will if they want to. Secondly, it determines how much notice is required. If the employer thinks that 4 weeks is necessary to make the transition, 4 weeks notice can be required. Or longer, in the right case. Employees seldom feel very empowered to negotiate the terms of an employment contract, and even less so as regards termination clauses. (See this earlier entry regarding negotiating termination clauses.)
That being said, insisting on too much notice may send the wrong message to the employee. I have seen contracts requiring employees to give three months of notice, but in one of those contexts (being a contract that was being put to me personally by a prospective employer) it was coupled with other red flags that told me that the firm was having difficulties with employee retention, which factored significantly into me not accepting the offer.
Termination by the Employer
This is, by a large margin, the most common issue to arise from employment contracts. As I discussed in detail in this recent entry, when terminating an employment relationship without just cause, an employer is likewise obligated to give notice or pay in lieu thereof. There's the statutory minimum, which creates a floor for most employees, yet the implied term requiring an employer to give "reasonable notice" usually makes for much more significant liabilities.
So, once again, there are two advantages to the termination clause: It can be used to reduce liabilities to as low as the statutory minimum, and it also provides some degree of certainty. Calculating "reasonable notice" is not an exact science, and an employer shouldn't be surprised if the employee's lawyer is demanding a significantly higher amount of money than the employer's own lawyer opines they should need to pay. Just negotiating a settlement is going to drive up legal fees, and it gets even more expensive if it has to go to litigation.
As well, there are related advantages in terms of limiting the employer's responsibilities. When setting out the terms of the remuneration package in the written contract, Courts have held in some circumstances that terms requiring 'active employment' as of certain dates for bonus eligibility can be enforceable.
Post-Employment Obligations
A written contract at the outset of employment is really the best time to set out any restrictive covenants. If you're going to require non-solicitation or non-competition clauses, that's the place for them. Of course, there are certain requirements for restrictive covenants to be enforceable (which I previously discussed here).
Tomorrow, how to make a written employment contract binding.
*****
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.
Sunday, August 7, 2011
Application is not appropriate for enforcing restrictive covenants
For non-law readers, let me first simply explain a point of civil procedure.
In civil litigation, there are really two kinds of proceedings: Applications, and actions. (It's really quite a bit more complicated than that, but let's keep it simple.) An action is what we usually think of as a law suit: I sue you, you defend, we go through disclosure and discovery, pre-trial conferences, then we set a trial date.
An application under the Rules of Civil Procedure is usually a much briefer and simpler process. If I'm issuing a Notice of Application, I will obtain a date from the Court before I even start the process, which could be just a couple of weeks out. I issue the documents, serve them on any respondents, and you have an opportunity to file responding materials...but we end up in Court fairly quickly. Witnesses aren't usually called to testify, but evidence is introduced through affidavit.
It's simpler and faster, but not always permissible under the Rules. Even in cases in which an application is permissible, if there are serious facts in dispute, such matters can be referred to a trial, and are then treated as an action.
In the recent case of Portable Packaging Systems Inc. v. Brackin, the employer attempted to proceed by application to enforce restrictive covenants against the employee, seeking damages and injunctive relief. The Court noted that injunctive relief is only available on an application where it is ancillary to other relief properly sought by application, and damages are seldom available on applications.
The proceeding by application is likely a consequence of the admitted difficulty in proving damages. But the Court ultimately concluded that an application was inappropriate and that the relief sought should be sought by way of an action. Accordingly, the Court dismissed the application.
I question why the decision does not address the applicability of Rule 14.05(3)(d), which permits applications seeking, among other things, "the determination of rights that depend on the interpretation of a ...contract...". Consider, for example, Mason v. Chem-Trend Limited Partnership, which I blogged about here: The employee brought an application for a declaration that restrictive covenants were unenforceable, and the Court of Appeal ultimately found them not to be enforceable.
*****
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.
In civil litigation, there are really two kinds of proceedings: Applications, and actions. (It's really quite a bit more complicated than that, but let's keep it simple.) An action is what we usually think of as a law suit: I sue you, you defend, we go through disclosure and discovery, pre-trial conferences, then we set a trial date.
An application under the Rules of Civil Procedure is usually a much briefer and simpler process. If I'm issuing a Notice of Application, I will obtain a date from the Court before I even start the process, which could be just a couple of weeks out. I issue the documents, serve them on any respondents, and you have an opportunity to file responding materials...but we end up in Court fairly quickly. Witnesses aren't usually called to testify, but evidence is introduced through affidavit.
It's simpler and faster, but not always permissible under the Rules. Even in cases in which an application is permissible, if there are serious facts in dispute, such matters can be referred to a trial, and are then treated as an action.
In the recent case of Portable Packaging Systems Inc. v. Brackin, the employer attempted to proceed by application to enforce restrictive covenants against the employee, seeking damages and injunctive relief. The Court noted that injunctive relief is only available on an application where it is ancillary to other relief properly sought by application, and damages are seldom available on applications.
The proceeding by application is likely a consequence of the admitted difficulty in proving damages. But the Court ultimately concluded that an application was inappropriate and that the relief sought should be sought by way of an action. Accordingly, the Court dismissed the application.
I question why the decision does not address the applicability of Rule 14.05(3)(d), which permits applications seeking, among other things, "the determination of rights that depend on the interpretation of a ...contract...". Consider, for example, Mason v. Chem-Trend Limited Partnership, which I blogged about here: The employee brought an application for a declaration that restrictive covenants were unenforceable, and the Court of Appeal ultimately found them not to be enforceable.
*****
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.
Sunday, July 17, 2011
Restrictive Covenant Language
I posted yesterday about the Superior Court enforcing a non-solicitation clause in an employment contract. This is actually fairly rare, as restrictive covenants are quite difficult to enforce.
In order to enforce a restrictive covenant in an employment contract, the employer first has to show that there is some legitimate proprietary business interest which couldn't be protected by lesser means, and then further has to establish that both the geographical restrictions and the temporal restrictions are reasonable. So a non-competition clause that says "You can never compete with my business, anywhere" would likely be unenforceable. What constitutes "reasonable" limitations is a matter of judgment, and varies from circumstance to circumstance. So in a particular circumstance a provision might say "You can't compete within a period of 18 months within 25 km." If the Court finds that only a 12 month covenant is appropriate, the clause doesn't get written down, but is void entirely. This forces employers to err on the side of caution and to be conservative with non-competition agreements.
A couple of years ago, I received a job offer that included restrictive covenant language in it along the following lines:
Now, there are a number of potential problems with the implementation of the clause, but what interests me, and what I would welcome discussion on, is the overall concept of the clause, having a series of lesser alternatives built in.
There's nothing in the concept that is fundamentally at odds with the existing case law on restrictive covenants, but there still seems to be something...perhaps too good to be true...about the clause, from an employer's perspective. Conversely, there is something troubling about the way that it puts the ball entirely into the employee's court in terms of risk and legal costs. Imagine a clause that prevented competition "for the maximum time and geographical scope as a Court of competent jurisdiction finds reasonable". The effect is essentially the same, conceptually, and yet the trouble is that there's a lack of clarity, a failure to tell the employee exactly what terms the employee is going to be held to.
So I think that's the crucial flaw in the language: Saying "this or this or this" doesn't specifically tell the employee which one, and thus becomes unclear and ostensibly unenforceable.
I would back up this assertion with reference to Shore v. Ladner Downs, in which the question was whether or not a termination clause with a formula for notice which exceeded the statutory minimum at the time of termination but failed to formulaically meet the statutory minimums in other circumstances:
*****
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.
In order to enforce a restrictive covenant in an employment contract, the employer first has to show that there is some legitimate proprietary business interest which couldn't be protected by lesser means, and then further has to establish that both the geographical restrictions and the temporal restrictions are reasonable. So a non-competition clause that says "You can never compete with my business, anywhere" would likely be unenforceable. What constitutes "reasonable" limitations is a matter of judgment, and varies from circumstance to circumstance. So in a particular circumstance a provision might say "You can't compete within a period of 18 months within 25 km." If the Court finds that only a 12 month covenant is appropriate, the clause doesn't get written down, but is void entirely. This forces employers to err on the side of caution and to be conservative with non-competition agreements.
A couple of years ago, I received a job offer that included restrictive covenant language in it along the following lines:
In the event of termination, commencing with the termination date, [employee] shall not practice law for the greatest of the following periods:When I first read it, I couldn't help but think that it was clever. I hadn't seen language like it before. And I was surprised, because it was clear that the specific law firm was not sophisticated in the ways of employment law. (Their HR recruiter - outsourced - found me and essentially the first three questions he asked were my age, marital status, and family status, and later the principals of the law firm asked the same questions repeatedly.)
three years, or
two years, or
one year
within the largest of the following areas, being within a radius of:
35 kms, or
25 kms, or
10 kms
of the incorporated municipalities within which [employer] have offices at the time of termination. At the present time [employer] have offices within [location]. The clauses in this paragraph shall be read severally, and any clause found to be excessive or invalid shall be severed, leaving the next most restrictive clause in place.
Now, there are a number of potential problems with the implementation of the clause, but what interests me, and what I would welcome discussion on, is the overall concept of the clause, having a series of lesser alternatives built in.
There's nothing in the concept that is fundamentally at odds with the existing case law on restrictive covenants, but there still seems to be something...perhaps too good to be true...about the clause, from an employer's perspective. Conversely, there is something troubling about the way that it puts the ball entirely into the employee's court in terms of risk and legal costs. Imagine a clause that prevented competition "for the maximum time and geographical scope as a Court of competent jurisdiction finds reasonable". The effect is essentially the same, conceptually, and yet the trouble is that there's a lack of clarity, a failure to tell the employee exactly what terms the employee is going to be held to.
So I think that's the crucial flaw in the language: Saying "this or this or this" doesn't specifically tell the employee which one, and thus becomes unclear and ostensibly unenforceable.
I would back up this assertion with reference to Shore v. Ladner Downs, in which the question was whether or not a termination clause with a formula for notice which exceeded the statutory minimum at the time of termination but failed to formulaically meet the statutory minimums in other circumstances:
The policy considerations applied in Machtinger, supra, would not be served if the contract were to be interpreted in favour of the employer so as to leave the individual employee responsible for determining, at the point of termination, whether the statutory minimum had risen above the notice period stated in the contract. It is neither reasonable nor practical to leave the individual employee in the position of having to keep an eye on the relationship between the statutory minimum and the contractual term.I would argue that the same policy considerations would lead to a conclusion that it cannot be put on the employee to determine which of several options is the applicable one. (Of course, it occurred to me that, as a labour and employment lawyer, I was ill-positioned to make such an argument. But I didn't accept the position for other reasons.)
*****
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.
Saturday, July 16, 2011
Interlocutory Injunctions and Restrictive Covenants
A recent case from the Superior Court involved a relatively rare event in Ontario: An employer obtained an interlocutory injuntion, relying on a non-solicitation clause, preventing a former employee from soliciting its customers.
In DCR v. Vector, Vector is a company started by a former executive of DCR, Ted Nham, among others. Nham's employment was subject to a non-competition clause that prevented him from doing anything to compete during his employment, and a non-solicitation clause preventing him from soliciting customers for a year after the end of his employment.
Nham provided one month's notice of resignation on July 20th, 2010, to be effective August 20th, 2010. The judge doesn't survey the evidence in much detail, but points out that Nham's evidence is largely undermined by the fact that he appears to have registered Vector's domain name on July 26th, 2010. (Though, quite frankly, if the employer is putting much stock in that fact alone as offending the non-comp clause, I would doubt the viability of that claim. Registering the domain name is purely preparatory. Preparatory actions aren't considered to violate any fiduciary duty, and I would expect the same thing to apply here. Ordering stationery, entering into discussions to rent a facility, etc., are not actually acts of competition. If I'm entitled to set up a competing business on August 20th, 2010, I'm entitled to take every step necessary to be able to actually open my doors to the public on that date.)
The employer became aware that Vector was soliciting its clients (using information taken from DCR) and brought a motion for an interlocutory injunction, which was obtained (presumably on an ex parte basis, without notice to the defendants) on April 12th, 2011, preventing Vector from soliciting DCR's customers. When an injunction is obtained ex parte, it has to be for a short period of time, until the parties can all show up in Court to argue the case. Vector filed affidavits, and DCR wisely cross-examined on the affidavits, and the motion ultimately wasn't heard in full until June 20th, 2011, but the injunction was continued until that time, and from there until the release of this decision on July 13th, 2011.
The judge accepted that the non-solicitation clause was valid and enforceable, finding its terms reasonable, and granted the injunction. However, the judge did not see any reason to impose fiduciary obligations in excess of those contained in the written contract, and so the injunction will expire after August 19th.
Given that the evidence is that Vector doesn't actually have any customers yet, that's actually kind of a loss for the plaintiff.
Commentary
The judge's decision to terminate the injunction after August 19th minimizes the effect of the fact that the defendants apparently misappropriated DCR's customer lists. There is a line of cases involving misappropriated customer lists, starting with 1259695 Ontario Inc. v. Guinchard in 2005, in which abuse of misappropriated customer lists warrants long-term continuation of such injunctions.
The trouble with this decision is that it appears that Vector, a few weeks from now, will be free to pull out DCR's customer list again and start sending out a new round of solicitations.
*****
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.
In DCR v. Vector, Vector is a company started by a former executive of DCR, Ted Nham, among others. Nham's employment was subject to a non-competition clause that prevented him from doing anything to compete during his employment, and a non-solicitation clause preventing him from soliciting customers for a year after the end of his employment.
Nham provided one month's notice of resignation on July 20th, 2010, to be effective August 20th, 2010. The judge doesn't survey the evidence in much detail, but points out that Nham's evidence is largely undermined by the fact that he appears to have registered Vector's domain name on July 26th, 2010. (Though, quite frankly, if the employer is putting much stock in that fact alone as offending the non-comp clause, I would doubt the viability of that claim. Registering the domain name is purely preparatory. Preparatory actions aren't considered to violate any fiduciary duty, and I would expect the same thing to apply here. Ordering stationery, entering into discussions to rent a facility, etc., are not actually acts of competition. If I'm entitled to set up a competing business on August 20th, 2010, I'm entitled to take every step necessary to be able to actually open my doors to the public on that date.)
The employer became aware that Vector was soliciting its clients (using information taken from DCR) and brought a motion for an interlocutory injunction, which was obtained (presumably on an ex parte basis, without notice to the defendants) on April 12th, 2011, preventing Vector from soliciting DCR's customers. When an injunction is obtained ex parte, it has to be for a short period of time, until the parties can all show up in Court to argue the case. Vector filed affidavits, and DCR wisely cross-examined on the affidavits, and the motion ultimately wasn't heard in full until June 20th, 2011, but the injunction was continued until that time, and from there until the release of this decision on July 13th, 2011.
The judge accepted that the non-solicitation clause was valid and enforceable, finding its terms reasonable, and granted the injunction. However, the judge did not see any reason to impose fiduciary obligations in excess of those contained in the written contract, and so the injunction will expire after August 19th.
Given that the evidence is that Vector doesn't actually have any customers yet, that's actually kind of a loss for the plaintiff.
Commentary
The judge's decision to terminate the injunction after August 19th minimizes the effect of the fact that the defendants apparently misappropriated DCR's customer lists. There is a line of cases involving misappropriated customer lists, starting with 1259695 Ontario Inc. v. Guinchard in 2005, in which abuse of misappropriated customer lists warrants long-term continuation of such injunctions.
The trouble with this decision is that it appears that Vector, a few weeks from now, will be free to pull out DCR's customer list again and start sending out a new round of solicitations.
*****
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 5, 2011
Reasonableness of Restrictive Covenants
An interesting case was just released from the Ontario Court of Appeal.
The case is Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344. Mason worked for Chem-Trend for 17 years, then was terminated, allegedly for cause. This case is not about whether or not there was cause; the wrongful dismissal case is a separate proceeding.
This decision deals with an application for a declaration on the enforceability of a restrictive covenant in Mason's contract, which he signed in 1992. The trial judge found that the clause was enforceable, and Mason appealed. The Court of Appeal allowed the appeal and found it unenforceable.
Here's the language of the clause:
But it does affect reasonableness. Indeed, that becomes a significant problem: It is a global company which has a very large customer list. In order to avoid doing business with any of its customers in competition, Mason would have to simply not compete at all. Anywhere. For a year.
Even beyond that, there seems something rather unreasonable about saying to a departing employee that a customer from 17 years earlier is off-limits today, in light of the fact that the restrictive covenant was only effective for a year. As well, the scale of activities being limited is beyond what is appropriate in the circumstances (Mason was just a technical sales representative with a limited territory).
There is also an interesting discussion on the doctrine of clean hands. It's out of place: As the Court notes, equitable relief isn't being sought. Still, it's useful to note that the Court, when asked to determine the enforceability of the restrictive covenant, shouldn't hold it against the employee if he is already breaching the restrictive covenant. As Justice Gray put it, "[t]he fact that the applicant is engaging in activities that are arguably contrary to the restrictive covenant is of no moment. If the restrictive covenant is invalid, the applicant is free to engage in those activities. If it is valid, the respondent has remedies."
*****
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.
The case is Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344. Mason worked for Chem-Trend for 17 years, then was terminated, allegedly for cause. This case is not about whether or not there was cause; the wrongful dismissal case is a separate proceeding.
This decision deals with an application for a declaration on the enforceability of a restrictive covenant in Mason's contract, which he signed in 1992. The trial judge found that the clause was enforceable, and Mason appealed. The Court of Appeal allowed the appeal and found it unenforceable.
Here's the language of the clause:
3. I agree that if my employment is terminated for any reason by me or by the Company, I will not, for a period of one year following the termination, directly or indirectly, for my own account or as an employee or agent of any business entity, engage in any business or activity in competition with the Company by providing services or products to, or soliciting business from, any business entity which was a customer of the Company during the period in which I was an employee of the Company, or take any action that will cause the termination of the business relationship between the Company and any customer, or solicit for employment any person employed by the Company. [Emphasis added by the Court of Appeal.]The main guts of Mason's argument is that he doesn't know all the company's customers, and so can't know who he isn't allowed to do business with. He argued that the clause was ambiguous. The trial judge disagreed and found that the language is, in fact, quite clear. The Court of Appeal agreed with that: There's nothing unambiguous about the language. To the extent that he can't know who he isn't allowed to do business with, that's a separate problem.
But it does affect reasonableness. Indeed, that becomes a significant problem: It is a global company which has a very large customer list. In order to avoid doing business with any of its customers in competition, Mason would have to simply not compete at all. Anywhere. For a year.
Even beyond that, there seems something rather unreasonable about saying to a departing employee that a customer from 17 years earlier is off-limits today, in light of the fact that the restrictive covenant was only effective for a year. As well, the scale of activities being limited is beyond what is appropriate in the circumstances (Mason was just a technical sales representative with a limited territory).
There is also an interesting discussion on the doctrine of clean hands. It's out of place: As the Court notes, equitable relief isn't being sought. Still, it's useful to note that the Court, when asked to determine the enforceability of the restrictive covenant, shouldn't hold it against the employee if he is already breaching the restrictive covenant. As Justice Gray put it, "[t]he fact that the applicant is engaging in activities that are arguably contrary to the restrictive covenant is of no moment. If the restrictive covenant is invalid, the applicant is free to engage in those activities. If it is valid, the respondent has remedies."
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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.
Saturday, April 2, 2011
Enforcing a Non-Competition Clause
A recent decision from the Ontario Superior Court of Justice, Dent Wizard v. Catastrophe Solutions, could have important implications for non-competition agreements.
Robert Pietrantonio had been the head of Dent Wizard Canada, a paintless dent repair (PDR) company, the Canadian franchisee of Dent Wizard International. He sold the franchise back to DWI and became an employee, then later (in 2007) signed a termination agreement with a non-competition clause.
Following a major hailstorm in Calgary in 2010, DWI failed to take full advantage of the business opportunity presented thereby. Dent Wizard executives and technicians went to Pietrantonio, who at that point was enjoying his retirement on the links in Florida. Pietrantonio started up a new company, Catastrophe Solutions, primarily to capitalize on the Calgary storm.
By the time DWI came around and decided to send technicians to Calgary three weeks after the storm, it had already lost its major contracts with various insurers. Catastrophe Solutions, on the other hand, made millions.
But what about the non-competition clause?
Following the Shafron case, his non-comp was seen as being part of an employment contract (as distinct from a commercial sale contract), which calls for closer Court scrutiny of the reasonableness of its terms.
The issues in this case are complex and myriad, but while the Court's finding that the restrictive covenants are unenforceable is, perhaps, uncontroversial, some of the Court's alternative findings (i.e. if the covenants had been enforceable) are more interesting:
Dent Wizard was leaving its customers high and dry, so to speak, and was exposed to possible litigation for having done so. It was content to allow Catastrophe Solutions to step in and pick up the slack, and therefore was estopped from later suing Catastrophe Solutions. And further, the reason the customers refused to come back to Dent Wizard was because it had left them high and dry (and not because Catastrophe Solutions had come along), so Dent Wizard was the author of its own misfortune and suffered no damages through Pietrantonio's actions.
*****[189] Notwithstanding that DWC effectively abandoned the business opportunity of serving the PDR needs of Aviva and Intact following the July 12, 2010 hailstorm as a result of DWI’s withdrawal decision, Maracle imposes a significant burden on the respondents to establish promissory estoppel. Certainly McNamara did not give any express assurance to Pietrantonio which was intended to affect the legal relationship embodied in the Termination Agreement. Pietrantonio, through Morrison, floated the trial balloon of a royalty agreement, and it was shot down. Given that response by DWI’s President, I do not think that Pietrantonio could reasonably take from the reading of the Intact and Aviva Confirmation Emails to him by Morrison that DWI was providing him with an unambiguous assurance that it would not enforce the restrictive covenants; DWI was hedging its bets. I think Pietrantonio’s approach throughout was to the effect, “If you are not going to tell me to stop, then I’ll go ahead”. Pietrantonio elected not to clarify matters directly with McNamara, and by proceeding with CSI he took on the risk that he might be skating on very thin ice which could crack at any moment.
[190] Yet, at the critical times in July when CSI was moving to meet Aviva and Intact’s business needs with, as I have found, the knowledge of the applicants, that ice did not crack. The applicants’ executives stood by silent, content I think, to allow CSI to mollify Aviva and Intact, thereby reducing the risk that either customer would sue DWC for leaving them high and dry in their time of need.
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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