In yet another example of the reluctance of the Ontario Superior Court to restrict competitive activities of former employees, the Court rejected an employer’s request for an injunction. In the decision of Consumer Impact Marketing Limited v Hesham Shafie and Brand Momentum Inc., released on June 7, the Court considered the case of an employee who was an officer, director and minority shareholder of the employer.
The employee had signed a number of agreements including a unanimous shareholders’ agreement, and an employment agreement. Both agreements imposed obligations of non-solicitation, non-competition and confidentiality on the employee. The shareholders’ agreement specifically prohibited the employee from carrying on business in competition with his employer, soliciting the employer’s customers or taking any action that would harm the business interest of the employer. This obligation continued for a period of 12 months.
Following the termination of the defendant’s employment, he sought to open his own business providing services which were competitive with those of his former employer. In fact, his former employer found two business plans for the new business on the computer system that the employee used while in the course of his job. When the former employer discovered the activities of its ex-employee, it commenced an action against him, and sought an injunction from the Court to prohibit him from engaging in such competitive activity.
In considering whether to grant the injunction, the Court reviewed the test set out in the leading case of R.J.L. McDonald v Canada:
1. Is there a serious question to be tried?
2. Will the applicant suffer irreparable harm if the injunction is not granted?
3. Does the balance of convenience favour the party seeking the injunction?
The Court first considered the restrictive covenants in both the employment agreement and the shareholders’ agreement. While the judge was not prepared to make a decision as to whether or not they were enforceable based on the record before him, he did conclude that the employee’s challenge to the enforceability of those covenants would have to await a full hearing of the issues at trial. The judge therefore concluded that there was a serious issue to be tried.
He next considered whether or not the company had suffered irreparable harm. The judge’s analysis focused on the comparative size of the two businesses, and the maximum amount of revenue which it could be said that the defendant was taking from the plaintiff. The judge pointed out that the evidence at best indicated the defendant was generating revenue of approximately $34,000 per month. On the other hand, the plaintiff’s revenue exceeded $75,000,000 in the previous fiscal year. The judge therefore concluded that, even if he accepted the best case for the plaintiff, the amount of business which it was losing was comparatively minor.
The judge also reviewed the volume of affidavits filed by the moving party to conclude that, in spite of the volume of material, that the former employer had proved only two isolated incidents of solicitation by the defendant. He therefore concluded that further evidence was required to make any finding on that issue. He therefore rejected the plaintiff’s argument that it was suffering irreparable harm.
To put the final nail in the coffin, the judge held that refusing to grant the injunction would have minimal effect, if any, on the viability of the plaintiff’s business. However, issuing the injunction prohibiting the individual defendant from working for the defendant company would, in all likelihood, result in the cessation in operations of the defendant. In summary, the judge found that there was no irreparable harm and that the balance of convenience clearly favoured the former employee.
What the decision highlights is the continuing difficulty that employers’ counsel will experience before the Ontario courts in seeking to enforce restrictive covenants. Given the costs in bringing such motions, employers should be reluctant to do so in all but the clearest cases.
Garfinkle, Biderman LLP
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