Court File and Parties

CITATION: MD Management Limited v. Campbell, 2010 ONSC 4217

COURT FILE NO.: 233/10

DATE: 20100804

SUPERIOR COURT OF JUSTICE – ONTARIO - DIVISIONAL COURT

RE: MD MANAGEMENT LIMITED, Moving Party (Plaintiff)

AND:

TIMOTHY WILLIAM CAMPBELL and BMO NESBITT BURNS INC., Responding Parties (Defendants)

BEFORE: MOLLOY J.

COUNSEL: Paul Bates and Bernadette Chung, for the Moving Parties

Malcolm J. MacKillop and Hendrik T. Nieuwland, for the Responding Parties

HEARD: June 29, 2010

ENDORSEMENT

MOLLOY J.:

Introduction

[1] The plaintiff seeks leave to appeal to the Divisional Court from the decision of Grace J. dated May 3, 2010, dismissing the plaintiff’s motion for an interlocutory injunction in a “departing employee” case. At issue is the use of confidential information by a departing employee and the test to be applied in granting an injunction in the financial services industry, particularly in light of the high degree of regulation and record-keeping in that industry.

[2] The plaintiff submits that there are conflicting decisions on what is required to establish irreparable harm in cases involving a departing financial investment adviser who solicits business from his former clients using confidential information acquired from his former employer. In some cases judges have found damage to goodwill and reputation to be irreparable harm warranting the protection of an injunction; in other cases judges have refused an injunction because the extensive record keeping required in the investment industry meant that any harm suffered would be compensable in damages. In light of the uncertain state of the law, the plaintiff submits that it is desirable to have the issue determined at an appellate level and that the test for leave in Rule 62.02(4)(a) is met.

[3] Alternatively, the plaintiff submits that there is reason to doubt the correctness of the motion judge on this issue and that the proposed appeal involves matters of such importance that leave to appeal should be granted pursuant to Rule 62.02(4)(b).

Background

[4] The plaintiff, MD Management Limited (“MD”) is a financial services company which is wholly owned by the Canadian Medical Association (“CMA”), a voluntary association of medical doctors in Canada. MD’s services are provided only to doctors who are members of the CMA and their immediate family members.

[5] The defendant Timothy Campbell was employed by MD as an investment adviser from November 1, 2004 to September 24, 2009. Mr. Campbell signed a Letter of Employment and a Confidentiality and Non-Solicitation Agreement, which prohibited the disclosure of confidential information regarding MD’s existing and potential clients and soliciting MD clients for two years following termination of employment with MD. He also periodically signed MD’s Code of Conduct agreeing to maintain the confidentiality of all client and MD information and not to use confidential information for his own benefit.

[6] At some point in 2009, Mr. Campbell decided to leave MD and join the defendant BMO Nesbitt Burns as an investment adviser. On September 24, 2009 Mr. Campbell advised MD he was resigning. Shortly before announcing his resignation, he prepared for himself a list of clients and prospects from MD files, including their names, addresses, email addresses, and phone numbers for work, home and cell. Shortly after resigning, he proceeded to contact those clients by telephone and email advising that he had relocated to Nesbitt Burns, providing his new contact information, and stating, “I value the relationship we have built together and I look forward to helping you manage this change comfortably.”

[7] MD sued both Mr. Campbell and Nesbitt Burns and sought an interlocutory injunction restraining them from using information concerning MD’s clients and prospects and from soliciting their business.

The Decision of the Motion Judge

[8] The motion judge applied the well known three-part test for an interlocutory injunction established in RJR-MacDonald:[^1] (i) a serious issue to be tried; (ii) irreparable harm if the injunction is not granted; and (iii) the balance of convenience favouring the applicant.

[9] The motion judge held that the first RJR-MacDonald requirement had been met, whether it be defined as a “serious issue to be tried” or a “strong prima facie case.” However, he dismissed the motion because of his finding that the other two requirements of RJR-MacDonald had not been met. The vast majority of motion judge’s reasoning (paras 25-35) is on the irreparable harm issue. The one paragraph dealing with balance of convenience (para 36) begins with the statement, “My findings with respect to irreparable harm weigh in favour of the defendants in the balance of convenience analysis.” The only additional analysis on this point is the observation that a number of the MD clients contacted by Mr. Campbell who had already moved to Nesbitt Burns had signed declarations indicating they had done so of their own free will and without solicitation. The motion judge reasoned that restraining further future contact with former clients, while excluding those already at Nesbitt Burns, could lead to confusion. It is apparent from the reasons that the motion judge’s decision hinged on his finding with respect to irreparable harm.

[10] On the irreparable harm issue, the motion judge (at para. 26) relied upon a line of cases holding that an investment firm’s losses are capable of being quantified in monetary terms “because that industry is highly regulated, precise records are kept with respect to the identity of clients and their holdings and therefore it ‘will not be difficult… to quantify the number of lost clients, the value they contributed…before their departure and the value they contributed going forward.’”[^2]

[11] The motions judge referred (at para 29) to a line of Ontario Superior Court cases relied upon by the plaintiff which have held that “where prima facie, the enforceability and breach of a non-solicitation clause is established, irreparable harm should be presumed.”[^3] However, he also noted that two recent decisions (one from the Ontario Superior Court and one from the British Columbia Court of Appeal) have held that the breach of a negative covenant is more a matter of the weight to be given to irreparable harm, rather than a presumption.[^4] He referred as well to the decision of Code J. in Bell Canada v. Rogers Communications[^5] for the proposition that where the evidence establishing a breach of a negative covenant is strong, less emphasis will be placed on issues of irreparable harm and balance of convenience.

[12] Having considered these competing principles, the motion judge ruled (at para 33) that irreparable harm should not be presumed. He stated that the reference in RJR-MacDonald to “permanent market loss” and “irrevocable damage to business reputation” does not mean that the existence of any harm falling into that category is automatically irreparable. Rather, he found that irreparable harm was not established in this case because: the investment industry is highly regulated; statistics with respect to the movement of clients to Nesbitt Burns were being maintained; there had not been a significant transfer of clients to Nesbitt Burns already; and, there was nothing to suggest that a significant transfer would occur in the future.

Analysis

(i). The test for leave to appeal

[13] It is well-settled that the test for obtaining leave to appeal is a strict one and that leave should not given easily. There are two possible branches upon which leave may be granted under Rule 62.02(4), each of which has two requirements that must be satisfied. The more common basis is under Rule 62.02(4)(b), which requires that there be reason to doubt the correctness of the decision in question and that the proposed appeal involve “matters of such importance” that leave should be granted. Alternatively, leave may be granted under Rule 62.02(4)(a) if there is a conflicting decision of another judge or equivalent level court in Ontario or elsewhere and it is “desirable” that leave be granted.

(ii). The second part of the “reason to doubt correctness” test is not met.

[14] In my opinion, the plaintiff has met the test for leave based on the “conflicting decision” branch of the Rule. While it is not necessary for me to deal with the test on the “reason to doubt correctness,” I will say that, but for my conclusion that there are conflicting decisions on this particular legal issue, I would have held that the dispute involved here was of interest only to the immediate parties and not a matter of broad public importance warranting an appeal to a higher court on this interlocutory issue. For me, it is the conflict in the law that gives rise to the public importance of these issues. My decision to grant leave, therefore, rests on subrule (a) of Rule 62.02(4).

(iii). There are conflicting decisions.

[15] A party relying upon subrule (a) must establish that there is a conflicting decision in Ontario or elsewhere on the point in issue. A conflicting decision must be with respect to a matter of principle, not merely a situation in which a different result was reached in respect of different facts.[^6]

[16] As a general rule, following the decision of the Supreme Court in RJR-MacDonald, courts have commonly found that things like loss of goodwill, loss of market share, loss of future business, and damage to business reputation are things that cannot be calculated in damages and support a finding of irreparable harm. There is a line of recent cases involving investment advisers that has found to the contrary, as was noted and followed by the motion judge in this case.[^7] This is not merely one or two cases in which judges have gone down a different path as a result of unusual fact situations. I believe there has been an actual trend away from finding irreparable harm in these cases because of the nature of the financial services industry. Interestingly, both Nesbitt Burns and MD have been parties in some cases applying that reasoning. The case law, however, is by no means uniform.

[17] One of the arguments advanced by MD on the motion was that it has a limited client base (only doctors who are members of the CMA) and is very dependent upon referrals and new business from existing clients. The motion judge did not accept that this factor would constitute irreparable harm. However, there are many cases that have held it to be impossible to calculate in damages the possible spin-off effect of referrals and future business from lost customers. For example, in Sheehan & Rosie Ltd. v. Northwood,[^8] Quinn J. held that the loss of actual and potential customers by an insurance brokerage business operating in a relatively small market is not something that can be calculated as a mathematical exercise and therefore constitutes irreparable harm. Likewise, in London Life v. Heaps,[^9] Weekes J. held that the “loss of any other insurance business such a client would generate over the course of his or her lifetime…is clearly unquantifiable.” As was noted by the Alberta Court of Appeal in Dreco Energy Services Ltd. v. Wenzel,[^10] “The plaintiffs can keep track of business which they get and the revenues from it, but no one can keep a record of business which does not come to the plaintiffs.” Of particular significance is the decision of the British Columbia Supreme Court in MD Management v. Dhut[^11], a case on all fours with this one involving the same plaintiff and the same agreement at issue in this case, but occurring in British Columbia. In a fact situation strikingly similar to the one now before this court, the British Columbia motion judge applied the test in RJR-MacDonald and granted the injunction sought. He reasoned that the departing employee’s interference with the privacy rights of MD’s clients could cause harm to MD’s reputation for which damages would not be adequate compensation and that it would be virtually impossible after the event to “unscramble the egg” and determine how much MD lost as a result of the defendant’s violation of the agreements. I conclude from these cases that there are conflicting decisions on the extent to which the loss of customers, and the future business and referrals they would generate, can be fully compensable in damages and the circumstances in which this would constitute irreparable harm.

[18] It was also argued in this case, but not accepted by the motion judge, that the breach of confidentiality involved by having a departing employee contact former clients would be damaging to MD’s business reputation in a manner that could not be fully detected nor measured in damages. Again there are conflicting decisions on this issue, including the British Columbia decision in MD Management v. Dhut.^12

[19] In Bell Canada v. Rogers Communications Inc.[^13] one of the issues before the court was whether misleading advertizing by one party resulting in damage to business reputation and loss of goodwill met the test for irreparable harm. In that case, Code J. noted (at para 34) that there is an emerging conflict in the jurisprudence as to whether loss of goodwill and damage to reputation amounts to irreparable harm such that damages are not an adequate remedy. He referred to similar comments about the conflict in the case law made by M. F. Brown J. in Canpages Inc. v. Quebecor Media Inc.[^14]

[20] Code J. attempted in the Bell Canada case to reconcile the seemingly conflicting jurisprudence by reference to the principle that the three-part test in RJR-MacDonald must be approached holistically rather than as three separate compartments, such that a strength in one part of the test may compensate for a weakness elsewhere. This may well be correct, but it underscores yet another area of conflict in the case law dealing with financial advisers, which is the extent to which a departing employee providing his or her new contact information to former clients is merely professionalism as opposed to a breach of confidentiality. There is also uncertainty as to the point at which this types of contact crosses the line to become outright improper solicitation. Because the line is not clearly drawn on this point, there are divergent decisions on how serious particular conduct may be and therefore how strong the plaintiff’s case is on its merits. This in turn has resulted in some divergence in the case law on the extent to which irreparable harm should be presumed upon proof of the breach of a negative covenant. In BMO Nesbitt Burns Inc. v. TD Waterhouse Investor Services,[^15] Corbett J. described the dilemma as follows:

Cases in this area go both ways. It would be helpful to have some clear authority about the rights and duties of investment advisors upon departure from one employer for another. The debate in the cases becomes almost comical, with respect, with close parsing of what is meant to “solicit”, and the manifest duty someone has to advise clients that their investment advisor has left.

[21] In my view, the first requirement of the test for leave to appeal under subrule (a) is met; there are conflicting decisions of the Superior Court in Ontario, and also conflicting decisions of other superior courts in Canada applying the same general test for injunctive relief. I see the areas of conflict as being:

(a) the extent to which irreparable harm is presumed where there is a breach of a negative covenant;

(b) the seriousness of a breach of covenant as a factor in determining the weight to be given to irreparable harm, and in particular what constitutes solicitation by an investment adviser as opposed to merely providing new contact information

(c) the extent to which loss of goodwill, loss of future referrals and future business from customers, and damage to business reputation can be said to constitute irreparable harm;

(d) whether there is a different standard for establishing irreparable harm in cases where the departing employee is an investment adviser due to the highly regulated nature of the financial services industry and the requirement of record-keeping.

(iv) It is desirable that leave to appeal be granted

[22] Even in the face of conflicting decisions, leave to appeal is not automatic. I must be satisfied that it is “desirable” in the circumstances that leave be granted.

[23] The factual underpinnings of this case are by no means rare. That much is apparent from the sheer number of injunction cases dealing with departing investment advisers alleged to have solicited former clients in breach of confidentiality requirements. It is also apparent that virtually all of these cases are decided at the interlocutory injunction level and very few have resulted in a principled analysis by an appellate court. It is therefore important that there be consistency of approach in these cases, from one judge to the next. That is not to say that the same result will always follow, as different factual issues may well dictate different results. However, individuals in the industry are entitled to know with more certainty what they can expect from the courts.

[24] For example financial service institutions and individual investment advisers need to know whether advisers have a responsibility to ensure that their clients, whose financial affairs they have been managing, are able to contact them after their departure from a particular employer. If there is such a responsibility (and it may well be in the best interests of the public to recognize one), then retention of contact information for clients may not be a serious breach, or even a breach at all. Likewise, contacting a former client merely to provide the adviser’s new phone number may not be problematic. Further, if there is such a responsibility, the former employer will have a greater incentive to contact its clients directly to advise of the departure of the former employee and his or her contact information, rather than having that contact come from the employee. The obligations at this point are very unclear, and the liabilities are accordingly, also unclear.

[25] It is also important for financial services institutions to know whether negative covenants and confidentiality agreements will be strictly enforced by the courts through interlocutory injunctions, or whether the courts can be expected to leave these matters to be sorted out by way of damages at trial after the dust has settled.

[26] It is unclear to me why there should be a different injunction standard in the financial investment industry than there is for the rest of the business world. If there is to be a distinction, the reasons for it need to be more clearly delineated. In our current electronic age, detailed record-keeping is often achievable in a wide range of businesses. Even if it is not imposed by law, it could be imposed by court order (perhaps as an alternative to an injunction). However, in situations where there is a clear and binding negative covenant, one policy concern is the extent to which the courts should be seen to be sanctioning breach of contract. Should we hold people to their contracts and require them to honour their commitments? Or are we content to simply keep track of the damages?

[27] Thus, important issues are involved for the parties and for the public generally. The law should be more settled than it is at present and the clarification of some of these principles from an appellate court would undoubtedly assist in that regard. In these circumstances, I consider it desirable that leave to appeal to the Divisional Court be granted.

Conclusion

[28] Therefore, leave to appeal is granted. The parties agree that the quantum of costs for this leave motion should be fixed at $10,000.00. Which party should be liable to pay those costs is left to the court hearing the appeal.

MOLLOY J.

Released: August 4, 2010

[^1]: RJR-MacDonald Inc. v. Canada (Attorney-General), 1994 117 (SCC), [1994] 1 S.C.R. 311

[^2]: BMO Nesbitt Burns Inc. v. Ord, [2007] O.J. No. 2620 (S.C.J.) at para 39; MD Funds Management Inc. v. Gaumond (April 16, 2004, Kingston 04-CV-26564 (S.C.J.); ATB Securities Inc. v. RBC Dominion Securities Inc. , [2008] A.J. No. 1111 (Q.B.); Sun Life Financial Distributors (Canada) Inc. v. Sanche, [2008] M.J. No. 122 (Q.B.) and Nesbitt Burns Inc. v. Lange, [2000] O.J. No. 842 (S.C.J.)

[^3]: Industrial Rush Supply v. Faria, 2003 Carwsell Ont 568 (S.C.J.); J-Tech Design Ltd. v. Bosnjak 2009 Carswell Ont 1203 (S.C.J.); Church & Dwight Ltd. v. Sifto Canada Inc., 1994 7314 (ON SC), [1994] O.J. No. 2139 (Gen.Div.)

[^4]: Counterforce Inc. v. Volpe, [2009] O.J. No. 1649 (S.C.J.); Belron Canada Inc. v. TCG International Inc., 2009 BCCA 577, [2009] B.C.J. No. 2529 (C.A.).

[^5]: 2009 39481 (ON SC), [2009] O.J. No. 3161 (S.C.J.)

[^6]: Comtrade Petroleum Inc. v. 490300 Ontario Ltd. (1992), 1992 7405 (ON SC), 7 O.R. (3d) 542 (Div. Ct.)

[^7]: See footnote 3.

[^8]: [2000] O.J. No. 716 (S.C.J.)

[^9]: [1993] O.J. No. 1403 (S.C.J.)

[^10]: 2004 ABCA 95, [2004] A.J. No. 242 (C.A.) at para 16

[^11]: 2004 BCSC 513, [2004] B.C.J. No. 764 (B.C.S.C.)

[^13]: Supra, footnote 5

[^14]: [2008] O.J. No. 2169, 66 C.P.R. (4th) 285 (S.C.J.)

[^15]: [2006] O.J. No. 2074 (S.C.J.) at para 12.