COURT FILE NO.: CV-12-455215-00
DATE: 20120802
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: GDL Solutions Inc., Plaintiffs
AND:
Gary Walker, Sean Mears, Michael Hager, Aleksander Jankovic, Devindra Sukhdeo a.k.a. Andy Sukhdeo, James Evershed, Barbara Lynn George, Hudson Technology Corp. and 2167381 Ontario Inc. c.o.b. as Bay Street IT, Defendants
BEFORE: Carole J. Brown J.
COUNSEL: Paul Fruitman and Daniel Z. Naymark, for the Plaintiffs
Eli S. Lederman and Andrew Parley, for the Defendants
HEARD: July 5, 2012
ENDORSEMENT
[1] The plaintiff, GDL Solutions Inc. ("GDL"), brings this motion for injunctive relief on an urgent basis. The plaintiff submits that it has discovered that the defendant, Gary Walker ("Walker"), the individual from whom it purchased the GDL business, has, with several of his former subordinates and employees at GDL, joined a newly established direct competitor that is actively soliciting GDL clients. The plaintiff argues that Walker is in breach of the non-competition and non-solicitation covenant which he signed at the time of the sale of his business. The plaintiffs seek an interlocutory injunction enjoining the defendant, Walker, from breaching the restrictive covenants set forth in his non-competition and non-solicitation agreements ("NCNSA"), enjoining the other defendants from joining with Walker in any act or enterprise that would, if undertaken by Walker, violate the terms of any restrictive covenant contained in the non-competition and non-solicitation agreements or the employment agreement, enjoining all of the defendants from directly or indirectly soliciting business from GDL's clients for 12 months from the date of the order and enjoining the other defendants from directly or indirectly soliciting, contacting, approaching or in any way seeking to obtain the business of GDL's clients on behalf of Hudson Technology Corp. ("Hudson") and from using, misusing or disclosing any and all confidential and/or proprietary information of GDL. The plaintiff argues that clients of GDL have already been lost to the competitor, Hudson Technology Corp. and 2167381 Ontario Inc., c.o.b. as Bay Street IT.
Background
The Parties
[2] The plaintiff, GDL, provides intellectual technology ("IT") services to customers (small-and mid-sized companies, as well as municipalities and government agencies) scattered throughout Ontario and in other jurisdictions. It offers four types of services: infrastructure, outsourcing, managed services, and service continuity and disaster recovery. For its disaster recovery services, GDL uses CPR (Centralize-Protect-Recover) software and hardware, which provides continuous replication and protection of client data on the client’s premises and in the GDL vault. It is one of four companies that uses this technology.
[3] The defendant, Hudson Technology Corp. ("Hudson"), based in Toronto, was incorporated in October 2011, just prior to the resignations from GDL of Walker and Mears. Hudson offers the same services as GDL to the same client demographic, including "Disaster Recovery and System Continuity Service". Walker joined Hudson in November 2011.
[4] The defendant, 2167381 Ontario Inc. ("Bay Street IT") carries on business under the trade name Bay Street IT, as a supplier of hardware and software. The defendant, James Evershed ("Evershed") is the owner and president of Bay Street IT. The defendant, Barbara Lynn George ("George") is Evershed's wife, an employee of Bay Street IT and also the sole listed director of Hudson. Bay Street IT, Evershed and George (collectively referred to as "Bay Street IT defendants") have assisted in the creation and management of Hudson, which operates out of Bay Street IT's office space.
[5] The other individual defendants had been employed with GDL and, at the material time, became employed with Hudson.
[6] The defendant, Walker, started the information technology business in 2003. The plaintiff, GDL, purchased the business, including its goodwill, technology, and book of business, from Walker in early 2010. GDL paid $350,000 for purchase of the business. GDL explains that its decision to purchase the business was motivated by the market response to the CPR product. As a condition of the purchase, Walker became general manager of GDL, and expressly covenanted not to compete with GDL, solicit or accept business from its clients, solicit or employ its employees, or misuse its confidential information during his employment and for a period thereafter. After the purchase, Walker stayed on as GDL’s general manager and Shawn Mears stayed on as GDL’s only full-time employee, a technology expert and key client contact.
The Agreement of Purchase and Sale/Acquisition of the Business
[7] In the Agreement of Purchase and Sale, GDL’s business was defined as follows:
“Business” means the business currently and heretofore carried on by the Vendor consisting of “managed services” being the management and operation of software applications and information technology (“IT”) infrastructures, involving some IT project based work but otherwise primarily restricted to hourly support packages with respect to existing technologies installed and configured by the Vendor and includes day-to-day support of corporate servers, workstations, printers, applications and other networked devices.
[8] As part of the sale Agreement, Walker agreed to a Non-Competition and Non-Solicitation Agreement (NCNSA):
- not to compete with GDL “by directly or indirectly [...] carry on, be engaged in, have any financial interest in or be otherwise commercially involved with any business that is the same as, similar to or competitive with the Business or any portion thereof anywhere within ten kilometres of any of the Restricted Areas [defined as the Province of Ontario]” for a period of three years following his termination (Section 2.1);
- not to solicit GDL’s employees or customers for a period of five years following his termination (Sections 2.2 and 2.3); and
- not to interfere with GDL’s business or misuse its confidential information (Section 2.4).
[9] In the recitals to the NCNSA, Walker acknowledged that this Agreement was necessary for GDL to receive “the full benefit of the clients and the goodwill of the Business.”
[10] The terms of the sale were negotiated by GDL and Walker through their counsel. Walker claims that he did not have equal bargaining power, because he had already transferred client contracts to GDL. He says that he was pressured into signing these documents. However, there are copies of emails in evidence before me that show that Walker’s counsel had requested and GDL made many changes to the Agreement. Some of the terms were drafted by Walker himself, such as the definition of “business”. Walker also claims that he did not realize that this term would be used for the restrictive covenants. However, his counsel copied him on all emails negotiating the terms of the Agreement. His counsel explained the terms of the Agreement in plain English and offered to speak to him further by telephone if clarification was necessary. Walker admitted to reading all these emails.
[11] I do not accept that Walker, a businessman, represented by counsel, did not have equal bargaining power, or was disadvantaged or under duress in the negotiation of the Agreements.
The Individual Defendants Join the Bay Street IT Defendants
[12] In June 2011, Walker was introduced to James Evershed and Alex Jankovic, a former employee of GDL. Evershed was planning to expand his IT business to Ottawa. He incorporated Hudson Technology Corp. (“Hudson”) on October 24, 2011. Jankovic helped to set up Hudson.
[13] In November of 2011, Walker and Mears both left GDL. Walker advised GDL that he was going to do consulting work (he was offered a consulting position that he turned down) and Mears advised that he was going to work for his father, an IT consultant. Both joined Hudson. Hudson then began to offer a CPR-like service for data recovery. There are only two companies other than GDL and Hudson offering such a service.
[14] Other employees also joined Hudson. The defendant, Devindra Sukhdeo ("Sukhdeo") who managed the account of GDL client, StewardEdge, left GDL in February 2012, advising that he would be starting a business with his cousin in Florida. Instead, he joined Hudson, taking StewardEdge with him. The defendant, Michael Hager, who provided support services for GDL clients along with Mears, resigned in April 2012, indicating that he was moving to Kitchener, but instead joined Hudson. All the defendants state that their move to Hudson was by chance rather than by design.
[15] Along with StewardEdge, two other clients of GDL left GDL and began to use Hudson’s services. The defendants' position is that these clients came to them unsolicited.
[16] GDL discovered Walker’s involvement with Hudson when Mears accidentally addressed an email to Walker’s old GDL email address.
Confidential Information
[17] GDL also alleges that the defendants all took confidential information. Hager transferred confidential files to USB keys; however he claims that he deleted them before he left GDL. When GDL’s expert, Martin Musters, examined the USB keys, he found that the drives on them were not the same drives used to take GDL’s confidential information. This suggests that Hager may have reformatted the drives on the keys. GDL argues that Hager has not offered any explanation for why he may have done this.
[18] Mears also used a USB key while working at GDL. Mr. Musters reviewed the key and found that thousands of files were written onto the key beginning on June 5th, after Mears had been served with GDL’s motion record. He found that files were then deleted on June 6th and subsequently replaced with new files on June 8th, in violation of McEwen J.’s interim order. The defendant’s expert has countered that this does not prove that the files were completely unrecoverable.
[19] Walker had confidential files on his laptop but claims that he no longer has access to them because his laptop broke. GDL doubts that Walker did not back up these files, especially considering his expertise in data recovery.
Proceedings in This Court
[20] On June 6, 2012, McEwen J. issued a consent order prohibiting the defendants from soliciting the plaintiff’s clients or using its confidential information and requiring them to return GDL’s confidential information and preserve their electronic records.
[21] On June 13, 2012, Stevenson J. continued the interim order of McEwen J. and ordered an additional interim term prohibiting Walker from competing with GDL, except for his dealings with existing Hudson clients.
[22] The plaintiff is now seeking a continuation of the relief ordered by McEwen and Stevenson JJ., a forensic review of the defendant’s computers, and an interlocutory injunction preventing Walker from breaching his contractual obligations to GDL and the other defendants from participating in any such breach.
Issues:
- What test governs the issuance of this injunction?
- Has the plaintiff established a strong prima facie case for the enforcement of the non-competition and non-solicitation clauses? a. Are the terms of the non-competition clause reasonable and not too vague?
- Has the plaintiff established that it will suffer irreparable harm and that the balance of convenience lies in its favour?
- If the plaintiff has met the test for the injunction except for term(s) of the non-competition clause that the Court finds to be unreasonable or vague, as a remedy, can this Court issue the injunction but sever the impugned terms from the rest of the non-competition clause?
- Should injunctive relief issue against the other named defendants?
- Should the interim orders regarding the confidential information be continued?
Analysis of the Issues:
Issue 1: What is the test that governs the issuance of an injunction in this case?
The Positions of the Parties:
[23] The defendants have characterized this case as an employment case, pointing to the plaintiff’s employment agreement with Walker and the effect of a non-competition clause on Walker’s ability to earn his livelihood. They have argued that following a line of Ontario caselaw, the plaintiff must establish at the first part of the test, that there is a strong prima facie case, a higher threshold than a serious issue to be tried, and that the restrictive covenant is reasonable.
[24] The plaintiff has, in turn, characterized this case as a sale of a business case, pointing to the asset purchase agreement and Walker’s recitals acknowledging the value of a non-competition clause to the purchase Agreement. The plaintiff counters that if this higher threshold of a strong prima facie case is applied and met, then there is no need to examine the second and third parts of the RJR-MacDonald injunction test. However, if it is not met, then it may simply meet the regular injunction test. In support, it points to the comments of Pattillo J. in Van Wagner Communications Co., Canada v. Penex Metropolis Ltd., [2008] O.J. No. 190 (S.C.).
The Law and Analysis:
[25] A party seeking an interlocutory injunction must satisfy the tripartite test established by RJR-MacDonald Inc. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311, as follows:
- Is there a serious issue to be tried, or in a narrow band of cases, is there a strong prima facie case?
- Will the applicant suffer irreparable harm if the motion is refused?
- Which party will suffer the greater harm from granting or refusing the remedy pending a decision on the merits?
[26] The Supreme Court of Canada in RJR-MacDonald noted at paras. 45 and 56 that the purpose of the lower threshold of the “serious issue to be tried” in the first part of the test is to account for the limited evidence of factual and legal issues at this early stage.
[27] However, it held that where the injunction will amount to a final determination of the action, where a constitutional issue presents as a question of law alone, or where, in a private law context, the factual record is largely settled, the plaintiff must show a strong prima facie case rather than a serious issue to be tried at the first step of the test (paras. 51-56).
[28] In Ontario, the caselaw is divided as to whether the “strong prima facie case” or the “serious issue to be tried” standard is applicable to restrictive covenants.
[29] One line of cases in Ontario has found that the higher standard of a strong prima facie case should be met where parties are seeking to enforce restrictive covenants, both in the context of an employment agreement and of a sale of a business. In these cases, if the higher standard is met, less emphasis is placed on the second and third parts of the injunction test. See for example, Boehmer Box L.P. v. Ellis Packaging Ltd., [2007] O.J. No. 1694 (S.C.); Sherwood Dash Inc. v. Woodview Products Inc., [2005] O.J. No. 5298 (S.C.); 1259695 Ontario Inc. v. Guinchard, [2005] O.J. No. 2049 (S.C.); Kohler Canada Co. v. Porter, [2002] O.J. No. 2418 (S.C.); Button v. Jones, [2001] O.J. No. 1976; Hargraft Schofield LP v. Schofield, [2007] O.J. No. 4400 (S.C.); Industrial Rush Supply & Service Ltd. v. Faria (c.o.b. Halton Industrial Technology), [2003] O.J. No. 475 (S.C.); Singh v. 3829537, [2005] O.H. No. 2402 (S.C.); Quizno’s Canada Restaurant Corp. v. 1450987 Ontario Corp., 2009 CanLII 20708 (ON SC), [2009] O.J. No. 1743 (S.C.)).
[30] In Quizno’s Canada Restaurant Corp. v. 1450987 Ontario Corp., 2009 CanLII 20708 (ON SC), [2009] O.J. No. 1743 (S.C.), Perell J. described at para. 42 the strong prima facie case standard as requiring a “strong case with a high although not absolutely assured likelihood of success based on the material presently before the court.”
[31] In Kohler Canada Co. v. Porter, [2002] O.J. No. 2418 (S.C.), in considering a motion for an injunction to enforce a non-competition clause in an employment context, Molloy J. noted that there were three good reasons for Ontario courts to continue to apply the higher standard, that is, the strong prima facie case test. Firstly, she noted at para. 15 that the “preponderance of case authority from this Court supports applying the strong prima facie test in non-competition injunction cases.” Secondly, she acknowledged at paras. 16-17 the policy reasons for the court’s hesitance to enforce non-competition clauses, that is, their serious impact on the ability of employees to earn a living. Thirdly, she noted that a non-competition clause can effectively function as a final determination by excluding a person from working in a certain field.
[32] In Hargraft Schofield LP v. Schofield, [2007] O.J. No. 4400 (S.C.), Himel J. applied this higher standard to a non-competition clause in an agreement for the sale of a business. After finding that the moving party met this higher standard, she then noted at para. 24 that although the second and third parts of the test were not “mandatory”, they were “relevant.”
[33] Similarly, in Industrial Rush Supply & Service Ltd. v. Faria (c.o.b. Halton Industrial Technology), [2003] O.J. No. 475 (S.C.), Hoy J. (as she then was) applied the strong prima facie test to a case, in which the non-competition clause was present in both an employment agreement and in a shareholders’ agreement but was given in the context of the sale of a business. Hoy J. observed that she would be placing less emphasis on the second and third parts of the test, and explained at para. 4 of that decision:
If Industrial Rush is capable of satisfying the higher prima facie test, very little regard will need to be had to the questions of irreparable harm and balance of convenience. As Sharpe J.A. comments in Injunctions and Specific Performance, loose-leaf ed. (Aurora, Ont.: Canada Law Book, 2002) at para. 9.40, "The stronger the plaintiff's case, however, the less emphasis should be placed on irreparable harm and balance of convenience and, in cases of a clear break of an express negative covenant, interlocutory relief will ordinarily be granted."
[34] In contrast, another line of Ontario cases has not insisted that parties seeking to enforce a restrictive covenant make out the strong prima facie case standard. Rather, they have simply found that where a strong prima facie case can be made out, there is no need to give great regard to the second and third parts of the injunction test. Where only a serious issue to be tried can be established, these courts have found that they must give greater regard to the second and third parts of the injunction.
[35] In Van Wagner Communications Co., Canada v. Penex Metropolis Ltd., [2008] O.J. No. 190 (S.C.), leave to appeal refused, [2008] O.J. No. 1707 (Div. Ct.), Pattillo J. applied this approach. In doing so, he pointed to statements from Canada (Attorney General) v. Saskatchewan Water Corp., 1991 CanLII 3951 (SK CA), [1991] S.J. No. 403 at para. 37 (Sask. C.A.) that were adopted in CBJ International Inc. v. Lubinsky, [2002] O.J. No. 3065 (Div. Ct.):
In summary, we find that to apply the appropriate test where an interlocutory injunction is sought on the basis of breach of a negative covenant the judge should use the following approach. To satisfy the first test he must undertake a preliminary and tentative analysis of the strength of the case put forward by the plaintiff. Is it overwhelming? Is a strong prima facie case? Is it a prima facie case? Is it less than a prima facie the case? Similarly he must make a tentative and preliminary assessment of the possible defences which may be offered, all with a view to estimating the extent to which those defences reduce the strength of the case initially shown by the plaintiff. At the end of that process the judge must answer the question: Is the plaintiff left with at least a prima facie case? If the answer is yes, the first test has been satisfied. As for the second and third tests, the strength of the case that the plaintiff is left with will determine how heavily the balance of convenience and irreparable harm must be weighed in the context of negative covenants. If the plaintiff is left with a strong prima facie case approaching a plain and uncontested breach of a clear covenant, then an injunction ought to be granted without much regard to the balance of convenience and irreparable harm. If the plaintiff is left only with a prima facie case then more regard needs to be had to the balance of convenience and irreparable harm.
[36] After reviewing these comments and other jurisprudence, Pattillo J. concluded at para. 39 of Van Wagner Communications Co., Canada v. Penex Metropolis Ltd:
Each of those respected judges are saying, in my view, that in the case of an interlocutory injunction to restrain a breach of a negative covenant, irreparable harm and the balance of convenience need to be still considered. The extent of the consideration, however, will be directly influenced by the strength of a plaintiff's case. Even where there is a clear breach of a negative covenant which is reasonable on its face, the issues of irreparable harm and balance of convenience cannot be ignored. They may, however, become less of a factor in reaching the final determination of the issue depending on the strength of the plaintiff's case.
[37] Pattillo J.’s approach was cited with approval by Newbould J. in Rogers Communications Inc. v. Shaw Communities Inc., [2009] O.J. No. 3842 (S.C.). I too have chosen to follow his approach. I believe that it reconciles conflicting caselaw in Ontario. It also achieves a fine balance in addressing the competing policy goals of not placing too high a burden on moving parties in interlocutory injunction cases, where legal and factual issues remain unresolved, and maintaining high scrutiny of restrictive covenants.
Issue 2: Has the plaintiff established a strong prima facie case for the enforcement of the non-competition clause?
The Positions of the Parties
[38] The plaintiff argues that there is a strong prima facie case that the non-competition clause is reasonable. It submits that the non-competition clause must be viewed in the context of a sale of a business.
[39] The defendants counter that the non-competition clause is not reasonable and , therefore, is unenforceable. They argue that the clause must be viewed in the employment context.
[40] It is my view that the NCNSA Agreement is to be viewed in the context of the sale of a business. It is further my view that there is a strong prima facie case and that the restrictive covenant is reasonable, with one exception as stipulated below, and is enforceable, for the reasons set forth below.
Sub-Issue 2(a): Are the terms of the non-competition clause reasonable and not too vague?
[41] To determine whether a restrictive covenant is reasonable, this Court must apply the four part inquiry set out by Tank Lining Co. v. Dunlop Industrial Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O.R. (2d) 219 (C.A.):
Does the covenant restrain trade?
Is the restraint one of the exceptional cases (for example, covenants associated with leases of commercial tenancies may contain enforceable restrictive covenants) where restraints of trade are permitted?
Is the restraint justifiable as reasonable between the parties?
Is the restraint justifiable as reasonable with respect to the interests of the public?
See also Martin v. ConCreate USL Ltd. Partnership, 2012 ONSC 1840 at para. 48.
Does the Covenant Restrain Trade?
[42] The defendants argue that the non-competition agreement restrains trade and effectively prevents Walker from working in his field.
[43] However, the plaintiff notes that the reality is much more nuanced and argues that although restrictive covenants are generally viewed with scrutiny, in the case of agreements of the sale of a business, they are “justified restraints on trade.” The plaintiff points out that, in this case, the covenant actually promotes trade by allowing people to sell their businesses. It further submits that in this case, there were extensive negotiations over the terms of the sale and thus these terms should be given deference by this Court.
[44] In Elsley v. J.G. Collins Ins. Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, the Supreme Court of Canada outlined the two competing policy goals in enforcing restrictive covenants, discouraging restraints on trade and labour on the one hand and promoting freedom of contract on the other. Dickson J. stated at pp. 923-4:
A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. As in many of the cases which come before the courts, competing demands must be weighed. There is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants. On the other hand, the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power.
[45] In Shafron v. KRG Insurance Brokers Western Inc., 2009 SCC 6, the Supreme Court elucidated at para. 15 how restrictive covenants generally restrain trade:
A restrictive covenant in a contract is what the common law refers to as a restraint of trade. Restrictive covenants are frequently found in agreements for the purchase and sale of a business and in employment contracts. A restrictive covenant precludes the vendor in the sale of a business from competing with the purchaser and, in an employment contract, the restrictive covenant precludes the employee, upon leaving employment, from competing with the former employer.
[46] However, as the plaintiff notes, the policy goal of discouraging restraints on trade is not offended in the context of a restrictive covenant in the sale of business. In Shafron v. KRG Insurance Brokers Western Inc., the Supreme Court observed at para. 21 that a sale of a business involves a sale of goodwill, which can only be protected by a restrictive covenant:
The sale of a business often involves a payment to the vendor for goodwill. In consideration of [page168] the goodwill payment, the custom of the business being sold is intended to remain and reside with the purchaser. As Lord Ashbourne observed at p. 555 of Nordenfelt:
I think it is quite clear that the covenant must be taken as entered into in connection with the sale of the goodwill of the appellant's business, and that it was entered into with the plain and bona fide object of protecting that business.
And as stated by Dickson J. (as he then was) in Elsley v. J. G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at p. 924:
A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser that he, the vendor, would not later enter into competition.
[47] Similarly, in Martin v. ConCreate USL Limited Partnership, Perell J. explained at para. 11:
The paradigm of a justifiable restraint on trade is the situation of the sale of a business, including its goodwill, where in order for the vendor to attract purchasers, the vendor may need to agree not to compete against his or her former enterprise. See Mason v. Provident Clothing and Supply Co., [1913] A.C. 724 (H.L.) at p. 738. Enforcing the covenant in these circumstances is consistent with economic activity and also advances the public policy supporting freedom of contract.
[48] In this case, the sale of the assets of Walker’s business to GDL clearly included its goodwill and client base. The defendants have argued that the client base and particularly the goodwill only represented a small portion of the sale price. However, this argument mischaracterizes the sale. It is clear from the recitals in the Agreement that the goodwill was an integral part of the sale and the NCNSA was meant to ensure that the purchaser received the full value of the business. Indeed, the policy considerations outlined by the Supreme Court in Elsley and Shafron are at play and the non-competition agreement can be viewed as a justifiable restraint on trade.
Is the Restrictive Covenant Reasonable between the Parties?
[49] For the purposes of this motion, the plaintiff must meet its onus of establishing that the non-competition clause is reasonable in the interests of the parties: Rogers Communications Inc. v. Shaw Communities Inc. at para. 38.
[50] In Rogers Communications Inc. v. Shaw Communities Inc., Newbould J. underscored at para. 39 that where the parties are sophisticated and armed with legal representation, their agreement is to be treated with deference:
Parties of equal bargaining strength such as Rogers and Shaw acting with legal advice, which was the case here, are in my view the best judges of what is reasonable as between them. In Tank Lining Corp. v. Dunlop Industries Ltd., supra, Blair J.A. stated at 225:
The test of reasonableness in the interest of the party upholding a restrictive covenant is that it is not more than adequate to protect that party's interest: Herbert Morris, Ltd. v. Saxelby, [1916] 1 A.C. 688. When two competently advised parties with equal bargaining power enter into a business agreement, it is only in exceptional cases that the courts are justified in over-ruling their own judgment of what is reasonable in their respective interests as Lord Haldane stated in North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] A.C. 461 at 471:
... when the question is one of the validity of a commercial agreement for regulating their trade relations, entered into between two firms or companies, the law ... looks carefully to the interest of the public, but it regards the parties as the best judges of what is reasonable as between themselves. (underling added)
[51] The Agreement is the subject of many emails between counsel for the plaintiff and Walker, all of which were copied to Walker. Both Walker’s counsel and Walker himself had a hand in drafting and modifying many of the provisions at issue. Walker’s counsel explained the terms to him in layperson’s terms. Perhaps Walker now feels that he has made a bad business deal, but this does not give him the right to back out. All the facts point to this non-competition clause being part of a negotiated agreement between two sophisticated parties with legal representation.
[52] To determine whether a restrictive covenant is reasonable, it is necessary to examine its geographic coverage, time period, and extent of activity covered: as per Dickson J. in Elsley at p. 925.
[53] In Shafron, the Supreme Court of Canada underscored that to be reasonable, the terms of the contract also must not be vague. It held at para. 27:
However, for a determination of reasonableness to be made, the terms of the restrictive covenant must be unambiguous. The reasonableness of a covenant cannot be determined without first [page170] establishing the meaning of the covenant. The onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms. An ambiguous restrictive covenant will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of an ambiguity. As stated at the outset, the main difficulty that arises in this case is the ambiguity of the geographical restriction contained in the covenant. However, before turning to the case at hand, I will discuss the doctrine of severance as it applies to restrictive covenants in employment contracts.
[54] Once again, in this case, the non-competition clause set out in section 2.1 of the NCNSA provides that, for a period of three years following the termination of Walkers’ employment, Walkers cannot:
directly or indirectly [...] carry on, be engaged in, have any financial interest in or be otherwise commercially involved with any business that is the same as, similar to or competitive with the Business or any portion thereof anywhere within ten kilometres of any of the Restricted Areas [defined as the Province of Ontario]”
Geographic Coverage
[55] The geographic coverage of the non-competition clause is Ontario and a surrounding 10 km ring. The plaintiff argues that this restriction is reasonable, because GDL’s clients are mostly in Ontario. It also points out that GDL has many clients outside of Ontario, so the coverage could have been broader.
[56] The defendants have argued that this geographic coverage does not make it clear whether Walker cannot work physically in the restricted areas or with clients in the restricted areas. Looking at the context of this clause, it is clear that the geographic restriction is directed to the location of the clients rather than the location of the office. The nature of the IT business is that it can operate from anywhere. The plaintiff seeks, by the clause, to protect its client base, which is primarily located in Ontario, as indicated by the broader language of the non-competition clause, which states that competition is prohibited whether direct or indirect.
[57] The defendants have also countered that the vast majority of GDL’s clients are in Ontario, so the 10 km ring is not justified. They point out that the 10 km ring is not easy to measure, particularly where it touches certain towns or bodies of water. I accept the defendant’s argument that the 10 km ring does not appear to be justified. I have examined Schedule C to the Asset Purchase Agreement, which lists the 31 client contracts being assigned to GDL. Of the 31 clients listed, 25 are located in Ontario. The other six are in New Brunswick, Alberta, Quebec, and North Carolina. The plaintiff does not appear to carry on business along the border of Ontario in Manitoba or Quebec. Thus, the 10 km ring appears to be an arbitrary addition to the scope of the geographic coverage. Therefore, I would sever it from the non-competition clause, as I will discuss below.
Time Period
[58] The non-competition clause extends for three years after Walker leaves his position as general manager. The plaintiff points out that it is shorter than the five-year non-solicitation clause and that similar time periods have been found to be reasonable by the jurisprudence – in Rogers Communications Inc. v. Shaw Communities Inc, the non-competition clause was for 10 years, in Martin v. ConCreate USL Ltd. Partnership, 3.5 years, in Hargraft Schofield LP v. Schofield, 3 years. The defendants have not put forward any cases to suggest that this time period is unreasonable. I agree with the plaintiff that this time period is well within the reasonable range suggested by caselaw.
Scope of Activity
[59] The non-competition clause covers “any business that is the same as, similar to or competitive with the Business [as defined] or any portion thereof.” The defendants have argued that this scope of activity is both overly broad and vague. Walker says in his affidavit that he is not sure how to interpret this provision when looking for work.
[60] The plaintiff argues that Walker knew exactly how to find work after he left GDL, pointing to his representation that he would work in IT consultation. It submits that he could also work in-house in IT.
[61] The plaintiff submits that on cross-examination, Walker agreed that he understands what the terms “same as” and “competitive with” mean. The plaintiff also points out that in an earlier examination, before Walker had contested the non-competition clause, he described one of his potential jobs with IBM as similar to Hudson’s services. The plaintiff argues that this suggests that Walker is capable of interpreting what “similar to” means.
[62] Moreover, the plaintiff submits that courts have consistently upheld restrictive covenants covering businesses “similar to” a business being sold as clear and unambiguous: See Doerner v. Bliss and Laughlin Industries Inc., 1980 CanLII 50 (SCC), [1980] 2 S.C.R. 865 at 868 and 872 and Key Pos Business Systems Inc. v. Singh, [2008] O.J. No. 1791 at paras. 10 and 20 (S.C.).
[63] I agree with the plaintiff that the phrase “similar to” is not vague. It is a plain language term and it is clear what it means. Indeed, Walker was able to describe a potential job as similar to Hudson's business. In the context of the parties’ extensive negotiations over the asset sale, neither is the term overly broad. As the plaintiff pointed out, courts have consistently upheld non-competition agreements containing the phrase “similar to.”
Is the Restrictive Covenants Reasonable in the Public Interest?
[64] With respect to this issue, the onus shifts to the defendants to establish that the non-competition agreement is not reasonable in the public interest: in Rogers Communications Inc. v. Shaw Communities Inc. at para. 38.
[65] The defendants have argued that it would offend public policy to restrain trade where only a small amount of the sale price is paid for goodwill. Although only a portion of the sale price may have been directly attributed to goodwill, the asset purchase agreement and NSNCA make it clear that goodwill is essential to the plaintiff’s purchase of the business. In fact, in the recitals to the NSNCA, the parties specifically acknowledge that the NCNSA is in place to ensure that the plaintiff gets the full value of the goodwill. I note, further, that the stipulated allocation of purchase price among assets, goodwill and clients was, on the admission of both parties, not accurate and, further, was for the purpose of taxes.
[66] Moreover, the jurisprudence reviewed above, including Supreme Court of Canada decisions Shafron v. KRG Insurance Brokers Western Inc and Elsley v. J. G. Collins Insurance Agencies Ltd., make it clear that restrictive covenants in the context of the sale of a business are considered to be justified restraints on trade.
[67] Accordingly, the defendants have not met their burden of establishing that the non-competition clause is unreasonable in the public interest.
[68] In all of the circumstances of this case, based on the evidence and submissions before me, I find that the plaintiff has established a strong prima facie case with a high likelihood of success, and that the non-competition clause is reasonable, except for the extension of the geographic coverage to 10 km around Ontario, which will be addressed further, below.
Issue 3: Has the plaintiff established that it will suffer irreparable harm and that the balance of convenience lies in its favour?
[69] I have found that the plaintiff has a strong prima facie case and will apply the second and third parts of the injunction test, but with less rigour.
[70] The plaintiff argues that if the injunction is not imposed, GDL will be subject to unfair competition from the defendants. It submits that this unfair competition constitutes irreparable harm. It notes that following RJR-MacDonald at 341, the focus of irreparable harm is on the nature of the harm rather than its magnitude.
[71] In support of its contention that unfair competition constitutes irreparable harm, the plaintiff points to Precision Fine Papers Inc. v. Durkin, [2008] O.J. No. 703 (S.C.). In that case, in the context of an injunction to enforce a non-solicitation clause, Strathy J. found at para. 25, that unfair competition often leads to irreparable harm, due in part to the loss of potential customers:
Cases of unfair competition have often been recognized as ones in which damages may not adequately compensate the plaintiff for the loss suffered due to the defendant’s conduct. Not only is it difficult to quantify the loss of goodwill or market share suffered by the plaintiff due to the defendant’s actions, but the damage to relationships with customers is inherently difficult to assess. In a competitive industry, where there can be considerable fluidity of customer allegiances, it may be difficult for the moving party to establish an accurate measure of damages.
[72] In Hargraft Schofield LP v. Schofield, Himel J. noted at para. 27:
This is a case where it may be difficult at trial to assess damages in a way that there is adequate compensation for the harm suffered. There is no suggestion that Hargraft will be put out of business if the injunction is refused. However, it may be that it will suffer permanent market loss or damage to its reputation if the harm alleged continues. Furthermore, Edgehill is a new company and may not have sufficient assets to cover a damage award if the plaintiff is successful at trial.
[73] The plaintiff argues that the balance of convenience lies in its favour. Without the injunction, the plaintiff, as discussed above, may suffer unquantifiable losses. On the other hand, Walker alleges that he will be effectively prevented from working at all in his field, IT. The evidence suggests otherwise – that Walker is capable of getting a job that will not infringe this non-competition agreement, for example in consulting. The plaintiff points out that even if Walker cannot find a job, his damages are easily quantifiable if he is successful at trial. He was paid a set salary at GDL and this amount could be paid to him. Accordingly, the balance of convenience lies in the plaintiff’s favour. I agree with the plaintiff in this regard, and find that the balance of convenience lies in favour of GDL.
Issue 4: If the plaintiff has met the test for the injunction except for term(s) of the non-competition clause that the Court finds to be unreasonable or vague, as a remedy, can this Court issue the injunction but sever the impugned terms from the rest of the non-competition clause?
[74] There are two types of severance. One form is called “blue pencil” severance, in which the court strikes out the impugned portion as void without affecting the meaning of the part remaining. The other form is called “notional” severance, in which the court reads down the impugned portion. See Shafron at paras. 29 and 30.
[75] In the case of restrictive covenants in the employment context, the Supreme Court has observed that if the court cures broad contracts with the severance doctrine, employers will be encouraged to continue to draft broadly. It held in Shafron at para. 33:
Where the provision in question is a restrictive covenant in an employment contract, severance poses an additional concern. While the courts wish to uphold contractual rights and obligations between the parties, applying severance to an unreasonably wide restrictive covenant invites employers to draft overly broad restrictive covenants with the prospect that the courts will only sever the unreasonable parts or read down the covenant to what the courts consider reasonable. In Mason, Lord Moulton made the well-known statement to this effect at p. 745:
It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the Courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the longer purse of his master.
[76] The Supreme Court in Shafron found that in these cases, “blue line” severance would be appropriate in exceptional cases but “notional” severance would never be appropriate. It explained its reasoning at paras. 36 and 37:
I think the approach of Lord Moulton in Mason is the appropriate view of the law rather than the approach taken in the cases cited in para. 35 above. I am of the opinion that blue-pencil severance may be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant. However, the general rule must be that a restrictive covenant in an employment contract found to be ambiguous or unreasonable in its terms will be void and unenforceable.
However, I am also of the view that notional severance has no place in the construction of restrictive covenants in employment contracts. In my opinion, there are at least two reasons why it would be inappropriate to extend the doctrine of notional severance to the case of restrictive covenants in employment contracts.
[77] The Court, at paras. 39-42, identified those reasons for not employing “notional” severance as firstly, that there is no “bright line” for reasonableness and secondly, that it would serve as an encouragement for employers if courts were to draft their restrictive covenants for them.
[78] The instant case is in the context of the sale of a business rather than in the employment context. Therefore, the cautions regarding severance are less applicable. However, I find that only “blue line” severance is appropriate. This case involved two sophisticated parties who were both represented by counsel, and who engaged in many months of negotiation. It would not be appropriate to rewrite their contract for them. However, where individual terms are found to be unreasonable, they can certainly be severed.
[79] Thus, in this case, I find that the phrase “ten (10) kilometres of” should be struck from the non-competition clause so that it reads:
directly or indirectly [...] carry on, be engaged in, have any financial interest in or be otherwise commercially involved with any business that is the same as, similar to or competitive with the Business or any portion thereof anywhere within any of the Restricted Areas [emphasis added].
[80] Accordingly, with respect to Walker, I order that an interlocutorry injunction issue:
(i) enjoining Walker from breaching any of the restrictive covenants set forth in his non-competition and non-solicitation agreement and his employment agreement, dated February 1, 2010, as amended at paragraph 79 above;
(ii) enjoining Walker from accepting business from GDL clients already solicited by him;
(iii) enjoining Walker from directly or indirectly soliciting, contacting, approaching or in any way seeking to obtain the business of GDL's clients; and
(iv) enjoining Walker from soliciting GDL's employees.
Issue 5: Injunctive Relief regarding Other Named Defendants
[81] With respect to the interlocutory injunctive relief sought regarding the other named defendants, there is no evidence before me that any of them had an employment agreement or a NCNSA with the plaintiff. Further, there is no evidence before me that any of them other than Walker were fiduciaries of the plaintiff.
[82] However, the plaintiff argues that fiduciary duties are owed to an employer by departing "key" employees including those in management or otherwise senior positions. Relying on Gas TOPS Ltd v Forsyth, 2009 CanLII 66153 (ON SC), [2009] O.J. 3969 (S. C.) at paras.82-85, aff’d 2012 ONCA 134, the plaintiff submits that such duties are impressed on more "junior" personnel in certain circumstances, including where:
(a) the employer is in a situation of vulnerability because the employee has the power to fundamentally affect the business of the employer;
(b) by reason of his or her particular relationship with clients, the employee is in a position to obtain confidential information;
(c) the employee joins a new business venture which successfully diverts the business opportunity of his or her former employer; and
(d) the employee has knowledge of customer contact information, needs and preferences, and therefore an ability to influence customers. The plaintiff relies on the case of GasTops Ltd v Forsyth, 2009 CanLll 66153 (ONSC), 2012 ONCA 134.
[83] The plaintiff argues that Walker was a fiduciary due to his key, senior founding role in establishing the technology and client base of GDL. It says further that Mears was a fiduciary, because he was GDL’s key technology expert and maintained regular close contact with GDL clients.
[84] Moreover, the plaintiff argues that fiduciary duties attach to otherwise non-fiduciary employees if they aid true fiduciary employees in breaching their duties by, for example, departing with fiduciaries who set up a competing business. In support of this proposition, the plaintiff relies on Precision Fine Papers Inc. v. Durkin, [2008] O.J. No. 703 (S.C.). Based on this proposition, the plaintiff argues that the other defendants became impressed with fiduciary duties once they joined Mears and Walker at Hudson.
[85] The defendants counter that none of them who worked for GDL was a fiduciary of GDL. The defendants further argue that even if they are found to be fiduciaries, they are permitted to compete with the plaintiff after leaving their employment, provided that they do so fairly: Veolia ES Industrial Services Inc. v. Brulé, 2012 ONCA 173 at para. 33.
[86] For the purposes of this motion, I do not need to consider whether there is a strong prima facie case that the other named defendants are fiduciaries of GDL, as I find that there is a strong prima facie case that Walker is a fiduciary of GDL and the other named defendants are impressed with fiduciary duties by joining Walker at Hudson in a competing business.
I am guided by the remarks of Strathy J. in Precision Fine Papers Inc. v. Durkin at paras. 22 and 23:
There is a serious issue to be tried as to whether Ms. Durkin herself owed fiduciary and common law duties of confidence to Precision. For the purposes of this motion, however, it is not necessary to investigate that issue. Case law has clearly established that fiduciary obligations attach to employees who depart with fiduciaries to work with competitive businesses. Were it otherwise, the fiduciary would be permitted to do indirectly what he or she cannot do directly: Canadian Industrial Distributors Inc. v. Dargue (1994), 1994 CanLII 7319 (ON SC), 7 C.C.E.L. (2d) 60 (Ont. Gen. Div.); DiFlorio v. Con Structural Steel Ltd. (2000), 2000 CanLII 22765 (ON SC), 6 B.L.R. (3d) 253 (S.C.J.), aff'd (2001), 2001 CanLII 32743 (ON CA), 21 B.L.R. (3d) 22 (Ont. C.A.). I conclude that there is a strong prima facie case that Ms. Durkin is bound by the same obligations as Mr. Durkin because she was aware of his non-solicitation agreement and his fiduciary duties to Precision, and she participated with him in the breach of his duties.
It is also well-established that a third party who knowingly assists or participates in a breach of fiduciary duty, or who knowingly receives the fruits of such a breach, will be liable along with the breaching party: Anderson, Smyth & Kelly Customs Brokers Ltd. v. World Wide Customs Brokers Ltd. et al. (1996), 1996 ABCA 169, 184 A.R. 81 (C.A.). In order to grant meaningful and effective relief, the new employer, who has knowledge of the employee's obligations, must also be restrained: Ontario Duct Cleaning Ltd. v. Wiles, [2001] O.J. No. 5150 (S.C.J.); Wallace Welding Supplies Ltd. v. Wallace (1986), 1986 CanLII 7626 (ON SC), 32 B.L.R. 99 (Ont. H.C.J.). It is not disputed that Inter-World was aware from the outset of Mr. Durkin's non-solicitation agreement and it may be liable for any breaches of his obligations, both contractual and common law. There is a strong inference to be drawn that Inter-World was aware of the Durkins' breaches of duty and knowingly received the fruits of their misconduct.
[87] I also note from the evidence and orders before me, that in the appearances before McEwan and Stevenson JJ, the defendants had agreed not to solicit the clients or employees of GDL and had signed interim terms to that effect on June 13, 2012.
[88] In light of the foregoing evidence and caselaw, and considering the RJR-McDonald tripartite test, I order that an interlocutory injunction issue against all of the other defendants as follows,
(i) enjoining the defendants from directly or indirectly soliciting, contacting, approaching or in any way seeking to obtain the business of GDL's client;
(ii) enjoining the defendants from soliciting GDL's employees;
(iii) enjoining the defendants from joining with Walker in any enterprise that would, if undertaken by Walker, violate the terms of any restrictive covenant contained in the NCNSA or the employment agreement;
(iv) enjoining the defendants from accepting business from GDL clients already solicited by any one of them, for 12 months from the date of this Order.
Issue 6: Breaches of Confidence
[89] The Plaintiff further seeks an Order enjoining the defendants from using, misusing or disclosing any and all confidential and/or proprietary information of GDL, including all records, materials, information, contracts, policies, software, processes, source codes, electronic information and data, and all confidential files and/or proprietary information of a third-party provided to the plaintiff; an Order prohibiting any of the defendants from, in any way, deleting, modifying or in any way interfering with any of their electronic equipment, including computers, used by the individual defendants since October 24, 2011; an Order authorizing the plaintiff's expert to attend the defendants premises to create forensic images of all electronic devices, including computers of Hudson, Bay Street IT and the individual defendants that have been used by the individual defendants since October 24, 2011 or that contain confidential information, for preservation subject to further Order of the Court, and an Order that the that the defendants shall cooperate with the plaintiff's expert in this regard.
[90] As set forth above, the plaintiff argues that there is evidence to establish that the defendants took confidential information from the plaintiff and that there is also a serious issue to be tried in this regard. It is the submission of the plaintiff that Walker, Jancovic, Sukhdeo, Mears and Hagar breached duties of confidence owed to GDL, and that there is a serious issue to be tried and a strong prima facie case that Jancovic, Sukhdeo, Mears and Hagar breached their common law duties by aiding Walker in transferring to Hudson GDL's confidential information, and, by so doing, assisting GDL's direct competitor, Hudson. The plaintiff argues that departing employees are constrained by common law obligations from misappropriating the former employer's confidential information or using it to compete with the former employer or at all: GasTOPS Limited v Forsyth, supra. Further, the plaintiff argues that departing employees are also prohibited from "springboarding" off their former employers confidential information: Omega Digital, supra. at paragraphs 21 – 22.
[91] Further, the plaintiffs argue that in addition to this common law duty, Walker also contractually agreed not to disclose or misuse confidential information of GDL in his Employment Agreement at section 18.
[92] The defendants argue that there has been no misappropriation of confidential information. They argue that the defendants gave an immediate undertaking at the commencement of this action to review their files and return all confidential proprietary information belonging to GDL Solutions which may be in their possession after having left the plaintiff. They indicate that they delivered all such information promptly. Further, the defendants submit that they undertook to take steps to preserve the electronic and other records of the departed employees, which undertaking was also complied with. Further, they argue that the expert report provided by the plaintiff contains no analysis of which files were removed from Mears computer, although they were able to identify those files belonging to Hagar and, therefore, argue that the expert report is without foundation. The defendants state that they will continue to preserve the electronic and other records of the departed employees until trial and that the plaintiff is not entitled to use an interlocutory injunction, such as this, to obtain early discovery.
[93] Based on the evidence before me, the plaintiff's expert's evidence, the submissions of counsel, and considering the RJR McDonald tests for granting injunctive relief, I find that the plaintiff has met the tests, that there is a strong prima facie case made out, that misappropriation of GDL's data and use of confidential information gives rise to the probability of irreparable harm and that the balance of convenience favors the plaintiff in this regard. Accordingly, I grant the interlocutory injunctive relief sought by the plaintiff, as set forth above at paragraph 89, above.
Orders
[94] Based on all of the foregoing, the Orders are to go as set forth at paragraphs 79, 80, 88 and 89, above.
Costs
[95] I would urge the parties to agree upon costs, failing which I would invite the parties to provide any costs submissions in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges’ Administration at 361 University Avenue, within thirty days of the release of this Endorsement.
Carole J. Brown J.
Date: August 2, 2012