SUPERIOR COURT OF JUSTICE - ONTARIO
RE: ALTUS GROUP LIMITED
Plaintiff
- and -
CORY YEOMAN, ANDREW YEOMAN, SCOTT NIEPAGE, YEOMAN & COMPANY PARALEGAL PROFESSIONAL CORPORATION and GARY YEOMAN
Defendants
BEFORE: Justice S. M. Stevenson
COUNSEL: Erik R. Hoaken and Ranjan K. Agarwal, for the Plaintiff
David E. Greenwood, for the Defendants Cory Yeoman, Andrew Yeoman, Scott Niepage and Yeoman & Company Paralegal Professional Corporation
Kristian Borg-Olivier, for the Defendant Gary Yeoman
DATE HEARD: July 12, 2012
E N D O R S E M E N T
1The defendants Cory Yeoman, (“Cory”), Andrew Yeoman, (“Andrew”), Scott Niepage (“Scott”) and Gary Yeoman (“Gary”) are all former employees of the plaintiff Altus Group Limited (“Altus”).
2Altus seeks an interim injunction and preservation order against the defendants based on an alleged breach of non-competition and non-solicitation agreements Altus has with the individual defendants. Altus’ motion for an interlocutory injunction is scheduled to be heard on November 6, 2012. Specifically, Altus seeks an interim order prohibiting the defendants from soliciting Altus’ clients and employees until November 6, 2012 to preserve the status quo pending the interlocutory injunction motion. Altus also seeks an order allowing a forensic investigator to image the defendants’ computers and media devices and search for confidential information belonging to Altus. Altus also seeks an order requiring the defendants to preserve any documents in their possession.
3At the commencement of the motion, the Court was advised that Altus was not seeking any relief with respect to the interim injunction against Gary as he was abiding by the terms of his employment contract. However, Altus confirmed that they were still proceeding against Gary with respect to the interlocutory motion in November.
Background Facts
4Gary was the former CEO of Altus. His employment was terminated in November 2011. Cory and Andrew, Gary’s sons, resigned in January 2012, while Scott resigned in April 2012. Altus contends that even before Cory and Andrew resigned, they established a competing realty tax business, the defendant Yeoman & Company Paralegal Professional Corporation (“YPC”). Altus states that in the four months since the creation of YPC, the defendants have acquired approximately 48 of Altus’ clients and two of its key employees.
5They contend that on April 11, 2005, the individual defendants entered into an Investment and Combination Agreement (the “Agreement”) with Altus Income Group Income Fund (the “Altus Fund”). They submit that the Agreement contemplated an initial public offering by Altus Fund (the “IPO”).
6Altus states that pursuant to the Agreement, Altus Fund purchased the individual defendants’ interests in Altus Realty Tax Corporation. In doing so, the Altus Fund acquired, in large part, Altus Realty Tax Corporation’s clients. Cory, Andrew and Scott submit that they were gifted shares from Gary and that they were not involved in the negotiation of the Agreement.
7As part of the transaction, Altus states that the individual defendants agreed to non-solicitation and non-competition covenants in the Agreement, in favour of the Altus Fund (which was converted into the Altus Group effective January 1, 2011). Altus relies on the restrictive covenants that they say are clearly worded and not ambiguous. Altus contends that the defendants have breached those restrictive covenants.
8Altus states that the defendants are in direct competition with it because the defendants work in the realty tax business, which is specifically prohibited by the terms of the restrictive covenants. As former Altus employees, the defendants are all specializing in the review and appeal of property tax assessments and in assisting clients with admissible vacancy rebates, realty tax budgeting and tenant realty tax recoveries. Altus submits that this is prohibited by the restrictive covenants. Altus contends that they are at risk of losing a number of other clients and key employees if measures are not put in place to ensure compliance with the restrictive covenants.
The Law
9As set out in s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43 and in Rule 40.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, a judge may grant an interlocutory order or mandatory order on such terms as are considered just.
10In order to succeed on this motion, the plaintiff must meet the three-part test set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311, [1994] S.C.J. No. 17, at para. 43:
i) there is a serious issue to be tried;
ii) irreparable harm will be suffered by the applicant if the injunction is not granted; and
iii) the balance of convenience favors granting the injunction.
Issues
111) Does Altus meet the three-part test for the granting of an interim injunction?
i) Is there a serious issue to be tried?
ii) Will Altus suffer irreparable harm if the injunction is not granted?
iii) Has Altus established that the balance of convenience favours it?
- Should a forensic investigator be appointed or preservation order be granted?
(1) Does Altus meet the three-part test for the granting of an interim injunction?
(i) Is there a serious issue to be tried?
12Altus submits that the threshold to establish whether there is a serious issue to be tried is low. It contends that it need only establish that the claim is not “frivolous and vexatious”. In support of this position they rely on RJR-MacDonald, at para. 44.
13Altus submits that the issue to be tried is whether the individual defendants breached the covenants contained in the Agreement. They contend that there is no dispute that the individual defendants have breached the non-competition covenants in the Agreement because they are directly competing against Altus. The defendants have solicited approximately 48 former clients and at least two former employees or consultants of Altus. They further contend that the deliberate breach of the negative covenant is sufficient to establish a strong prima facie case.
14Altus contends that the validity of the restrictive covenant is subject to a two-stage inquiry. The plaintiff must establish that the covenant is reasonable as between the parties and that the defendants bear the onus of proving that an otherwise reasonable covenant is contrary to the public interest. They further submit that the test of reasonableness has to be applied “in the peculiar circumstances of the particular case”. They rely on the decisions of J.G. Collins Insurance Agencies Ltd. v. Elsley Estate, 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, at p. 923; Tank Lining Co. v. Dunlop Industries Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O. R. (2d) 219 (CA), at pp. 222-23; and Martin v. ConCreate USL Limited Partnership, 2012 ONSC 1840, [2012] O.J. No. 1367, at paras. 13-14.
15Altus submits that the restrictive covenants were entered into in connection with the sale of a business and therefore the reasonableness of the covenant will be scrutinized less rigorously than an employment contract. See Martin, supra, at paras. 11, 20-21. They also contend that the restrictive covenants are clearly worded and are not ambiguous. They submit that the covenants are reasonable as between the parties with respect to the parties’ reasonable expectations, the extent of the activities prohibited and the geographic and temporal scope of the restrictive covenants.
16Altus also submits that the individual defendants agreed in writing that the covenants in the Agreement are reasonable, and a court is likely to find that they are not an unfair restraint on trade.
17The defendants submit that the non-competition covenant that Altus relies on is not enforceable. They submit that the terms of the covenants are unreasonable and overbroad and that the restriction imposed by the covenant expired in 2010.
18Cory, Andrew and Scott contend that they had no role in negotiating the terms of the transaction or the Agreement whereby the shares, which were gifted to them by Gary, were sold. They submit that they did not have any input into the terms of the non-competition clause. It is their position that they did not have equal bargaining power.
19It is the position of Cory, Andrew and Scott that they were not even aware of the existence of the non-competition clause until they were served with Altus’ Motion Record. In any event, they submit it was unreasonable for Altus to seek to impose restrictions on the ability of Cory, Andrew and Scott to work as realty tax consultants. They contend that the fact that Gary chose to make a gift in a tax advantageous manner (by gifting shares to Cory, Andrew and Scott) should not put Altus in a position that allows it to restrict the rights of these defendants to ply their trade.
20The defendants also contend that the two-year term is excessive and that the geographic scope and activities the clause seeks to restrict are punitive and wholly inconsistent with reasonable expectations. They contend that none of the defendants engaged in the vast majority of the activities that Altus seeks to restrict. Their business is restricted to realty tax services and Altus has no reasonable interest in preventing the defendants from engaging in lines of work they have not performed in the past.
21The defendants also contend that the non-competition clause seeks to restrict Cory, Andrew and Scott from working as realty tax professionals anywhere in Canada. This is overreaching as the evidence is that Cory, Andrew and Scott all provide services mainly in the greater Toronto area and their clients are all situated in Ontario. They also submit that the clause is ambiguous and will be prima facie unenforceable because the party seeking enforcement will be unable to demonstrate reasonableness in the face of ambiguity. They rely on the decision of Mason v. Chem-Trend Limited Partnership, 2011 ONCA 344, [2011] O.J. No. 1994, at para, 14, in support of their position.
22The defendants also submit that at the time the Agreement was signed, Cory, Andrew, and Scott worked for Altus Realty Tax Management Corporation (“ART”). They contend that in 2008 their employment with ART was terminated and thereafter they became employed by Altus Group Tax Consulting Paralegal Professional Corporation (“APC”). They submit that APC is an independent company and that they were paid by this company.
23The defendants also take the position that Altus condoned the decision by Cory and Andrew to start YPC or alternatively, they waived the enforcement of the non-competition clause. They contend that Cory and Andrew informed Jim Derbyshire (“Jim”), the Altus Global President, Realty Tax Consulting, that they would be leaving Altus and that he did not object. They submit that Altus supported their decision to leave and in fact cooperated by transferring files and referring work to them. They submit that during a dinner on April 4, 2012 attended by Cory, Andrew and Jim, Jim was specifically asked if Altus objected to the fact that they had left to start their own company and the reply was “no”.
24The defendants contend that the true purpose of Altus commencing this action is to discourage its remaining employees from leaving their employment with Altus. They submit that nothing was done about the existence of YPC for over four months and that Altus actively supported and assisted YPC during its start-up. It was only after other employees started to leave that Altus objected to YPC' s existence. They also point to the fact that other employees with similar restrictive covenants have left Altus to work for a competitor and no legal action has been taken by Altus against those former employees.
Analysis
25Some courts in Ontario have held that the higher standard of a strong prima facie case should apply where parties are seeking to enforce restrictive covenants, both in the context of an employment agreement and the sale of a business. If the higher standard is met, less emphasis is placed on the second and third parts of the injunction test. See: Boehmer Box L.P. v. Ellis Packaging Ltd., [2007] O.J. No. 1694 (S.C.J.) and Quizno’s Canada Restaurant Corp. v. 1450987 Ontario Corp., 2009 CanLII 20708 (ON SC), [2009] O.J. No. 1743 (S.C.j.)
26In other decisions, the courts have not insisted that the parties seeking to enforce a restrictive covenant make out a strong prima facie case. They have found that where a strong prima facie case can be made out, there is no need to examine the second and third parts of the injunction test. Where only a serious issue to be tried can be established, there is more emphasis on the second and third parts of the injunction test.
27Pattillo J., in the decision of Van Wagner Communications Co., Canada v. Penex Metropolis Ltd., [2008] O.J. No. 190 (S.C.J.), leave to appeal refused, [2008] O.J. No. 1707 (Div. Ct.), applied this approach. At para. 35, he referred to statements from Canada (Attorney General) v. Saskatchewan Water Corp., 1991 CanLII 3951 (SK CA), [1991] S.J. No. 403 (C.A.) that were adopted in C.BJ International Inc. v. Lubinski, [2002] O.J. No. 3065 (S.C.J.), at para. 16:
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 a [sic] 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 a[t] 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.
28I do find that there is a serious issue to be tried. I do not find that the claims made by Altus are frivolous or vexatious. There is no dispute that these covenants were part of the Agreement signed by the defendants. I acknowledge that questions surround whether they are still applicable and if so, whether they are enforceable or unenforceable by virtue of being unreasonable. There are also questions regarding the execution of the Agreement raised by the defendants that need to be addressed to assist with the issue of the validity and enforceability of the restrictive covenants.
29However, there is no question that the individual defendants are competing directly against Altus as they are in the realty tax business. It is also undisputed that approximately 48 clients and some employees have left Altus to join YPC in a very short period of time. There is a prima facie case that a breach of the restrictive covenant has taken place and there is a reasonable basis to find that solicitation has occurred.
30I cannot determine at this stage of the proceeding whether Altus has a strong prima facie case and whether there is little doubt as to the merits of the case. It may be determined that the restrictive clauses are unenforceable or that Altus condoned the creation of YPC or waived the application of the restrictive covenants. As such, it is incumbent upon Altus to show that the second and third parts of the tests for granting an injunction are met.
(ii) Will the plaintiff suffer irreparable harm if the injunction is not granted?
31Having found that there is a serious issue to be tried, the second part of the test requires the Court to determine if the plaintiff will suffer irreparable harm if the interim injunction is not granted.
32Altus contends that as the realty tax business is relationship-driven, and YPC is focusing their solicitation efforts directly on the clients and employees who are loyal to the individual defendants, Altus is particularly vulnerable and is at a significant risk of losing its market share. They submit that the impact of the solicitation has already led to rumours in the marketplace, threatening Altus’ reputation and goodwill.
33Altus submits that some of the approximately 48 clients who have left to go to YPC had no direct relationship with the individual defendants. Altus is concerned that the impact of the loss of clients cannot be adequately measured in damages as some of the clients who left have taken only their realty tax business to YPC, but continue to retain Altus for other matters. Altus is concerned that these clients may take their remaining business elsewhere and if this were to occur, this loss, which is hard to measure in damages, would be attributed to YPC.
34Altus further submits that as property tax assessments run on a four-year cycle, the damages will flow over the four-year period, making damages an inadequate remedy in this context.
35Altus also submits that the defendants are in possession of Altus’ proprietary and confidential information which either is, or could be, actively used by YPC to unfairly compete with Altus. They contend that possession of these documents is a significant breach of Altus’ confidentiality obligation to its clients. This, Altus submits, exposes them to liability and threatens to damage their reputation and client relationships.
Analysis
36I do not find that Altus will suffer irreparable harm if the interim injunction is not granted. As stated by Lauwers J. in Paradigm Shift Technologies Inc. v. Oudovikine, 2012 ONSC 148, [2012] O.J. No. 190 (S.C.J.), even where the subject matter of the litigation is the alleged breach of a restrictive covenant, the moving party must show evidence of irreparable harm that is clear and not speculative. At para. 54 of that decision, Lauwers J. quoted from the decision in Barton-Reid Canada Ltd. v. Alfresh Beverages Canada Corp., 2002 CanLII 34862 (ON SC), [2002] O.J. No. 4116, at para. 18:
[E]vidence of irreparable harm must be clear and not speculative. Barton-Reid has provided no real evidence, other than its bald statement, that it will either lose market share, or be put out of business. Lost sales and market share can be compensated in damages, and can generally be calculated on the basis of sales histories, and sales projections. Although perhaps difficult, the damages can be calculated. If the nature of the damage can be calculated in money, then no matter how hard it may be to quantify the damages, the court should decline to grant an injunction.
37I agree with the defendants, that at this stage Altus has not produced sufficient evidence to support its contention that it will suffer irreparable harm if the interim injunction is not granted. I note that Altus is a very large corporation with over 15,000 clients and annual revenue estimated to be in excess of $300 million. It has 3,000 clients in the realty tax consulting division and has over 300 realty tax professionals across Canada. YPC currently has four realty tax professionals and approximately 48 clients and concentrates on the realty tax market. There is also some evidence that of the 48 clients who left, Altus expected at least some of them to transfer to YPC and may have assisted with the transition of some of those files. There is some evidence before the Court, albeit untested by cross-examination, which suggests that Altus may have condoned and even supported the establishment of YPC.
38The issue of damages can be easily determined as Altus is familiar with its client base and would have knowledge of the historic revenue it earned from the clients who transferred to YPC. As submitted by counsel for the defendants, YPC will also be required to disclose the revenue it has earned from these clients as part of the discovery process.
39I also agree that there is no evidence before the Court demonstrating that if Altus loses a client from the realty tax division, it will inevitably lose that client’s business in areas of business where YPC does not compete with Altus. At this point, this is merely speculation on the part of Altus.
40The Court was also advised that the recent Affidavits sworn by Jim Derbyshire and Liana Turrin do not list any other clients who have left Altus since the initial 48 prior to this court action. Additionally, only three of the 48 clients who left did not have an existing, ongoing relationship with Cory, Andrew or Scott.
41There is also evidence that the employees who left Altus to join YPC were all looking to leave their employment at Altus and took the initiative to contact Cory and Andrew. The evidence of these former employees is that they were not solicited by Cory and Andrew. There is also evidence that other employees have left to work for competitors apart from YPC.
42Taking all of these factors into consideration, it is not clear that Altus will suffer irreparable harm if the interim injunction is not granted.
(iii) Has the plaintiff established that the balance of convenience favours it?
43Given my determination on irreparable harm, it is not necessary to consider the balance of convenience in detail. I do not find that Altus’ commercial viability is threatened by the defendants. I find that the balance of convenience favours the defendants.
(2) Should a forensic investigator be appointed?
44Altus submits that a former employee of Altus, Tom Carambelas (“Tom”), who is now an employee of YPC, copied highly confidential and sensitive files and documents onto a USB key weeks before he resigned his employment and weeks after he was asked by a co-worker whether he had copied all of his files.
45Altus further submits that Andrew’s laptop computer was re-imaged, deleting any record of any possible efforts to copy or remove electronic information. They contend that there was no legitimate reason for this re-imaging.
46Altus submits that if the Court does not allow Altus to preserve and protect its confidential information, which it states is likely in the defendants’ possession, there is a serious risk that the information will be intentionally or inadvertently deleted or destroyed. They submit that the balance of convenience favours the granting of the preservation order sought by Altus and that Altus will be irreparably harmed if the documents are destroyed as it will be unable to prove the extent to which the individual defendants violated their respective duties of confidentiality.
47Altus further submits that the preservation and forensic inspection order sought by them is proportionate and reasonable, and calls for an independent third party inspector. As an example, it points to the order granted in the decision of Hotspex Inc. v. Edwards, 2011 ONSC 3837, [2011] O.J. No. 3180 (S.C.J.). The order sought by Altus is similar to the order granted in Hotspex Inc. as it defines a procedure for ensuring that the defendant’s own privileged or confidential information is protected; it ensures that the parties’ counsel are mutually advised of the findings; and ensures that the plaintiff will bear the costs of inspection, among other things: see Hotspex Inc. at para. 25. Altus also agrees that it should bear the initial cost of the inspection, subject to being able to recover the expense through an order of costs later in the proceeding.
Analysis
48I am not prepared to grant the order sought by Altus. At this point, there is no evidence that Tom inappropriately copied highly confidential and sensitive files and documents onto the USB device. In a sworn Affidavit for this motion, Tom indicates that copying files from the network to a laptop computer was common practice at Altus. He deposes that it was necessary to have this information when working off-site. Tom’s evidence was corroborated by Cory, Andrew and Scott. Tom also indicates that the laptop computer in question was left with Altus after his employment ended and that Altus remains in possession of the computer in question.
49There is no evidence before me that Tom has taken confidential information belonging to Altus. He admitted that he used a USB device while working at Altus, but there is no evidence that he has any confidential or proprietary information of Altus in his possession. Tom deposed that the USB device referred to was used to copy his personal files prior to the end of his employment with Altus. He stated that these personal files included educational materials for completed and ongoing courses he was taking, and some tax impact information that he copied for a meeting with Hydro One. This meeting was scheduled to take place while he was still employed by Altus. He also indicated that the information that he copied to the key for the meeting with Hydro One had previously been forwarded to clients and peers in the industry when requested.
50It was also Tom’s evidence that he has not brought the USB device in question to YPC’s office and that he only accessed the USB device after his first review of Jim Derbyshire's Affidavit and prior to swearing his own Affidavit.
51Even though this is an interim injunction, I note that no evidence was provided by the company that reviewed Tom’s computer that would have assisted the Court in determining this issue. Additionally, there is no indication in any of the Affidavits put forward by Altus for this motion of what information, documentation or files Altus believes are in Tom’s possession.
52With respect to Andrew’s computer, Andrew’s sworn Affidavit indicates that he gave his laptop computer to Deron Cain, CIO of Altus, on January 13, 2012, because it was starting in “safe mode” and Microsoft Outlook was running slowly. Andrew’s evidence was that he was going away on vacation the week of January 15th to the 22nd and he asked Deron to do whatever was necessary to have the computer fixed. After Andrew’s return from vacation he recalled that he received an e-mail from Deron indicating that the hard drive on the computer had been replaced in order to fix the problems.
53There is no evidence put forth by Altus challenging Andrew’s Affidavit with respect to his laptop. I agree with the submissions of counsel for the defendants that it appears that Andrew’s version of events with respect to his computer has not been investigated by Altus at this stage to determine its veracity.
54For all of these reasons, I am not prepared to grant the requested remedy of allowing a forensic investigator to image the defendants’ computers and media devices to search for confidential information. At this stage in the proceeding, this extraordinary remedy does not appear to be justified. However, given that I have found that there is a serious issue to be tried, I am prepared to grant an order requiring the defendants to preserve any documents and/or devices belonging to the plaintiffs that are in their possession, including any USB devices until further order of the Court.
Order
55I make the following order:
i) The motion by the plaintiff for an interim injunction and forensic inspection is dismissed.
ii) The defendants, Cory Yeoman, Andrew Yeoman, Scott Niepage, and Yeoman & Company Paralegal Professional Corporation, shall preserve any documents and devices belonging to the plaintiff that are in their possession, including any USB devices until further order of the court.
iii) The issue of costs shall be adjourned to the Judge hearing the motion for an interlocutory injunction. The issue of the costs incurred by the defendant Gary Yeoman for this motion shall also be determined by the Judge hearing the motion for an interlocutory injunction.
Stevenson J.
DATE: July 27, 2012