Court File and Parties

COURT FILE NO.: CV-15-522608 DATE: 20160413 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Korn/Ferry Canada Inc., Plaintiff/ Defendant by Counterclaim AND: Jeff Rosin, Defendant/Plaintiff by Counterclaim

BEFORE: Stewart, J.

COUNSEL: Barbra H. Miller, for the Korn/Ferry Canada Inc. Matthew P Gottlieb and Andrew Winton, for Jeff Rosin

HEARD: November 24, 2015

Endorsement

[1] The Plaintiff Korn/Ferry Canada Inc. has brought this motion for an order staying the counterclaim advanced by the Defendant Jeff Rosin and referring all matters in dispute in the counterclaim to arbitration in accordance with the dispute resolution provisions contained in the Supplementary Employee Retirement Plan (“SERP”).

[2] Rosin has brought a cross-motion for declaration that certain provisions in the SERP amount to a restrictive covenant that is unenforceable. He therefore seeks summary judgment on the crossclaim in the amount of $2.1 million, the value of vested SERP entitlements he claims are owed to him.

[3] Both motions were heard together and engage similar facts.

Background

[4] Korn/Ferry Canada is a wholly owned Canadian subsidiary of Korn/Ferry International, a publicly traded corporation on the New York Stock Exchange. Korn/Ferry provides services in Canada which include executive recruitment and leadership development programs as well as enterprise learning, succession planning and recruitment process outsourcing.

[5] Rosin is a chartered accountant. Prior to his joining Korn/Ferry Canada Inc. (“Korn/Ferry”), Rosin worked for various companies in the areas of finance and internal audit.

[6] In January of 1996, Rosin commenced employment with an affiliate of Korn/Ferry. On February 19, 2001 Rosin continued his employment with Korn/Ferry as the Managing Director of its Toronto office.

[7] Rosin ultimately became President of Korn/Ferry. On May 1, 2003, he became a director of Korn/Ferry. As a result, Rosin held the highest ranking executive position within Korn/Ferry until his resignation in 2014. When he departed, any bonus compensation awarded to Rosin was to be within the sole discretion of Korn/Ferry.

[8] During the course of Rosin’s employment, Korn/Ferry had introduced pre-paid up front retention payments (“Retention Awards”) for certain employees, including Rosin, in respect of future services. Rosin was to earn these Retention Awards in tranches pursuant to a vesting schedule.

[9] In exchange for being paid these Retention Awards in advance of the vesting of any portion thereof, Rosin signed promissory notes in favour of Korn/Ferry in which he agreed to make repayment of all unvested portions of the Retention Awards in the event of his voluntary resignation or the termination of his employment.

[10] As a result of his resignation from employment on November 24, 2014, Rosin became indebted to Korn/Ferry in the sum of $339,647.00, in accordance with the terms of the promissory notes he had signed. Despite repeated demands, Rosin refused to make the agreed payment. On February 24, 2015, Korn/Ferry issued its Statement of Claim against Rosin seeking payment as required under the promissory notes.

The SERP

[11] In 2004, Korn/Ferry introduced the SERP as a new and separate form of retirement savings benefit offered to attract, motivate and retain upper level employees and executives.

[12] The SERP includes the following statement of its purpose and scope:

1. Purpose of the Plan

The purpose of this plan is to promote the success of the company by providing a select group of management and highly compensated employees an opportunity to accumulate retirement savings as an additional means to attract, motivate and retain such employees. Only Eligible Employees (as defined herein) are eligible to participate in this plan.

“Eligible Employee” shall mean any employee of the company who is in the position category of vice president or above and who customarily performs services for 30 or more hours per week for the company.

[13] The SERP provides for Korn/Ferry to make company contributions thereto (“Company Contributions”) into a company contributions account (“Company Contributions Account”). The eligible employee may irrevocably elect to reduce his or her eligibility to receive a Company bonus and have such bonus amount credited to an account in the SERP known as the retirement account (“Retirement Account”).

[14] With respect to the Company Contributions Account, any right a participant may have to any Company Contributions, and any investment return credited thereto shall terminate, become null and void and be immediately forfeited if the participant engages in detrimental activity as defined in the SERP, whether before or within the one-year period after his or her employment or services with Korn/Ferry terminates. Section 5.5 of the SERP states as follows:

5.5 Forfeiture: Detrimental Activity. A participant’s rights with respect to any Company Contribution and any investment return credited thereto, whether vested or unvested, shall terminate, become null and void, and be immediately forfeited if the participant engages in any Detrimental Activity, whether before or within the one-year period after his or her employment or services within the Corporation Group terminates. In the event that the Committee determines that a participant has engaged in Detrimental Activity at any time during his or her employment within the Corporation Group or within the one-year period following his or her Termination Date, any amounts distributed at any time to such participant with respect to any Company Contribution (and any investment return credited thereto) shall be immediately refunded to the Company by the Participant or the Participant’s Beneficiary. Determination of whether a participant has engaged in Detrimental Activity shall be made by the Committee in its sole discretion.

[15] Detrimental activity referred to in this provision is defined in the SERP, as follows:

“Detrimental Activity” with respect to a participant shall mean that such participant:

(a) Has directly or indirectly engaged in any business for his or her own account that competes with the business of any entity within the Corporation Group (a business in competition with any entity within the Corporation Group includes, without limitation, any business in an industry which any business in the Corporation Group may conduct business from time to time and any business in an industry which any entity within the Corporation Group has specific plans to enter in the future and as to which the participant is aware of such planning); or

(b) Has committed or engaged in an unauthorized disclosure or use of inside information, trade secrets or other confidential information, or an unauthorized use of trade names, trademarks, or other proprietary business designations owned or used in connection with the business of any entity within the Corporation Group; has failed to timely return to the Company in accordance with Company policy all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of any entity within the Corporation Group; or

(c) Has entered the employ of, renders services to, or has acquired a financial interest in any person engaged in any business that competes with the business of any entity within the Corporation Group; has acted intentionally in a manner injurious to the reputation, business or assets of, any entity within the Corporation Group; has interfered with business relationships (whether formed before or after the date hereof) between any entity within the Corporation Group and any customers, suppliers, officers, employees, partners, members or investors; has influenced or attempted to influence a vendor or customer of any entity within the Corporation Group, either directly or indirectly, to divert their business away from the Corporation Group, induced a principal for whom an entity within the Corporation Group acts as agent to terminate such agency relationship, or induced an employee of any entity within the Corporation Group who earned $25,000 or more on an annualized basis during the last six months of his or her employment to work for any business, individual, partnership, firm, corporation, or other entity then in competition with the business of any entity within the Corporation Group; or

(d) Was terminated from the employment of the Company for cause, as that term is defined in law.

[16] Rosin was provided with a copy of the terms of the SERP when it was introduced and became a participant. Company Contributions were made by Korn/Ferry in accordance with the SERP’s provisions.

[17] When Rosin resigned from Korn/Ferry in November, 2014, he claimed and received all vested and non-forfeited amounts in his Retirement Account. However, Korn/Ferry has refused to give him any amounts reflecting the Company Contributions component of the SERP, relying on the terms of the SERP.

[18] Korn/Ferry alleges that Rosin has engaged in detrimental activity, as that term is defined in the SERP, following his departure. In particular, Korn/Ferry says that Rosin has competed with Korn/Ferry by immediately setting up a new business in direct competition with it, has induced Korn/Ferry employees to leave and join him and has sought to influence and solicit Korn/Ferry clients.

[19] As a result of this conduct, Korn/Ferry has taken the position that Rosin is not entitled to receive payments out of the Company Contributions Account of the SERP.

[20] Rosin takes issue with Korn/Ferry’s position and has asserted his entitlement to the SERP Company Contributions he says are owed to him in his counterclaim in these proceedings.

[21] Korn/Ferry takes the position on this motion that this counterclaim should be stayed and that Rosin should be required to submit his claim for resolution under the dispute resolution provisions of the SERP.

[22] The SERP provides express dispute resolution provisions which apply to any dispute regarding the SERP, as follows:

10.10 Claims Procedure. A Person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as “Claimant”) may file a written request for such benefit with the Committee, setting forth his or her claim. The request must be addressed to the Committtee at the Company’s then principal executive offices.

Upon receipt of a claim, the Committee shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Committee may, however, extend the reply period for an additional ninety (90) days for special circumstances. If the claim is denied in whole or in part, the Committee shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (i) the specified reason or reasons for such denial, (ii) the specific reference to pertinent provisions of this Plan on which such denial is based, (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary, (v) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and (v) the time limits for requesting a review set forth below.

Within sixty (60) days after the receipt by the Claimant of the written reply described above, the Claimant may request in writing that the Committee review its determination. Such request must be addressed to the Committee at the Company’s then principal executive offices. The Claimant or his or her duly authorized representative may, but need not review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review within such sixty (60) day period, he or she shall be barred and stopped from challenging the Committee’s determination.

Within sixty (60) days after Committee’s receipt of a request for review, after considering all materials presented by the Claimant, the Committee will inform the Claimant in writing, in manner calculated to be understood by the Claimant, of its decision setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review.

[23] The SERP further provides that in the event that a claimant disagrees with the result of the dispute resolution process, the matter is to be resolved by way of mandatory binding arbitration. Section 10.11 of the SERP provides as follows:

10.11 Arbitration. Any dispute regarding the plan shall be submitted to mandatory, binding arbitration. A Claimant must exhaust the claims procedure set forth in Section 10.10 as a condition of commencing arbitration. If a civil action concerning the plan has been brought, the Company and the claimant shall take such actions as are necessary or appropriate, including dismissal of the civil action, so that the arbitration can be timely heard. Once arbitration is commenced, it may not be discontinued without the unanimous consent of all parties to the arbitration.

Any claim for arbitration may be submitted as follows; if the Claimant disagrees with an interpretation of this plan by the Company, or disagrees with the calculation of his or her benefit under this plan, such claim may, after exhaustion of the claims procedure set forth in Section 10.10, be filed in writing with an arbitrator of the Claimant’s choice who is selected by the method described in the next four sentences. The first step of the selection shall consist of the Claimant submitting in writing a list of five potential arbitrators to the Company. Each of the five potential arbitrators must be a member of the ADR Institute of Canada. Within ten business days after receipt of the list, the Company shall select one of the five arbitrators as the arbitrator of the dispute in question. If the Company fails to select an arbitrator in a timely manner, the Claimant then shall designate one of the five arbitrators as the arbitrator of the dispute in question.

The arbitration hearing shall be held within thirty days (or as soon thereafter as possible) after the selection of the arbitrator. No continuance of said hearing shall be allowed without the mutual consent of the claimant and the Company. Absence from or non-participation at the hearing by any party shall not prevent the issuance of an award. Hearing procedures that will expedite the hearing may be ordered at the arbitrator’s discretion, and the arbitrator may close the hearing in his sole discretion when he or she decides he or she has heard sufficient evident to justify issuance of an award. The arbitrator shall apply the same standard of review referred to Section 9.4 as would be applied by a court of proper jurisdiction. Accordingly, with respect to any interpretation, construction or determination by the Committee prior to a change in control event, the arbitrator shall not apply a de novo standard of review in reviewing the decision rendered through the claims procedure but rather shall review the Committee’s interpretation, construction or determination under an abuse of discretion standard, and with respect to any interpretation, construction or determination by the Committee upon and after a change in control event, the arbitrator shall apply a de novo standard of review.

The arbitrator’s award shall be rendered as expeditiously as possible and in no event later than once week after the close of the hearing. In the event the arbitrator finds that the Claimant is entitled to the benefits he or she claimed, the arbitrator shall order the Company to pay or deliver such benefits, in the amounts and at such time as the arbitrator determines. The award of the arbitrator shall be final and binding on the parties. The Company shall thereupon pay or deliver to the Claimant immediately the amount that the arbitrator orders to be paid or delivered in the manner described in the award. The award may be enforced in any appropriate court as soon as possible after its rendition. If any action is brought to confirm the award, no appeal shall be taken by any party from any decision rendered in such action.

[24] Korn/Ferry argues that Rosin is bound by these provisions and has thereby agreed to the terms requiring arbitration of his claim. Korn/Ferry has indicated that, given that circumstances, it will waive reliance on any strict time limits for the dispute resolution process to be employed by the parties to determine the SERP issues.

Summary Judgment

[25] In response to Korn/Ferry’s motion to stay, Rosin has brought his own motion seeking summary judgment on his counterclaim on the basis that any provisions which might be said to disentitle him to receipt of SERP payments are in restraint of trade and thereby unenforceable.

[26] Rosin seeks a declaration to that effect, and summary judgment for the full amount of what he says is owing to him in the Company Contributions Account.

[27] I shall deal with these positions in reverse order.

Issues

A. Should summary judgment be granted in favour of Rosin on his counterclaim on the basis that the condition in the SERP is a restrictive covenant that should be declared unenforceable?

B. Should Rosin’s counterclaim for SERP payments out of the Company Contributions Account be stayed and required to proceed to arbitration?

Issue A: Should summary judgment be granted in favour of Rosin on his counterclaim on the basis that the condition in the SERP is a restrictive covenant that should be declared unenforceable?

[28] Pursuant to Rule 20 of the Rules of Civil Procedure, summary judgment is to be granted if no genuine issue for trial has been raised. If the evidence before the judge on a motion permits a fair and just resolution of the issue without a trial, summary judgment should be granted (see: Hryniak v. Mauldin, 2014 SCC 7).

[29] In my view, the issue as to the enforceability of the impugned provisions of the SERP raises a genuine issue for trial that cannot and should not be decided on this paper record.

[30] Although evidence has been tendered as to the nature of the payments and the compensation and bonus structure that provides some context within which the SERP may be interpreted, as well as the alleged detrimental activity said to have disentitled Rosin to receive the Company Contributions, there are many facts in dispute. These facts are generally relevant to a just determination of Rosin’s assertion that the cited provisions of the SERP are unenforceable.

[31] In particular, there is conflicting evidence in respect of:

(a) the nature and purpose of the SERP;

(b) the Company’s right to introduce the SERP;

(c) the distinction between the SERP and other forms of compensation; and

(d) the communications between Rosin and several other individuals, and the proper interpretation of those communications.

[32] Genuine issues in that regard are raised for determination, including:

(a) whether the compensation provided under the SERP constitutes a gratuitous benefit;

(b) whether in light of the parties’ relationship, the detrimental activity provision is a reasonable incentive to encourage employee loyalty or, alternatively, an unlawful restraint of trade;

(c) whether the detrimental activity provision is reasonable;

(d) whether the decision to enter into the SERP was exercised by knowledgeable parties of equal bargaining power;

(e) whether Rosin had broad access to confidential information that, if disclosed, would impair the Company’s competitive advantage;

(f) whether a special relationship existed between Rosin and the Company in terms of Rosin’s knowledge and the nature of the Company’s business;

(g) whether Rosin had a special and intimate knowledge of the Company’s customers and a means of influence over them;

(h) whether Rosin breached the detrimental activity provision by competing, by inducing employees to work with him and/or by failing to return to the Company all Company information, data, etc;

(i) whether Rosin’s character of employment, the nature of the Company’s business and industry practice is such that the detrimental activity provision was reasonable; and

(j) whether Rosin can properly bring the counterclaim and/or the motion for summary judgment because of his failure to comply with the Dispute Resolution Process set out in the SERP.

[33] Further, the determination of whether the Detrimental Activity provision is unenforceable as a restraint of trade necessarily will require a review of a complicated area of the law which to a great extent is fact driven, and an application of it to often-disputed facts.

[34] In view of these circumstances, I consider that not only have genuine issues for trial been raised, the summary judgment process is not an appropriate means for effecting a fair and just resolution of them.

Issue B: Should Rosin’s counterclaim for SERP payments out of the Company Contributions Account be stayed and required to proceed to arbitration?

[35] Section 7(1) of the Ontario Arbitration Act, 1991 requires a court to stay proceedings in respect of a matter where the parties have agreed to arbitrate, subject to certain limited discretionary exceptions, including a discretion to refuse to grant such a stay if the matter is a proper one for summary judgment. Sections 7(1) and (2) of the Arbitration Act, 1991 state as follows:

Stay

7.(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

Exceptions

(2) However, the court may refuse to stay the proceeding in any of the following cases:

1. A party entered into the arbitration agreement while under a legal incapacity.
2. The arbitration agreement is invalid.
3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario Law.
4. The motion was brought with undue delay.
5. The matter is a proper one for default or summary judgment.

[36] Having declined to award summary judgment in this case, those exceptions do not apply.

[37] Since the enactment of the Ontario Arbitration Act, courts have recognized a public policy shift towards the resolution of arbitrable disputes outside of court proceedings. The presumptive stay of court proceedings pursuant to s.7 of the Arbitration Act provides a forceful statement from the legislature signaling a shift in policy and attitude towards the resolution of disputes in civil matters through consensual dispute resolution mechanisms (see: Ontario Hydro v. Denison Mines, [1992] O.J. No. 2948).

[38] The court continues to recognize and give effect to the public policy rationale for holding parties to their agreements to arbitrate. When the parties agree to arbitration, the court shall favour the enforcement of their agreement and preclude them from litigating in the courts (see: Momentous.ca Corp v. Canadian American Association of Professional Baseball Ltd., 2010 ONCA 722).

[39] In this case, there is an agreement to arbitrate that should be given effect. Accordingly, the subject matter of Rosin’s counterclaim should proceed to arbitration.

Conclusions

[40] For these reasons, Rosin’s motion for summary judgment is dismissed.

[41] Rosin’s counterclaim is hereby stayed pending full resort to the process, including arbitration, in accordance with the dispute resolution provisions of the SERP.

Costs

[42] If the parties cannot agree on costs, written submissions may be delivered on behalf of Korn/Ferry within 30 days of the date of this decision, and by Rosin within 20 days thereafter.

Stewart J. Date: April 13, 2016

COURT FILE NO.: CV-15-522608 DATE: 20160413 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: KORN/FERRY CANADA INC. Plaintiff/ Defendant by Counterclaim AND: JEFF ROSIN Defendant/Plaintiff by Counterclaim

ENDORSEMENT

STEWART J. Released: April 13, 2016