COURT FILE NO.: CV-21-00660326-00CL
SUPERIOR COURT OF JUSTICE – ONTARIO
(COMMERCIAL LIST)
RE: MANDEVILLE HOLDINGS INC. and MANDEVILLE PRIVATECLIENT INC., Plaintiffs/Moving Parties
AND: JERRY SANTUCCI and ASSANTE CAPITAL MANAGEMENT LTD., Defendants/Responding Parties
BEFORE: S.F. Dunphy J.
COUNSEL: Susan Kushneryk and Eric Morgan, for the Plaintiffs Bruce O'Toole, for the Defendant/Responding party, Jerry Santucci Mitchell Fournie, for the Defendant/Responding party, Assante Capital Management Ltd.
HEARD at Toronto: June 4, 2021
REASONS FOR DECISION
1The main issue in this case is whether either or both of a non-competition and non-solicitation clause can be enforced by way of interlocutory injunction. The agreement containing these clauses was entered into by a financial advisor in connection with the sale of his portfolio of clients and associated goodwill to the parent company of the financial services firm he wished to associate with. Seven years later the two have parted ways and the defendant immediately took steps to attempt to persuade some or all of his former clients to follow him to a new firm.
2For the reasons that follow, I have found that the non-competition clause is very likely void as being unreasonably broad relative to the purposes and context of the transaction that gave rise to it. I have, however, found that the non-solicitation clause is a reasonable one and ought to be protected by way of an injunction. The defendant received significant value for the sale of the goodwill of the client portfolio. The client base that the defendant was actively attempting to move to his new firm was overwhelmingly part of the same portfolio of clients that the defendant sold to the moving parties seven years earlier. While the non-compete clause would prohibit the defendant from earning a living anywhere in Ontario in his profession of many years, the non-solicit clause is more targeted and is reasonable on its face. The lost opportunity to have a two-year window to cultivate and broaden its client relationships without interference from the defendant during the bargained-for two-year window constitutes irreparable harm and the balance of convenience strongly favours the moving parties.
Background facts
3The plaintiffs are parent (Mandeville Holdings Inc.) and wholly-owned subsidiary (Mandeville Private Client Inc.). MPC is a wealth management services company, registered as an investment dealer in Ontario and elsewhere and regulated by, among others, the Investment Industry Regulatory Organization (or “IIROC”). The structure of an unregulated parent holding company and a regulated subsidiary is quite a common one in this industry.
4The wealth management business of MPC is carried on through individual investment advisors. These are the agents who actually deal with the clients. The defendant Mr. Santucci was one such registered investment advisor. Working in a regulated industry, he too was required to be registered, with his registration sponsored by MPC.
5Mr. Santucci began discussions about joining MPC in late 2013. He received an “Indicative Term Sheet” on December 19, 2013 regarding his proposed relationship with “Mandeville”, a term defined in the Term Sheet as “[MHI] (and its related and affiliated subsidiaries)”. The Term Sheet recorded representations he made to Mandeville that his practice then had $65 million in Assets Under Administration and that he had no contractual commitments that precluded him from moving his practice to Mandeville, noting that he was “expected to honor previous contracts”. The offer made to him at that time included an offer to allow him to acquire 390,000 convertible preferred shares (to be converted to common shares after an initial assessment period of approximately 18 months), options to acquire further common shares, a $500,000 interest-free loan, the purchase of his customer list, incentives to be offered to transferring clients, advertising support and similar matters.
6Mr. Santucci was quite attracted to the prospect of acquiring an equity interest in MHI because of his own work history. The principal of MHI was Mr. Lee Chin. Mr. Santucci had worked as an investment advisor with a company headed by Mr. Chin earlier in his career. He believed that Mr. Chin’s shareholders did very well when that business was sold. His affidavit states that he “wanted to be a shareholder in the hopes that Lee Chin was able to do it again”. The arrangements made with Mr. Santucci by MPC – and in particular the purchase of his “book of business” – was by no means the standard method of doing business for MPC. This was a negotiated arrangement.
7In January 2014, Mr. Santucci and the plaintiffs entering into a series of related agreements. These agreements included the following:
a. A “Non-competition and Non-Solicitation Agreement (or NCNSA);
b. A “Purchase and Sale Agreement” (or PSA);
c. A “Principal-Agent Agreement” (or Agent Agreement).
8The Purchased Assets were described as “all books and records relating to the Private Client Business maintained by the Vendor”, “all current marketing material and marketing strategies used by the Vendor in connection with the Private Client Business”, and the goodwill of the Private Client Business. The “Private Client Business” was defined as Mr. Santucci’s private client business “in respect of the clients listed in Schedule A” which contained a list of approximately 240 clients Mr. Santucci was then servicing.
9The purchase price for the Purchased Assets was $390,000 which was to be paid through the issue of 390,000 fully paid convertible preferred shares. Mr. Santucci alleges the fair market value of his book of business was much higher than this. I attach no weight to his subjective and speculative evidence in that regard, particularly given the terms of the PSA that represent the purchase price as being fair market value.
10Some broad comparators of the purchase price paid are possible. Mr. Santucci’s evidence is that the commission split was 70:30 with 70% of commissions being retained by him and 30% going to MPC. This was modified somewhat due to MPC passing on some of the costs of the close regulatory supervision that Mr. Santucci was subject to at the time he joined MPC. His evidence is that his gross commissions were in the range of $410,000 to $500,000 per year. From this data I infer that the purchase price paid by MHI represented several times the level of annual commissions MPC could expect to derive from commissions arising from the book of business being acquired. While I do not have evidence of the net income of Mr. Santucci over the years in question, it is reasonable to infer that the purchase price represented something in excess of one year of his net income before tax since it was close to 100% of gross annual commissions and the payment was tax-structured to benefit Mr. Santucci. This general idea is sufficient for the purposes of any conclusions I may need to reach. The consideration was certainly substantial.
11Section 2.3 of the PSA stipulated that the NCNSA entered into contemporaneously with the PSA was part and parcel of the consideration for the PSA. It also provided that elections under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) would be made to ensure that “no amount in respect of the restrictive covenants described … is included in the income of the Vendor”. Other tax provisions dealt with the allocation of the purchase price to various tax accounts and the ability of the vendor to accomplish a “roll over” for tax purposes. All of this ensured that Mr. Santucci would pay as little tax arising from the receipt of $390,000 in value as possible and the structure was implicitly premised on the bona fides of the NCNSA for no value for tax purposes could be attributed to that agreement in good faith otherwise.
12The essential provisions of the NCNSA for the purposes of this motion at least are as follows:
a. MHI and Mr. Santucci were the only named parties thereto – MPC is not a party;
b. The “Restricted Territory” was described as “the geographic region within which [Mr. Santucci] is registered to provide any of the Restricted Activities on behalf of MHI or its subsidiaries as of the date on which he stops providing such services for MHI and its subsidiaries”. In Mr. Santucci’s case, this means all of Ontario.
c. The “Term” is “the two year period immediately after the last day on which the Advisor provides services for MHI, regardless of the reason for the cessation of services”. Mr. Santucci attaches particular importance to the failure to add “or its subsidiaries” after MHI as was done in the definition of “Restricted Territory”. I shall return to this question below.
d. The “Restricted Activities” is broadly defined to encompass the securities industry generally “the business of marketing, selling and/or distributing securities, providing investment advice, and the ancillary activities needed to perform the duties described”. Mr. Santucci notes that Restricted Activities is a broad term that encompasses essentially the entire securities industry including segments thereof that the plaintiffs may not be involved in.
e. Mr. Santucci agreed in article 2.1 that “he will not, during the Term, within the Restricted Territory, directly or indirectly, in any manner whatsoever, including either individually in partnership, jointly or in conjunction with any other person … be engaged in any undertaking or business … that is in whole or in part the same as or substantially similar to the Restricted Activities”.
f. Mr. Santucci agreed in Article 3.1 that he “will not, during the Term, within the Restricted Territory, directly or indirectly, in any manner whatsoever … induce any person who is … [a] customer … of MHI as of the date on which [Mr. Santucci] stops providing services for MHI, to terminate such relationship, to leave … to stop buying from, or otherwise to reduce its dealing with MHI or any of MHI”s affiliates”.
13The NCNSA contained what I might describe as the “usual” clauses acknowledging the irreparable harm that would result from any breach by him of its undertakings and his agreement of the right of MHI to seek injunctive relief.
14Article 5.6 of the NCNSA contained a very broad “severability” clause pursuant to which any provision found to be restricted, prohibited or unenforceable “shall be ineffective only to the extent of that restriction, prohibition or unenforceability and shall not affect the validity or enforceability of the remaining portions of that provision and, if applicable … without invalidating the remaining provisions of this Agreement”.
15The Agent Agreement acknowledged Mr. Santucci’s status as an agent of MPC within the context of the applicable regulatory regime. He was required to devote his full time to his practice as an MPC advisor, to comply with all regulatory requirements and similar matters. Among other things, this agreement acknowledges that all products sold and all business or professional activities in respect of which he was licensed “shall be conducted in the name of MPC, must flow through MPC and be carried on the books and records of MPC” and that all books and records that he is required to maintain by MPC or regulatory authorities are the property of MPC. Upon termination of the agreement, Mr. Santucci was obliged “without formal demand or request and without retaining any copies of summaries of any kind” to return to MPC all MPC Property.
16On December 14, 2020, MPC gave notice to Mr. Santucci that their relationship was “no longer of mutual benefit” and that Mandeville would be terminating the Agency Agreement effective the close of business on January 20, 2021. The letter reminded him of his sale of his book of business under the PSA and of the NCNSA pursuant to which, “you are prohibited from, among other things, soliciting any client of Mandeville for a period of 2 years”.
17The reasons for the termination of the relationship are not material for this motion. It is relevant, however, to note that MPC had initiated similar steps to terminate its relationship with Mr. Santucci in 2016, including sending him similar written letters reminding him of the terms of the NCNSA that would apply. MPC agreed with Mr. Santucci not to proceed with the termination of the Agency Agreement on that occasion. No issue was then taken by Mr. Santucci with the applicability or enforceability of the NCNSA.
18On January 19, 2021, Mr. Santucci was reminded of the termination of the Agency Agreement that would be effective the following day. He was reminded again of his obligations under the NCNSA. There is no indication of him raising any issues regarding the NCNSA at this time.
19On February 18, 2021, MPC wrote to Mr. Santucci alleging certain breaches of Mr. Santucci’s obligations. Among other things, the letter suggested that Mr. Santucci had refused to confirm that he had not retained any client information when this was requested of him and that MPC had information that (i) Mr. Santucci was in fact contacting clients regarding his future plans and (ii) that he had retained some financial documents relating to them.
20On cross-examination, Mr. Santucci stated that he had not given any thought nor sought advice about the enforceability of the NCNSA prior to receipt of this letter. He also claimed a similar level of ignorance of the contents of this agreement when he signed it in 2014. Given the frequency with which Mr. Santucci was reminded in writing of the general terms of the NCNSA and the frequency and type of communications Mr. Santucci maintained with his client base before and after January 20, 2021, I find those assertions hard to credit.
(a) Alleged breaches of NCNSA
21The moving parties have alleged a number of breaches of the NSNCA by Mr. Santucci. It is alleged that Mr. Santucci retained client records that belong to MPC, that he approached at least some of the clients he was formerly responsible for at MPC to tell them of his imminent move to Assante and that MPC had lost nine clients formerly handled by Mr. Santucci representing more than $4.2 million in AUA of whom seven representing $3.9 million had requested to transfer their investments to Assante. All but one of the transferring clients – to this point at least – were clients in the book of business originally purchased by MHI in 2014.
22Mr. Santucci began the process of becoming an investment advisor associated with a competitor of MPC – the defendant Assante Capital Management Ltd. in early March 2021. Assante has agreed not to take any steps to register the transfer of any clients from MPC associated with Mr. Santucci’s representative code and on that basis MPC is seeking no relief from Assante on this motion.
23Mr. Santucci’s evidence is that his computer and cell phone were wiped when he parted ways with MPC in January 2021 and he says he kept no physical records either. What contacts he has had with the clients he was servicing prior to that time has come, he says, as a result of those clients having contacted him at the cell phone number that he had for many years and featured prominently on his business cards and correspondence. He is aware of three such clients who had been with him for approximately 20 years who contacted him and insisted on moving their business to Assante.
24This is an interlocutory injunction and not a trial. The final determination of such matters will be for the trial judge. It does fall upon me to draw inferences from the evidence on this interlocutory injunction necessary to consider the test for issuing an injunction. Such inferences cannot be considered definitive findings of course.
25Subject to the foregoing caveat, the records of Mr. Santucci’s email, telephone and text message communications with MPC clients that he formerly serviced strongly suggests that the plaintiffs’ allegations of solicitation on the part of Mr. Santucci have significant substance to them and Mr. Santucci’s allegation of playing a passive role in those communications cannot be credited with much weight.
26The volume of communications recorded is quite high as is the number of clients corresponded with. At least one client contacted him on January 21, 2021 in an email that clearly implied significant prior discussions regarding Mr. Santucci’s new situation. The same client contacted him a short while later about a webinar Mandeville had invited him to attend and Mr. Santucci responded discouraging him from taking Mandeville1 up on the offer. He later advised the same client that he was just waiting for regulators to reinstate his licence and confirmed that the client should ignore documents sent to him by Mandeville for signature.
27There seems little doubt that Mr Santucci actively discouraged at least some former clients from staying with Mandeville. He kept them up to date about his progress in getting his license transferred, he asked some of them to tell him what they were receiving from MPC and gave them advice about what to do in response. In many cases, the records suggest no break in the frequency of contact with such clients before and after January 20, 2021.
28It cannot be said definitively at this juncture who initiated those contacts. It seems quite likely to me that Mr. Santucci initiated at least some of them given the visible continuity and frequency of contacts both before and after his termination date and the initiation of such contact involved the use of records that were the property of MPC. The factor of telephone records or computers allegedly being wiped would offer little in the way of practical obstacles to initiating such contact in a world of cloud back-ups and the fact that Mr. Santucci and his staff had been working from home for almost a year at that point. Mr. Santucci’s evidence suggests that he gave the NCNSA little thought or consideration until he sought legal advice about it after receiving the February 19, 2021 letter.
Issues to be decided
29There is no dispute regarding the high level description of the legal tests to be followed even if there is dispute about the application of those principles to this case. As the plaintiffs seek an interlocutory injunction, they must satisfy the three-part test crystallized in the Supreme Court of Canada decision in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311 of a serious issue, to be tried, the presence of irreparable harm and consideration of the balance of convenience. The application of the first test – the existence of a serious issue to be tried – was subject to some debate concerning whether a strong prima facie case must be shown to justify enforcing a restrictive covenant in all cases.
30The following questions require determination on this motion:
a. What is the strength of the plaintiffs’ case as regards the alleged breaches of the NCNSA and the Agency Agreement?
b. What is the strength of the plaintiffs’ case as regards the enforceability of the NCNSA?
c. What are the consequences of a strong prima facie case (or lack of one) on the second and third branches of the RJR test?
d. Have the plaintiffs established irreparable harm?
e. Does the balance of convenience favour the issuance of the requested injunction?
Analysis and discussion
31The defendant wished to ensure that I did not interpret the tightly constrained relief sought by the plaintiffs – restricted primarily to enjoining the use of MPC’s records or the solicitation of Mr. Santucci’s former clients – as an invitation to ignore the broad scope of the NCNSA as drafted which, the defendant argues, is overbroad and unreasonable and thus unenforceable. That argument has not been lost on me and I have addressed the first branch of the RJR test from the perspective of the enforceability of the agreements in question while the actual relief sought – being somewhat narrower than the full scope of the agreements might permit – is focused on in the context of the balance of convenience only.
(a) First issue: What is the strength of the plaintiffs’ case as regards the alleged breaches of the NCNSA and the Agency Agreement?
32For the reasons given above in my summary of the background facts, I find that the plaintiffs have established a strong prima facie case that Mr. Santucci retained and used records that were the property of MPC pursuant to the Agency Agreement. He was fielding detailed questions regarding the contents of client accounts after the termination of the Agency Agreement and I have found it quite likely that he initiated at least some of the client contacts evidenced in the voluminous telephone, text message and email contacts produced. All of these contacts involved the use of records that were the property of MPC pursuant to the Agency Agreement and that Mr. Santucci had a positive obligation to return to MPC upon the termination of the Agency Agreement on January 20, 2021. I acknowledge but do not necessarily accept Mr. Santucci’s evidence that he initiated no such calls and only input data into his phone from caller ID as and when calls came in. That appears to me to be an unlikely explanation given the volume and nature of the communications produced that I have reviewed fairly closely.
33The evidence of breach of the NCNSA is also extensive. The NCNSA contains two broad prohibitions, the enforceability of which shall be considered in the next section of these reasons: a prohibition on being actively involved in a competing securities business and a prohibition on inducing any customer to terminate his or her relationship or otherwise to reduce its dealing with Mandeville. While the evidence of frequent phone calls with numerous MPC clients before and after the termination of the Agency Agreement does not include the content of those calls, the contemporary evidence of emails and text messages leads to the strong inference that the phone calls were to similar effect. The written records of text messages and emails clearly veer into the domain of persuading MPC clients to reduce or terminate the services formerly being provided by MPC.
34The plaintiffs have made out a strong prima facie case that both the Agency Agreement and the NCNSA have been breached on a material and on-going scale by Mr. Santucci. Indeed, his evidence regarding the balance of convenience is essentially premised on the truth of that conclusion. His affidavit states that starting his business again from scratch without his clients would effectively end his career – that conclusion was expressed by him in the context of starting after a two year hiatus but is no less valid an admission as regards starting tomorrow without his existing client base to mine.
(b) Second issue: What is the strength of the plaintiffs’ case as regards the enforceability of the NCNSA?
35It is here that the crux of the dispute between the parties lies.
36Much ink has been spilled on the subject of the enforceability of restrictive covenants. As shall be seen, the tension in the case law can largely be laid at the feet of the contrasting approach to the issue taken by our courts when dealing with a sale of business or with an employment contract. To the degree, this case has unique traits it lies in the fact that Mr. Santucci’s agreements have aspects of both an employment-like arrangement and a traditional sale of business or goodwill.
37Rather than re-invent the wheel, I shall paraphrase the Court of Appeal’s effort to synthesize the jurisprudence. The following summary is taken from paragraphs 49 through 54 of the Court of Appeal’s decision in Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72 but slightly edited and shorn of citations:
a. Covenants in restraint of trade are contrary to public policy because they interfere with individual liberty and the exercise of trade. They are prima facie unenforceable.
b. A covenant will only be upheld if it is reasonable in reference to the interests of the parties concerned and the interests of the public in discouraging restraints on trade.
c. The party that seeks to enforce a restrictive covenant has the onus of demonstrating that the covenants are reasonable as between the parties. The party seeking to avoid enforcement of the covenant bears the onus of demonstrating that it is not reasonable with respect to the public interest.
d. If a covenant is ambiguous, in the sense that what is prohibited is not clear as to activity, time, or geography, it is not possible to demonstrate that it is reasonable. It is therefore unreasonable and unenforceable.
e. The law distinguishes between a restrictive covenant in connection with the sale of a business, and one between an employer and an employee. The former may be required to protect the goodwill sold to the purchaser, and does not usually involve the imbalance of power that exists between employer and employee. Accordingly, a less rigorous test is applied in determining the reasonableness of a restrictive covenant given in connection with the sale of a business.
f. Greater deference is given to the freedom of contract of “knowledgeable persons of equal bargaining power”. Nevertheless, the broader restraints on trade justifiable in the context of a sale of a business must be reasonable within such a context. There is a strong public interest “in discouraging restraints on trade and, maintaining free and open competition unencumbered by the fetters of restrictive covenants”.
g. The factors relevant in determining whether a restrictive covenant is reasonable are the same in the contexts of the sale of a business and an employment agreement: the geographic coverage of the covenant, the period of time that it is in effect and the extent of the activity prohibited. And reasonableness is determined in light of the circumstances existing at the time that the covenant was made. Those circumstances include the reasonable expectations of the parties about the future activities and marketplace of the business.
38In the present case there are four controversies regarding the enforceability of the NCNSA that must be addressed: (i) whether the employment or the sale-of-business lens (or both) ought appropriately be applied; (ii) whether the NCNSA is ambiguous; (iii) whether the NCNSA is reasonable; and (iv) whether the doctrine of “reading down” or “blue penciling” can be applied to uphold any part of the NCNSA if any other part is found unreasonable.
(i) Whether the employment or the sale-of-business lens (or both) ought appropriately be applied
39Neither party has taken the position that Mr. Santucci was an employee. Mr. Santucci’s affidavit does not make such a claim. Neither the Term Sheet nor the Agency Agreement made any such claim. Mr. Santucci maintained his own staff and paid many of his own expenses, receiving allowances for others.
40The sale of business lens is an appropriate one through which to analyse the reasonableness of the restrictive covenants contained in the NCNSA. While there is disputed evidence regarding the degree to which Mr. Santucci had independent legal advice concerning the agreements he entered into in January 2014, I cannot conclude that there was an imbalance of bargaining power whether Mr. Santucci consulted counsel or not. The sale of goodwill and purchase of shares framework offered to Mr. Santucci by the Term Sheet was not the standard arrangement in the industry or for MHI. Mr. Santucci was by his own account anxious to acquire an equity stake in MHI. The consideration for the sale of the book of business and associated goodwill – just under $400,000 in fully-paid shares – compares favourably to Mr. Santucci’s annual gross revenues and represents a significant multiple of MPC’s share of the commissions generated by the portfolio of clients to be acquired. Mr. Santucci’s suggestion that he neither read nor considered the contents of the agreements he signed – coming as it does seven years after the fact – is quite self-serving. Whether or not he had independent legal advice, he had plenty of time and access to it if he wished. He was and is a sophisticated individual with many years of experience in the securities business. He knew or ought to have known the documents he was signing had legal impact. His years of experience in the industry gave him or ought to have given him a high level of appreciation of the import of the restrictions he agreed to. He knew or ought to have known that the plaintiffs were relying upon his agreement to the terms of the various agreements signed being valid and binding upon him. They would not have agreed to enter into any dealings with him absent those binding agreements and he very much wanted them to do so.
41While the sale of business lens is an appropriate one through which to examine these arrangements, I do not view the matter as being an all-or-nothing proposition. While not an employee in the common law sense of the word, the arrangements between Mr. Santucci and the plaintiffs was at least “employment adjacent”. The arrangement was an exclusive one – the clients brought to Mandeville by Mr. Santucci and those that he developed relationships with after joining MPC were all clients of MPC and MPC owned all of the books and records relating to them (and bore the regulatory responsibility arising therefrom).
42At the end of the day, the test of reasonableness applies to restrictive covenants arising both from the sale of a business and from the employment context. The difference between them largely comes down to the degree of strictness applied to the analysis of them. That degree of strictness is not a binary “on or off” decision but may be considered to be more in the nature of a continuum. The Court of Appeal’s decision in Martin demonstrates this point since Martin was an employee but an employee taken on in the context of a sale of a business of which he was part owner. By contrast, the Supreme Court’s decision in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 SCR 157 was an employment law case and its strict approach to the questions of severance and “blue penciling” must be viewed to some degree in that light. While a sale of business was also involved there, the necessary connection between the restrictive covenant in question and the sale of the business – as opposed to the employment relationship – was lacking.
(ii) Whether the NCNSA is ambiguous
43The defendant’s arguments that the NCNSA is ambiguous all arise from the alleged inconsistent references in the NCNSA to MHI in some cases and to MHI and affiliates in others. Viewed in context and with applying the ordinary canons of contractual interpretation, there is no ambiguity. The holding company-regulated subsidiary structure used by Mandeville is not remotely rare or unknown in the industry and Mr. Santucci had decades of experience in the industry. He needed to be registered with IIROC and filed the appropriate paperwork to accomplish this in relation to MPC whereas he knew or ought to have known that MHI was the entity to whom he sold his book of business and from whom he purchased shares. Mr. Santucci’s protestations that he never appreciated the corporate separation in this case is another convenient self-serving assertion that requires me to ascribe a level of ignorance to him of documents that he executed that does not fit his standing as a securities registrant and experienced business-person.
44The specific language challenged as ambiguous is the definition of “Term” in art. 1.1 of the NCNSA and the non-solicitation language of art. 3.1. Both provisions make reference to “the last day on which the Advisor provides services for MHI”. The defendant’s position is that the non-competition restriction in art. 2.1 is only applicable during the “Term” and the “Term” does not begin until he stops providing services for MHI. Since he never provided services to MHI, he argues that the provision is ambiguous as to a material term and thus fatally flawed. The same argument is advanced in relation to the non-solicitation restrictions in art. 3.1, but with greater force since art. 3.1(a) forbids Mr. Santucci from doing various things during the same “Term” in relation to any person who is a “customer” of MHI “as of the date on which the Advisor stops providing services for MHI”.
45The premise that Mr. Santucci provided no services to MHI is a false one – he clearly did so on an indirect basis. Mr. Santucci sold his private client business to MHI who became the owner of it. The Term Sheet that described the inter-related framework of arrangements to be made to associate with Mr. Santucci referenced the arrangements being made with “Mandeville” generally. The sale of the book of business and goodwill took place in the context of a network of related agreements that contemplated Mr. Santucci continuing to service that same portfolio of clients going forward and to do so through MHI’s wholly-owned subsidiary MPC through the Agency Agreement. MHI had an interest, albeit an indirect one, in the continued servicing of the portfolio it purchased. As sole shareholder of MPC, it would benefit from the servicing of that portfolio on an on-going basis (as would Mr. Santucci both through the receipt of commissions and in his capacity as shareholder of MHI).
46Viewing the provisions in the context of the NCNSA as a whole, there is no ambiguity. It was clear at the time that the services to be provided by Mr. Santucci to MHI would be of the indirect sort described above. The parties knew that MPC was the regulated entity and the entity in connection with which Mr. Santucci would be registered. The non-solicitation provision of art. 3.1(a) applied to causing a “customer” of MHI from reducing its dealing with “MHI or any of MHI’s affiliates”. In providing for the assignment of MHI’s rights under the NCNSA, art. 5.7 clearly recognized that Mr. Santucci provided his services to a business unit of MHI: “MHI may assign or transfer its rights … under this Agreement to an affiliate, subsidiary … or to a bona fide purchaser of the business unit to which the Advisor provides services” [emphasis added]. Indeed, giving effect to the defendant’s argument would do no more than cause this application to be reformulated the next day following a formal assignment of the NCNSA to MPC. Such form over substance shell games are unnecessary if the agreements are read with a view to giving effect to rather than defeating the objective and clear intentions of the parties.
47The parties did not intend to enter into an agreement that was absurd and meaningless on its face where such agreement was explicitly a material element of the sale of the business and where the vendor was intended to receive tax benefits arising from the existence of the restrictive covenants that he was entering into. Art. 5.7 demonstrates the contextual interpretation of MHI as including the “business unit to which the Advisor provides services” was the intended meaning. This is consistent with common sense and ordinary language usage. A purchaser of an iPhone is commonly considered as a customer of Apple and not only of the Irish affiliate that owns the intellectual property, the Chinese affiliate that manufactured most of it, the American one that assembled it or the Canadian one that operated the retail store. Depending on context, reference to a corporation may be understood to refer to its subsidiaries or those of its subsidiaries within the contemplation of the parties. This is such a case.
48I find no ambiguity in the NCNSA arising from the failure to reference subsidiaries each time the term MHI was employed. The intention of the parties in the context of the document was clear and unambiguous. This is not a case like Shafron where “City of Metropolitan Vancouver” was an intrinsically ambiguous and uncertain phrase providing no guidance as to which of the surrounding districts, cities, villages or First Nations communities were intended to be included within it. MPC was known by both parties to be the regulated entity through which MHI conducted the securities business whose financial products Mr. Santucci was promoting or providing support for. The only ambiguity arising is the product of looking to find ambiguity that does not exist. Contracts are interpreted in context and not divorced from it.
(iii) Whether the NCNSA is reasonable
49The analysis of reasonableness must be examined in the light of all of the circumstances of the transaction viewed at the time the agreement was made.
50In my view art. 2.1 of the NCNSA fails the reasonableness test. It would operate to prevent Mr. Santucci from being associated with any other securities firm even in a capacity quite unrelated to that undertaken for the plaintiffs and even if the firm in question is not a competitor of the plaintiffs. The clause goes far beyond restrictions reasonably connected to the transaction giving rise to it – the protection of a book of business and associated goodwill being sold. This provision is clearly over-broad.
51I do not reach the same conclusion in relation to art. 3.1. The non-solicitation provisions of this article are subject to the same geographic and time limits as art. 2.1, but they are tightly tied to actions taken by Mr. Santucci in relation to the actual business of MHI.
52I reject the straw-man argument raised by the defendant that art. 3.1 is too vague because Mr. Santucci might not know whether a prospective client that he might contact in future is a client of MPC or an affiliate that he had not previous dealt with. That might be the case were Mr. Santucci selling widgets. It is not the case when selling financial services products in a regulated environment with broad know your client requirements. Any inadvertent attempt to sell financial products to a prohibited class of potential customers would be known long before any harm was done. There is plenty of capacity for Mr. Santucci to earn a living while honouring his commitments under art. 3.1 of the NCNSA if he is minded to do so.
53Having regard to the amount paid to acquire the goodwill of the business, the nature of the business, Mr. Santucci’s commission split and his on-going relationship with the clients in question, this non-solicitation restriction is reasonably and directly related to the transaction giving rise to it. I have been pointed to no basis on which such an otherwise reasonable restriction might nevertheless be contrary to the public interest.
54I therefore find that the moving parties have failed to discharge their onus of showing the restrictions in art. 2.1 are reasonable but they have satisfied me that the restrictions in art. 3.1 are reasonable in the circumstances. The responding party has failed to satisfy me that public policy prohibits the sort of restrictions on solicitation contained in art. 3.1 that are otherwise reasonably restricted to the foreseeable and identifiable interests of the purchaser of the goodwill sold by Mr. Santucci.
55I repeat for the sake of clarity the point made earlier: this is an interlocutory injunction application and not a trial. My role is to weigh and assess the evidence placed before me at this juncture and for the limited purposes of the motion before me. The last word on the subject – and after a more thorough review of the evidence – will belong to the trial judge.
(iv) Whether the doctrine of “reading down” or “blue penciling” can be applied to uphold any part of the NCNSA if any other part is found unreasonable
56The defendant leaned quite heavily upon the Shafron case and the comments of the Supreme Court in that case suggesting a very narrow scope for the doctrine of “blue penciling” or “reading down”. Having found art. 2.1 to be an unreasonable restriction on its face, I agree with the defendant that I cannot proceed to try to “fix” it by striking out portions of it or “reading it down” sufficiently to find some core of it that can be characterized as reasonable. Doing so would require me to write a “reasonable” non-competition clause that the parties never agreed to and never considered.
57The same cannot be said for the balance of the NCNSA. The NCNSA can be read quite reasonably and coherently without reference to art. 2.1. Further, enforcing the balance of the agreement save the provision struck out does not re-write the contract for the parties – it enforces the very agreement they made. Art. 5.6 provided for this specific circumstance. It reads as follows:
5.6 If any provision of this Agreement … is unenforceable, that provision shall be ineffective only to the extent of that restriction, prohibition or unenforceability and shall not affect the validity or enforceability of the remaining portions of that provision, and if applicable, without affecting its application to other circumstances, and without invalidating the remaining provisions of this Agreement.
58Art, 5.6 is clear and unambiguous on its face. The application of this article to the excision of art. 2.1 and the retention of the balance of the agreement neither remakes the agreement between the parties nor does it violate any other principle of public policy. To the contrary, it gives effect to the clearly expressed contractual intent of the parties.
59By contrast, invalidating the NCNSA in its entirety would impose a contract upon the parties that is diametrically opposite to what they agreed to and for which MHI paid and Mr. Santucci received very substantial consideration. MHI purchased the client list and associated goodwill from Mr. Santucci. Mr. Santucci accepted MHI’s shares that he ardently wished to own as consideration. The consideration received by Mr. Santucci was tax-structured in a way that was premised on the validity of the restrictive covenants agreed to. The PSA and the NCNSA were interconnected agreements. Mr. Santucci’s primary obligations under them were deferred until the time of his departure and it is those obligations that he seeks to resile from having received the full benefit of the rest.
60While I have found that art. 2.1 cannot be enforced because it is overbroad and thus unreasonable, I am required to give effect to the intent of the parties and to enforce the balance of the NCNSA. I find that art. 3.1 is both reasonable and enforceable notwithstanding my conclusions in relation to art. 2.1.
(v) Conclusion re: strong prima facie case
61In conclusion on this point, I find that the plaintiffs have established a strong prima facie case that Mr. Santucci has breached art. 3.1 of the NCNSA with MHI and that he has made use of business records that are the property of MPC pursuant to the Agency Agreement. I find the case for unreasonableness of art. 2.1 of the NCNSA to be sufficiently strong that the plaintiffs have failed to establish a triable issue that this provision could be found to be enforceable after a full trial. However, I have found that a strong prima facie case has been made out that art. 3.1 is enforceable notwithstanding the invalidity of art. 2.1.
(c) Third issue: What are the consequences of a strong prima facie case (or lack of one) on the second and third branches of the RJR test?
62I concur with Corbett J. in ADT Security Services Canada, Inc. v. Fluent Home Ltd., 2019 ONSC 2804 at para. 33-34 that there is not a stand-alone requirement for a party seeking to enforce a restrictive covenant to make out a strong prima facie case. The stronger the case that is made out, the lesser the weight given to the elements of irreparable harm and the balance of convenience.
63In this case, I find that the case strongly made out that Mr. Santucci has made use of business records of MPC that he had an obligation not to use and to turn over to MPC when the Agency Agreement terminated. I also find that MHI has made out its case quite strongly that Mr. Santucci is in breach of his obligation not to try to take away from MHI (or the subsidiary to which MHI had confided it) the very asset he sold seven years earlier for a considerable sum of money.
64At all events, the question of the enforceability of art 3.1 and art. 5.7 of the NCNSA in light of my findings in relation to art 2.1 thereof raises a serious issue to be tried. I must move to consider the questions of irreparable harm and the balance of convenience in either event.
(d) Fourth issue: Have the plaintiffs established irreparable harm?
65MPC has made out a strong prima facie case to be protected from the unauthorized use of its business records by Mr. Santucci and MHI has made out a strong prima facie case to be protected from further breaches of art. 3.1 of the NCNSA. Have either or both of them made out a case for the existence of irreparable harm?
66I start with the proposition that such clauses in connection with a sale of goodwill are entitled to more favourable consideration than those imposed in the employment context.
67I have noted earlier the fact that Mr. Santucci split commissions received from clients (the great bulk of whom were those whom he transferred over to MPC originally) on a 70:30 basis in his favour, that the purchase price likely exceeded one year of net commissions he might receive, and that the transaction including the restrictive covenants in the NSNSA was advantageously tax-structured to the benefit of Mr. Santucci. Conversely, MHI would need several years to recoup indirectly the purchase price paid given the lower share of commissions retained.
68The plaintiffs’ evidence of harm to date amounts to a significant figure already and the lost opportunities to cross-sell, to receive recommendations from or to sell enhanced services to the portfolio of clients that Mr. Santucci had an obligation to leave undisturbed by him for two years can only be guessed at. The plaintiffs had the right to a two-year window of opportunity to attempt firmly to stitch the client base maintained by Mr. Santucci back into the fabric of their business without interference from Mr. Santucci. Mr. Santucci received very significant compensation to ensure that he would not interfere. That bargained-for opportunity has already been very significantly damaged and the damage will only become more severe and difficult to gauge with the passage of time.
69MHI’s loss is derivative for the most part being reflected in loss of income and income potential for its wholly-owned subsidiary, but is no less real for that.
70MPC too has a direct interest in preventing the unauthorized use of the client books and records that Mr. Santucci undertook to return without copying for similar reasons.
71I find that the plaintiffs have both discharged their burden of establishing the likelihood of irreparable harm arising were the injunctions sought not granted. In the case of MPC, that interest is established regardless of the status of the NCNSA to which it is not a party absent an assignment.
(e) Fifth issue: Does the balance of convenience favour the issuance of the requested injunction?
72In my view, the balance of convenience favours issuing the limited injunction sought by the plaintiffs. The injunction sought is limited to clients formerly serviced by Mr. Santucci bearing his “Rep Code” and to the unauthorized use by him of client records of MPC which he is and was required to return without using or copying.
73While the order sought will certainly interfere with Mr. Santucci’s ability to earn a living, it only does so in line with agreements freely entered into and for which he was well paid. The injunction granted affects no more than his ability to mine for his own profit the client contacts that he agreed to leave undisturbed for two years. He will not be prohibited from working in the community or in the industry that he has spent several decades working in. Having sold his client list and associated goodwill already, the balance of convenience strongly favours holding him to his bargain to this limited extent.
Disposition
74Accordingly, I find that the moving parties are entitled to the relief sought in paragraphs 1(a), (b), (c) and (d) of the Notice of Motion as against the defendant Mr. Santucci. These orders sought prohibit violations of art. 3.1 of the NCNSA in relation to MPC clients formerly serviced by Mr. Santucci only (i.e. those with Mr. Santucci’s “Rep Code”) or the use or retention of client records that belong to MPC. No order was sought by or against the defendant Assante and no order is being made by me against Assante.
75The parties have agreed on the costs to be paid to the successful party by the unsuccessful party on this motion – these having been fixed by agreement between them at the level of $18,000. The moving parties shall be entitled to their costs that I fix at $18,000.
76I should note that it is ALWAYS preferable for the parties to address the subject of costs before the outcome of a particular motion is known and to consider carefully what amount can fairly be asked for or paid. In the event agreement between the parties does not emerge, they are at least able to address the issue at the close of argument as is mandated by Rule 57.01(6). The number of costs reserves has been skyrocketing recently due to the fact that parties are failing to take their obligations under Rule 57.01(6) seriously.
77All litigants should be aware that motions judges have and will exercise their discretion to decline to award any costs in future where Rule 57.01(6) is not complied with.
78Orders accordingly.
S.F. Dunphy J.
Date: June 18, 2021