COURT FILE NO.: CV-21-00658007-0000
DATE: 20210719
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: UAP INC., Plaintiff
– and –
YAKO HIRMIZ (JACOB) YAKO, SABAH (SAM) YAKO, SAKO AUTO PARTS INC., PRECISE AUTO PARTS LTD., SOWOD YAKO, ROBERT DININIO, LAWRENCE TYLER BACCHUS and PICKERING DISCOUNT AUTO PARTS INC. o/a 747 AUTO PARTS, Defendants
BEFORE: E.M. Morgan J.
COUNSEL: Sara Erskine and Ian Literovich, for the Plaintiff
Bota Mcnamara and Shaun Singh, for the Defendants, Yako Hirmez (Jacob) Yako, Sabah (Sam) Yako, and Sako Auto Parts Inc.
Chirstopher Lee and Wendy Ngai, for the Defendants, Precise Auto Parts Ltd. and Sowod Yako
Sharon Ilavsky, for the Defendant, Pickering Discount Auto Parts Inc. o/a 747 Auto Parts
Laura Freitag, for the Defendants, Danino and Bacchus
HEARD: July 12, 2021
Motion for interlocutory injunction
I. Background of the injunction request
[1] The Plaintiff purchased Paste Auto Parts Inc. (“Paste”) from two brothers – the Defendants, Yako Hirmiz Yako (“Jacob”) and Sabah Yako (“Sam”) – pursuant to an Asset Purchase and Sale Agreement dated November 22, 2018 (the “Agreement”). It now moves for the following interlocutory injunctions enforcing the Agreement’s non-competition and non-solicitation clauses:
(a) Restraining the defendants, Yako Hirmiz (Jacob) Yako, Sabah (Sam) Yako, Sako Auto Parts Inc. (“Sako”), and Precise Auto Parts Ltd. (“Precise”), from operating any business related to the wholesale or retail sale of auto parts within 75 kilometers of the Paste Auto Parts Inc. locations acquired by UAP pursuant to Asset Purchase and Sale Agreement dated November 22, 2018, or soliciting former Paste Auto Parts Inc.’s customers or employees; and
(b) restraining the defendants, Robert Dinino (“Dinino”) and Lawrence Tyler Bacchus (“Bacchus”) from operating or being employed by any business related to the wholesale or retail sale of auto parts within 50 kilometers of the [Plaintiff’s] NAPA Auto Parts Store located in Woodbridge, Ontario, or soliciting the Plaintiff’s customers or employees.
[2] The Plaintiff contends that a year and a half after its purchase of the business, Jacob and Sam established Sako as a competing business to sell auto parts to Precise, a company owned by a third brother, Sowod Yako (“Sowod”). It further alleges that Precise recruited two key former employees of Paste, the Defendants, Dinino and Bacchus, to solicit Paste’s former customers. Plaintiff’s counsel points to evidence that a substantial percentage of Precise’s business is composed of former Paste customers.
[3] Expert evidence presented by the Plaintiff has evaluated sales figures for Paste and for the Plaintiff at specific store locations, and has assessed that there has been an overall decline in sales to previous customers of Paste’s as compared to the same locations at the time the Agreement was signed. According to the Plaintiff’s market expert, between February and July 2020 there was a decline in sales to Paste customers of approximately 21%. Then, between August 2020 and January 2021, there was a decline in sales to Paste customers of approximately 34.1%.
[4] There is no direct evidence of customer solicitation by any of the Defendants. However, using photos of invoices and surveillance obtained by a private investigator, the Plaintiff has identified customers that moved from the Plaintiff to Precise for their auto parts once Precise went into business in mid-2020.
[5] Jacob and Sam concede that they are back in business as auto parts brokers. They submit, however, that they are engaged in business outside of the geographic scope of the non-competition clause and that they do not go out and solicit customers away from the Plaintiff. It is their view that the Plaintiff has lost market share due to ordinary competitive pressures, and that many customers simply prefer the service and pricing of smaller local merchants over those of a large corporate seller such as the Plaintiff.
[6] Counsel for Precise and Sowod submits that his clients are not bound by the Agreement and are not related (except for Sowod in the family sense) to Paste, Sako, Jacob, or Sam. Sowod’s view is that he is unfairly targeted for no reason other than his family relationship with Jacob and Sam, and his counsel submits that Precise is legitimately in a business that competes locally with that of the Plaintiff. He argues that the Plaintiff has seized on the irrelevant fact that Sowod shares a family name with Jacob and Sam in order to shut down a legitimate competing business.
[7] Counsel for Dinino and Bacchus contends that her clients are low level clerical employees not in a position to compete with the Plaintiff or solicit its clients. She submits that her clients have merely sought a new job in the same industry as they are permitted to do, and that they have not initiated any contact with former customers of Paste. It is Dinino’s and Bacchus’ position that they are not in violation of any agreement with the Plaintiff.
II. The sale of Paste Auto Parts Inc.
[8] As indicated, the Plaintiff purchased Paste from Jacob and Sam in November 2018. Paste and the Plaintiff were at the time both engaged in the business of selling replacement parts, equipment and accessories for cars and light trucks. The purchase price was $5 million.
[9] The record shows that $2.7 million – i.e. the majority of the purchase price – was allocated to goodwill, customer lists, and other intangibles reflecting an acquisition by the Plaintiff of Paste’s market in the auto parts business. For their part, Jacob and Sam covenanted to be restrained by non-competition and non-solicitation provisions so that the Plaintiff could be assured that the market share it acquired under the Agreement would not be taken back by the sellers. Section 4 of the Agreement provides that the purchase price is being paid in exchange for the ability to retain Paste’s customer base. It requires Paste to facilitate the transition by providing the Plaintiff with customer lists and contracts, inventory details, accounts receivable lists sorted by age, customers’ pricing profiles, and outsourced delivery contracts.
[10] Section 11 of the Agreement contains the specific non-competition/non-solicitation clause. Its time frame is 5 years from the date of the Agreement, and its geographic range is 75 kilometers from the location of any one of Paste’s former stores (all of which were in the GTA):
11(a) Each of the Sellers, Jacob and Sam, jointly and severally, acknowledged and agree that each of Jacob and Sam will be receiving proceeds from the sale transaction and is benefitting significantly from the sale transaction, that the Buyer would not enter into the purchase and sale transactions contemplated hereby without the covenants contained in this Section 11 and that it is a condition of the transactions contemplated hereby that each of the Seller, Jacob and Sam, jointly, acknowledge and agree that it is critical to the Buyer that the Seller, Jacob and Sam not: i) compete with the Buyer in its operation of the Business; ii) solicit the Buyer’s customers or potential customers in relation to the Business; or iii) solicit the Seller’s Employees.
(b) Accordingly, and in the case of the Seller, Jacob and Sam (the ‘Covanantors [sic]’), for a period of 5 years from the Closing Date, each shall not, directly or indirectly including through an affiliate of any one or more of the Covenantors: i) operate, invest in, loan money to, advise, be employed by, be a director or officer of, be a shareholder of, be a consultant to, supply products or services to or in any other manner be involved in a business which competes directly with the Business within a 75 kilometer radius from the boundaries thereof; ii) solicit the Buyer’s customers or potential customers for any purpose related to the Business or a business similar or competitive to the Business; or iii) solicit or encourage any of the Seller’s Employees to terminate his or her employment with the Buyer or accept employment with the Seller or any third party.
[11] Preserving customer relations was a central aim of the transfer of the business from Paste to the Plaintiff. Jacob himself acknowledged in cross-examination that continuing his and his brother Sam’s personal rapport with their customer base would be an integral part of the transition. Accordingly, Jacob and Sam were required in the Agreement to stay on in a consulting capacity with the Plaintiff for one year after closing of the sale. As noted above, for a 5-year period they also covenanted not to solicit the Plaintiff’s customers or to “supply products or services to or in any other manner be involved in a business which competes directly with the [Plaintiff’s] Business within a 75 kilometer radius from [Paste’s former locations]”.
III. The Sako and Precise businesses
[12] Jacob and Sam’s brother, Sowod, has also long been in the auto parts business, but not as a partner of his two brothers. For all of the time material to this action, Sowod has run his own independent operation, with no interest in or profit sharing with his brothers. Prior to the events in issue, he primarily sold brake and other auto parts to distributors through his company Promax. That company was a wholesaler, and, unlike Paste, did not sell to mechanics and end users.
[13] In May 2020, Sowod saw a niche to fill in the auto parts market and opened Precise. It is his view that many end users are not happy purchasing from the Plaintiff as it is a large corporation whose terms of business and prices are not as favorable as smaller local businesses. With the removal of Paste from the scene, Sowod sought to serve Paste’s former customers directly and so supplemented his wholesale business with Precise and commenced a direct-to-end-user business.
[14] Sowod’s evidence is that 40% to 60% of Precise’s business is retail, and the rest is wholesale. Precise is located not far from one of Paste’s former locations, and is within a 75 kilometer radius of that location. But, of course, Sowod is not subject to any non-competition agreement with the Plaintiff. Further, despite significant investigative efforts by the Plaintiff, including hiring private investigators to attend at Precise’s premises and look into its operation, there is no evidence that Jacob and Sam have any interest in Precise.
[15] As required, Jacob and Sam worked for the Plaintiff on a consulting basis following the Plaintiff’s purchase of Paste’s business. For Jacob, this arrangement lasted until January 2020 and for Sam until March 2020, when their respective contracts were up for renewal. Neither of the Yako brothers had their contracts renewed by the Plaintiff.
[16] There is a dispute among the parties as to whose fault the non-renewals were. It is the Plaintiff’s position that Jacob and Sam had always planned to venture into the auto parts business on their own again. It is Jacob and Sam’s position that they would have been happy to continue working for the Plaintiff but that neither of them was offered the kind of terms and positions that they found attractive.
[17] What is clear is that by the time they each left the Plaintiff, Jacob and Sam had worked more than the one year they had obligated themselves to work as consultants for the Plaintiff. They were each free to work elsewhere or open their own business if they wished – subject, of course, to the restrictions contained in the Agreement’s 5-year non-competition and non-solicitation clauses.
[18] In June 2020, Jacob and Sam incorporated Sako and are the only two shareholders. The company was dormant until mid-October 2020, when it commenced operations as an auto parts broker in Barrie, Ontario. Sako’s business is located 78 kilometers from the nearest former Paste location – i.e. outside of the restrictive covenant radius imposed by the Agreement. Sako does not sell or supply auto parts; its business is that of a brokerage, putting buyers and sellers of auto parts together, often not taking any delivery of the products itself.
[19] That Sako does not engage in supplying auto parts itself is not really disputed. The Plaintiff itself acknowledges that Sako does not have the personnel to engage in that type of operation. Jacob and Sam are Sako’s only employees, with the exception of one part-time driver. The evidence indicates that auto parts buyers either take delivery directly from the suppliers with which Sako has connected them, or pick up the auto parts from Sako’s office in Barrie. Any customers of Sako’s to which its driver delivers merchandise supplied by the seller companies are all located outside of the 75km radius set out in the Agreement.
[20] Precise is a customer of Sako’s. That is, Sako sources numerous auto parts for Precise’s customers and takes a brokerage fee. For that reason, when the Plaintiff sent its private investigators into Precise’s premises, they saw numerous invoices from Sako.
[21] The Plaintiff contends that arranging matters in this way with Precise has allowed Sako to continue doing business inside the 75km radius. In response, Jacob and Sam argue that they are keeping outside of the 75km radius, and that they have no relationship with Precise other than taking their phone calls and brokering products from sellers to them.
IV. The two desk clerks
[22] The Plaintiff has identified two former Paste employees, Bacchus and Dinino, as being lynchpins in the entire scheme between Sako and Precise. Counsel for the Plaintiff states that Dinino regularly generated more than 100 invoices per day from customers when he worked at Paste, and that many of the customers even had his personal cell phone number. Plaintiff’s counsel further points out that Bacchus was trained by Dinino and generated similar numbers of customer invoices.
[23] That said, there is no evidence that these two employees were actually salespersons; they did not earn a commission on sales or have any portion of their income tied to sales volumes. Counsel for Jacob and Sam describes them as clerks who took calls at the order desk, not sales personnel who actually generated any business. Neither Dinino nor Bacchus is a high level employee, and neither of them has anything beyond a high school education.
[24] As a result of their perceived importance to customer relations, Dinino received from the Plaintiff a signing bonus of $5,000 and Bacchus received a signing bonus of $4,000. In return, they were each required to sign non-solicitation and non-competition agreements. By this means, both of these employees were contractually prohibited from contacting the Plaintiff’s customers or competing against the Plaintiff within 50 km of any former Paste location for a period of 12 months after leaving their employment with the Plaintiff.
[25] On July 27, 2020, Dinino resigned from his employment with the Plaintiff. He deposed in an affidavit that he quit his job in order to take a position in a warehouse, but that the warehouse job later fell through. He has not been able to identify the warehouse or produce any correspondence with that prospective employer. Similarly, on August 11, 2020, Bacchus resigned from the Plaintiff. He deposed that he intended to pursue a job opportunity with a Chevrolet dealership where his uncle worked, but that job fell through. Like Dinino, Bacchus has been unable to identify any text messages, emails, or other communications with respect to the job for which he claims to have left the Plaintiff.
[26] On August 27, 2020, Dinino became employed by Precise. On September 15, 2020, Bacchus became employed with Precise. The Plaintiff contends that the reason they were hired by Precise is to sell auto parts to Paste’s former customers.
[27] Again, there is no evidence that these two employees are paid commission on sales or that their income with Precise is tied to volume of sales that they generate. There is also no evidence that Dinino or Bacchus initiate any calls to customers, or that they contact customers in any way except to answer the phone if it rings at Precise while they are at the order desk. That said, there is a significant overlap between Precise’s customers and Paste’s former customers.
[28] Both Denino and Bacchus have testified that at Precise they are paid much less than what they received while working for the Plaintiff. Dinino testified that he is paid $20 an hour in cash, and that he only earned a total of $3,000.00 for his work at Precise in 2020 and $8,000 in 2021 to date. Bacchus testified that he makes $20 an hour and is paid in cash, and that he made $2,500 in 2020 and $3,500 in 2021. They both claim not to have filed tax returns for the past two years and to have not kept track of their hours of work. Both of them left full time positions with the Plaintiff where they were working in the range of 40 hours a week.
V. The injunction test
[29] Turning to the Plaintiff’s request for an injunction, it bears repeating that the test was authoritatively set out by the Supreme Court of Canada in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311. The moving party must demonstrate:
(a) a strong prima facie case;
(b) irreparable harm if the injunction is not granted; and
(c) the balance of convenience favouring the moving party.
[30] As the injunction sought here entails enforcing a restrictive covenant, a relatively high test is imposed under the first heading: Schofield v Schofield, 2007 CanLII 48661, at para 16 (SCJ). In particular, when it comes to enforcing a non-competition clause contained in an agreement for the sale of a business, a modified approach has been adopted in which the moving party must “show a case of such merit that it is very likely to succeed at trial. Meaning, that upon a preliminary review of the case, the application judge must be satisfied that there is a strong likelihood on the law and the evidence presented that, at trial, the applicant will be ultimately successful in proving the allegations set out in the originating notice”: R. v. Canadian Broadcasting Corp., 2018 SCC 5, [2018] 1 SCR 196, at para 17.
[31] The evidence in the record does not demonstrate that the Plaintiff has met this standard. The Agreement bars Jacob and Sam from going into a competing business within 75km of their previous locations. The Plaintiff complains that they have indeed gone into business to compete with the Plaintiff, and are doing so from a location that is 78km away – almost, but not quite, within the prohibited radius. The Plaintiff’s problem is that, with all due respect, “almost” doesn’t count in the world of restrictive covenants. The Plaintiff imposed the non-competition clause for its own benefit and must live by its terms, without bending them to cover near misses.
[32] The same can be said of the business in which Sako engages – i.e. auto parts brokering. Section 11 of the Agreement prohibits Jacob and Sam from business activities in which they “supply products or services to or in any other manner be involved in a business which competes directly with the Business within a 75 kilometer radius from the boundaries thereof”. Jacob and Sam’s counsel submits, accurately, that as brokers they are middlemen putting deals together between buyers and sellers. They do not supply any products themselves.
[33] Again, the Plaintiff seems to have the restrictive covenant’s terms in its sights but has shot off a near miss. In drafting the non-competition clause, the Plaintiff could have used some terminology other than “supply products” which would have captured the activity of brokering deals in which others supply the products, but it did not do so. Having imposed its favored restrictive covenant on Jacob and Sam, it is not for the Plaintiff to now re-interpret it more broadly than it is phrased in the Agreement.
[34] The Plaintiff’s response to all of this is that, in effect, it is Sowod and Precise that are facilitating Jacob’s and Sam’s business. Plaintiff’s counsel’s theory is that Precise has been established within the 75km radius as a kind of agent working on behalf of Sako, and that the entire arrangement between those two supposed arm’s length companies is a sham whose reality will be demonstrated as this action proceeds.
[35] It may be that the Plaintiff has a point. But the point has yet to demonstrate with evidence. This is despite the Plaintiff having invested substantial time and resources into hiring private investigators to get to the bottom of the Yako brothers’ arrangement. In keeping with the need to have a strong prima facie case, the Plaintiff would also have to show that it will suffer irreparable harm if the injunction is not granted – that is, not that it might suffer irreparable harm but that it demonstrably will suffer irreparable harm: Airport Limousine Drivers Association v. Greater Toronto Airports Authority, 2005 CanLII 29654 (SCJ).
[36] So far, the Plaintiff has only succeeded in showing that Precise uses Sako to broker deals with auto parts suppliers, without any evidence that the relationship is other than arm’s length. The Plaintiff has also not demonstrated any real causal connection between Precise and Sako on one hand and the Plaintiff’s own loss of market share on the other. As Defendants’ counsel argue, a third factor – market considerations by local purchasers – may be the more realistic cause of the Plaintiff’s market share decline and the movement of customers from the Plaintiff to Precise.
[37] In any case, what evidence that the Plaintiff does have is inconclusive. Anything more alleged against Precise is speculative and thus does not meet the irreparable harm test: Kanda Tsushin Kogyo v. Covely (1997), 96 OAC 324, at paras. 3-4 (Div Ct). In fact, Sowod’s counsel submits, with some justification, that if Sowod did not have the same last name as Jacob and Sam the bottom would fall out of the Plaintiff’s entire case. Sowod is a brother of the two individuals restricted in their business by the terms of the Agreement, but he is not his brothers’ keeper.
[38] As for Dinini and Bacchus, the allegations against them are circumstantial. They are low paid employees that do not appear to be high enough in the hierarchy of any of the businesses in issue here to be guilty of being the lynchpins in a competitive conspiracy as alleged by the Plaintiff. They understandably know Paste’s former customers as they were the ones that took the orders when the customers called. But there is no evidence that they have ever been what one would call sales personnel; they are front desk order clerks whose income appears to never have been based on their own sales.
[39] I do agree with Plaintiff’s counsel that something is suspicious in the Dinino and Bacchus employment story, or that something is missing from the narrative as to why they left full time employment with the Plaintiff for part time employment with Precise. I also am skeptical of their apparent lack of record keeping and income reporting. Evidence may well emerge down the road that explains all of this one way or another.
[40] Having said all of that, I am not prepared to enjoin two relatively junior employees from working for their current employer based on suspicion alone. That would not meet the test set by the Supreme Court of Canada for granting the type of injunction sought here. In addition, counsel for Dinino and Bacchus has put forward some arguments casting doubt on the enforceability of the non-competition agreements which these two employees signed. I make no ruling on that here, but it is certainly an open and contentious issue that will need to be resolved at trial.
[41] Even if it were debatable that the Plaintiff has a strong prima facie case or that a lesser standard is demanded of the Plaintiff under the first head of the RJR-MacDonald test, it is clear to me that the balance of convenience favours the Defendants. The Plaintiff is a large corporate enterprise that will weather this storm through trial. If it is successful, it will have shown that it has lost expected profits and can make its claim in damages.
[42] Plaintiff’s counsel submits that this is more than just a damages claim and that, in fact, the Plaintiff may lose the entire value of the Agreement in which they purchased Paste’s business. That may or may not turn out to be true, but it does not compare with what the Defendants will lose if the Plaintiff is unsuccessful at trial. The Plaintiff stands to suffer a great financial loss, but Precise and Sako, with their respective principals, stand to lose everything. The Plaintiff’s financial loss will be unfortunate but ultimately the Plaintiff will survive; the Defendant’s loss of business will be fatal.
[43] The same is true of the injunction sought by the Plaintiff against Dinino and Bacchus. Those employees covenanted not to work for a competing business for one year, which will expire in about two months’ time. The potential harm to the Plaintiff in allowing them to continue in their jobs for another month or two is miniscule compared with the harm to the employees in being forced out of their jobs. Given that the Plaintiff, with all of its investigative resources, has not managed to identify a single individual customer that Dinino or Bacchus solicited, I find no grounds to issue an injunction against them.
[44] In all, the Plaintiff has not demonstrated a strong prima facie case against any of the Defendants and, in any case, the balance of convenience is in each of the Defendants’ favour. Accordingly, the grounds for an injunction have not been made out.
VI. Disposition
[45] The Plaintiff’s motion is dismissed.
[46] The parties may make written submissions on costs. I would ask both sets of Defendants’ counsel to send to my assistant by email short submissions (3 pages maximum) within two weeks of today, and for Plaintiff’s counsel to send to my assistant equally short submissions within two weeks thereafter. There is no need to deliver copies of authorities cited in these submissions, provided that any cases are cited with full citations so that they can be found online.
Date: July 19, 2021 Morgan J.