COURT FILE NO.: CV-21-666474
DATE: 20210908
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: Forward Signs Inc., Forward Power Lighting Inc., Hummingbird Construction Inc., and 2219371 Ontario Inc.
AND:
Philcan Group Inc., Ming Kwok Ho also known as Philip Ho, Wai Man Ho also known as Raymond Ho, Peter Luk and Guo Wei Li
BEFORE: W.D. Black J.
COUNSEL: John Philpott, for the Plaintiffs
Keith Juriansz, for the Defendants
HEARD: August 31, 2021
ENDORSEMENT
Overview and the Parties
[1] This motion is in the context of an unfortunate breakdown of family relationships within the plaintiff group of companies (the “FS Group”).
[2] The FS Group has carried on business since the 1980s, initially and primarily through the plaintiff, Forward Signs Inc. (“FS”), which makes signs for large commercial and retail applications. The other plaintiffs have been incorporated to carry on related businesses. Hummingbird Construction Inc. (“Hummingbird”), provides construction services related to the design, installation and renovation of signs. Forward Power Lighting Inc. (“FPL”), was in the business of providing lighting services but is not currently active.
[3] FS was started by Simon Ho (“Simon”) in 1986. Within a couple of years of the company’s founding, Simon’s brother, Philip Ho (“Philip”), joined him in the business (there is a dispute about how that came about but it is not material for the purposes of this decision). When Philip joined the business, Simon held 60% of FS’s shares and Philip held 40%. As FS grew and the related companies (Hummingbird and FPL) were created, 2219371 Ontario Inc. (“221”), was eventually established as a holding company through which the shares of the various operating companies were held. Consistent with their original understanding about ownership, Simon held (and holds) 60% of the shares of 221, and Philip holds 40% of those shares. In addition to the shares of the FS Group companies, 221 owns a commercial property at 60 Emblem Court in Scarborough (“60 Emblem”), out of which the FS Group companies operate.
[4] At its height, the FS Group employed over 1000 employees across Canada and the United States. As a result of the impact of the pandemic and as a result in part of the events giving rise to this litigation, the business of the FS Group has scaled back considerably, and it now employs approximately 75 people.
[5] In addition to Simon and Philip, the FS Group employed for a number of years Philip’s son the defendant, Raymond Ho (“Raymond”). At the time of his departure from the FS Group, Raymond held a position as the “bidding team manager” and previously had roles as the manager of operations and finance.
[6] The defendant, The Philcan Group Inc. (“Philcan Group”), originally known as Forward Construction Services Limited, was incorporated on November 11, 2020. Raymond was and is listed as its sole Officer and Director.
[7] Peter Luk (“Peter”) was an account executive of the FS companies and is described as having been the FS Group’s top salesman, the person who knew the customers best and who had the deepest relationships with them, and the person who in particular, had the best contacts with general contractors (through which many opportunities are sourced).
[8] Guo Wei Li (“Wei”) was the manager of Hummingbird, the construction arm of the FS Group.
Status of Proceedings and Case Conference on August 10, 2021
[9] The parties came before me pursuant to the endorsement of Justice Myers in connection with a case conference on August 10, 2021.
[10] At that time, a sale of 60 Emblem was reported to be pending and scheduled to close on August 20, 2021. There was evidence that proceeds of that transaction were intended, at least in part, to provide funding for Simon’s buyout of Philip. Justice Myers ordered that the parties attend before the Court on August 31, to address interim terms pending a disposition of the claims and terms with respect to disposition of the anticipated proceeds of the 60 Emblem sale. Justice Myers also encouraged the parties to enter into negotiation or mediation, reminding them that ongoing hostilities would damage the business and erode the assets over which the parties are fighting, which would be to no-one’s benefit.
[11] The parties have not eased up on hostilities since then and I am advised that the sale of 60 Emblem did not take place, owing to an inability to make a deal about the leaseback contemplated as a part of the transaction. The fact that the 60 Emblem transaction did not close makes the defendants’ cross-motion largely academic. While it is important, as Justice Myers also stressed in his August 10, 2021 endorsement, that there be transparency with respect to the sale of 60 Emblem if that ultimately occurs, the failure of the transaction that was to have closed on August 20 renders the immediate concerns about that deal moot.
[12] Accordingly, the parties’ submissions before me dealt for the most part with the terms sought by the plaintiffs by way of interim injunctive relief.
Parties’ Positions on Interim Terms
[13] Specifically, the plaintiffs seek an order preventing solicitation by the defendants, or any of them, of any past, current, or prospective clients of the FS Group with which contact is ongoing and potential business is imminent (“pipeline clients”); an order preventing solicitation of current employees of the FS Group; an order restraining the defendants or any of them to possess, divulge or use any confidential information of the FS Group; and an order preventing the defendants or any of them from competing in any way with the FS Group.
[14] With respect to the last item of relief sought, the plaintiffs maintain that the defendants should not be allowed to operate in any sector of the market in which the FS Group carries on business.
[15] The defendants maintain that the plaintiffs have failed to provide sufficient evidence to justify injunctive relief, that the defendants’ activities have been innocent and reasonable and are wrongly characterized by the plaintiffs as nefarious, and that they have not approached, and have no intention to approach, customers or employees of the FS Group, and have no ability nor intention to make use of any confidential information of the FS Group.
[16] As such, they argue that no interim terms are necessary or appropriate and that both sides should be free to carry on business, unencumbered, going forward as their dispute plays out in the court.
Relevant Background
[17] It is necessary to recite some of the relevant history here, since this backdrop will inform my assessment of the need or otherwise for interim terms.
(a) Creation of Philcan Group
[18] It is not disputed that in November of 2020, while employed in a significant role within the FS Group, Raymond incorporated what was then called Forward Construction Services Limited and later became Philcan Group. I note that it is hard to understand the first choice of name, prominently featuring “Forward”, as anything other than an attempt to trade on the market position and goodwill of the FS Group and/or to create confusion in the market. It is not disputed that the Philcan Group was created with the intention that it would and will compete with FS Group in the same business, i.e., the design, installation, and renovation of commercial/retail signs. It is said on behalf of Philcan Group that it currently lacks certain CSA credentials that will mean it cannot compete with FS Group for certain accounts, but in the meantime it will inevitably compete for other accounts and in the longer term will compete directly on all fronts on which FS Group operates.
[19] While Forward Construction Services Limited only later became Philcan Group, I will refer to that entity as Philcan Group throughout these reasons.
[20] It is significant that despite incorporating Philcan Group in November of 2020, and despite the involvement of the other individual defendants in the creation and business of Philcan Group from late 2020 onward, no defendant disclosed to Simon, or to anyone else on behalf of any of the plaintiffs, that Philcan Group had been created. It was only when Simon discovered, well into 2021, that Philcan was actively approaching FS Group employees and customers and confronted the defendants about Philcan Group and its activities that the defendants said anything about Philcan Group. Moreover, what they disclosed once confronted was in some cases incomplete and in many cases untrue.
(b) Simon Learns of Philcan Group
[21] In May of 2021, some of FS Group’s staff alerted Simon to the possibility that Philip was building a “secret” company.
[22] It is noteworthy that by that time, Raymond’s employment had been terminated (in February of 2021). There is some dispute about whether that termination was or could have been for cause, but in any event, Raymond agreed to a severance package. What is not in dispute is that even while negotiating his departure, Raymond did not mention that he had incorporated Philcan Group some months before, nor that he and his father and the other individual defendants (about which more below) had been planning and developing Philcan Group’s business for some time.
(c) Proceedings taken by Philip in early 2021
[23] It is also noteworthy that in the first quarter of 2021 Philip launched proceedings against Simon alleging oppression and, it can be fairly understood, seeking to be bought out of his shareholding with the FS Group. That proceeding was eventually settled by way of an agreement that neither brother could take certain steps in relation to the business (issuing dividends or taking shareholder loans) without the consent of the other. It is not those details that are particularly germane here, but the fact that at no time during the course of those proceedings did Philip disclose that he (and his son) had created and were well underway by that point with a business intended to compete with FS Group. The plaintiffs speculate with some force that Simon was attempting, in his oppression proceedings, to force an early buyout, before his creation of the competing business came to light and, in part, to finance that business with proceeds of the sale of his shares that he was attempting to orchestrate.
(d) Results of Simon’s investigations
[24] Once made aware of the existence of Philip’s secret business in May of 2021, Simon hired an investigator and did a detailed internal search of email within the FS Group.
[25] Through these avenues he learned, among other things;
(a) Throughout the fall of 2020, the defendants held various clandestine meetings to plan and discuss the creation of Philcan Group. For example on October 3, they held a “Follow Up Private Meeting” at a local hotel scheduled for three hours and attended by Raymond, Philip, Peter and Wei. It is not yet known how many meetings took place in this vein before the October 3 meeting, but the words “follow up” in the meeting invitation suggest that at least one such meeting had already taken place;
(b) As set out above, on November 20, 2020, Forward Construction Services Limited was incorporated. I have already discussed the implications of the choice of name. In that regard, it is not denied that when the name changed to Philcan Group, the “Phil” in the name was chosen to represent Philip (despite his claim that he has not been involved in the Philcan Group business to this point);
(c) Before incorporating the company, the defendants had acquired premises to serve as the office for Philcan Group. Those premises in Richmond Hill had previously been used as a nail salon, and, apparently with a view to maintaining the secrecy of the fledgling business, the defendants (despite being in the sign business), did not change the exterior signage or appearance of the premises which featured frosted glass and displayed the business name “Nail Nail”. As discussed below, many clandestine meetings occurred in the ensuing months involving one or more of the defendants, FS Group employees and others at the Nail Nail location;
(d) After incorporating Philcan Group, Raymond opened a bank account, obtained an HST number, and he and the other defendants used the Nail Nail office to develop Philcan Group’s business;
(e) It is alleged that as early as November 2020, Peter and Raymond diverted a potential client from FS Group instead to Philcan Group. While the particulars of this alleged diversion are not yet entirely clear, there is evidence in the record that that customer formed the understanding that she had been dealing with the Philcan Group in circumstances in which her contract was with the FS Group, and the FS Group was actually doing the work in question;
(f) On December 15, 2020, Philip emailed Wei, Peter and Raymond regarding someone who had applied for work at the FS Group. In his email, referring to the candidate, Philip said “Do you think this person is good for our new company?”;
(g) Philcan Group set up a website announcing that it is in the business of signs, metal cladding and miscellaneous metals, i.e., the same business as FS Group. Philcan Group has been operating (i.e., offering and providing its services) since at least March of 2021;
(h) As discussed in subparagraph (c) above, the investigator hired by Simon in or about May of 2021, confirmed that the defendants and various FS Group Employees met regularly at the Nail Nail location. For example, Philip was observed attending there for approximately six hours on June 11; three hours on June 24; and five hours on June 25. On each such day he was seen entering and exiting the premises at times with Raymond or with other FS Group employees;
(i) As set out above, in the April/May period of 2021, an FS Group client was convinced that the work done for her by the FS Group under her contract with the FS Group was done by Philcan Group (at a time before Simon was even aware of the Philcan Group);
(j) In May of 2021, despite Philip then and still maintaining that he had done no work with or for the benefit of Philcan Group, defendants’ counsel copied Philip on an email to plaintiffs’ counsel, inadvertently using Philip’s Philcan Group email address, indicating that, despite his denials, Philip was by then clearly involved in the Philcan Group business (since otherwise it is hard to understand why he would have a dedicated Philcan Group email address);
(k) There is evidence that Philip has charged various Philcan Group expenses to FS Group during the first half of 2021;
(l) In July of 2021, interviews (conducted by Simon and the investigator), were undertaken with various employees of FS Group. These interviews confirmed that FS Group employees had been instructed to complete work for Philcan Group, which one or more FS Group employees described as “Philip’s company”, while employed at FS Group and that Philcan Group had been soliciting FS Group employees, some of whom in fact resigned from FS Group to join Philcan Group;
(m) Philip was interviewed on July 28, 2021. At that time he denied knowing anything about Philcan Group, which was obviously untrue;
(n) Wei, when he was interviewed, initially denied knowledge about the Philcan Group business. However, when shown copies of the email referred to above from late 2020, he admitted his involvement in the business;
(o) Peter for his part, claimed that his visits to the Nail Nail location were just friendly visits to his friend Raymond and denied any role with the Philcan Group business.
[26] These examples are representative but not exhaustive. Collectively, together with other evidence in the record, they show a clear plan and effort led by Philip and involving all of the individual defendants, to incorporate, develop and operate a new business to compete with the FS Group. They also show that the defendants actively solicited customers and employees of FS Group, and that the creation, planning and operation of the business, including the solicitation of FS Group employees and customers, was, and was intended to be, secretive and deceitful. The defendants, and especially Philip, denied their involvement in the Philcan Group business even very recently at a time and in circumstances which should have made it clear that “the jig was up”.
[27] It is also alleged that the defendants, and in particular Raymond, have taken and continue to possess confidential information, including FS Group customer lists and technical information. While the evidence on this score is circumstantial, it is nonetheless concerning.
(e) Defendants’ Denials
[28] The defendants’ denials and/or explanations for their activities are also not reassuring. As set out above, they purport to justify their ongoing involvement with the new business as spending time with and providing friendly advice to their friend(s) in a new business venture.
[29] As mentioned above, they point out that there are some customers of FS Group, including the largest customers, for which certain CSA certification is required, and since the Philcan Group does not yet have that certification they cannot (yet) compete for that work.
[30] They say they have no intention of approaching current customers of FS Group. That, if believed, might be reassuring, except that various aspects of the evidence confirm that much of the business in this industry comes from or through general contractors. That is, for new construction or even renovation it is typical for an end user to ask the general contractor to arrange for a subcontractor to design and install signage. When I asked defendants’ counsel if the defendants’ intention not to approach current customers of FS Group included general contractors, he candidly acknowledged that it does not and that Philcan Group in fact intends to approach general contractors, many of whom are the source of work for FS Group.
Question of Fiduciary Obligations
[31] The defendants also argue that other than Philip, who it is alleged despite some of the evidence reviewed above, has not played a role and will not play a role in the Philcan Group business at least in the near term, none of the other individual defendants is a fiduciary. They point out that in addition, none of the individual defendants signed any non‑compete agreement and that therefore preventing them from participating in business with Philcan Group would be an unfair and unwarranted restraint on trade/employment. There is some force to this argument, although frankly it would be more compelling if not coupled with an unpersuasive denial (by all individual defendants other than Raymond, to varying degrees) of any participation in the business that they now say they ought not to be constrained from joining.
Test for Injunctive Relief and Analysis
[32] I turn now to the test for injunctive relief. As set out in RJR MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311 the plaintiff must show:
(a) That there is a serious issue to be tried;
(b) That it will suffer irreparable harm if the relief is not granted; and
(c) That the balance of convenience favours the granting of an injunction pending trial of the issues between the parties.
[33] The defendants argue that given that an injunction here would put the defendants’ business and ability to earn a living in serious peril, the first prong of the test requires me to find a strong prima facie case rather than just a serious issue to be tried (Jet Print Inc. v. Cohen, [1999] O.J. No. 2864 (S.C.)).
[34] On either test, serious issue or strong prima facie case, I have no trouble in finding that the plaintiffs meet the threshold here. For the reasons set out above, there is no doubt that the defendants have breached duties owed to the plaintiffs, engaging in a deliberate secret campaign to solicit FS Group customers and employees, and thereby to harm the plaintiffs’ business. I note that courts in Ontario have sometimes held that where a party is seeking to enforce restrictive covenants the higher standard of prima facie case should apply, and that if that higher standard is met, less emphasis might be placed on the second and third parts of the injunction test (TSI International Group Inc. v. Formosa, 2015 ONSC 1138; Boehmer Box L.P. v. Ellis Packaging Ltd., 2007 CanLII 14619 (Ont. S.C.)). As Justice Pattillo explained in Van Wagner Communications Co., Canada v. Penex Metropolis Ltd., 1427 (Ont. S.C.), referring to authorities discussing the approach to be taken in the case of an interlocutory injunction to restrain a breach of a negative covenant, this does not mean that the other aspects of the test are not considered, but may mean that they receive less emphasis than might otherwise be the case:
Each of those respected judges are saying, in my view, that in the case of an interlocutory injunction to restrain a breach of a negative covenant, irreparable harm and the balance of convenience need to still be considered. The extent of the consideration, however, will be directly influenced by the strength of a plaintiff’s case. Even where there is a clear breach of a negative covenant which is unreasonable on its face, the issues of irreparable harm and balance of convenience cannot be ignored. They may, however, become less of a factor in reaching the final determination of the issue depending on the strength of the plaintiff’s case.
[35] The defendants argue that since they, other than Philip, are not fiduciaries of FS Group, the case against them is untenable. In that regard, first, I believe that on balance, all of the individual defendants owed fiduciary duties to FS Group. They each held significant positions which caused and required them to maintain key relationships (in the case of Peter in particular), and/or to be entrusted with confidential customer, pricing and technical information (in the cases of Wei and Raymond).
[36] In TSI International Group, the court granted an interlocutory injunction when former employees, some being fiduciaries, competed with their employer and usurped developing business opportunities. Richetti J. held that the defendants were key employees with access to confidential information and documentation, and that they breached employment agreements and/or fiduciary duties by engaging, while employed by TSI, in a business that directly competed with TSI. The same holds true with respect to each of the individual defendants here.
[37] Moreover, in Edgar T. Alberts Ltd. v. Mountjoy (1977), 1977 CanLII 1026 (ON SC), 16 O.R. (2d) 682 (H.C.), a decision of Justice Estey (then sitting in the Ontario High Court of Justice), the court confirmed that employees who assist others in the breach of their fiduciary duties are also liable for the breach. While I believe that each of the defendants individually owed fiduciary duties to the FS Group, there is no doubt that they assisted Philip in the ongoing breach of his fiduciary duties and would be liable on that basis as well.
[38] The defendants also argue that I should ignore past conduct in assessing these issues, and instead focus solely on the situation going forward. I do not accept this submission. It is the conduct of the defendants, examples of which are set out above, which in fact gives rise to the potential need to restrain their conduct until this matter can be adjudicated on a full record.
[39] The question of irreparable harm gives me the most pause. While there is evidence of the defendants’ efforts and intention to divert business from the FS Group, the extent of actual harm is not quantified in the record before me.
[40] The plaintiffs argue that it is this inability to quantify the harm that requires injunctive relief. They say that it is clear that the defendants’ conduct was undertaken with the very aim of diverting business from the plaintiffs, and that the plaintiffs’ business and reputation in the market have already been and will continue to be injured.
[41] In RJR MacDonald, in the discussion of irreparable harm, the Supreme Court notes that irreparable harm refers to the nature of the harm rather than its magnitude. It is harm that cannot be quantified in monetary terms or which cannot be cured. This includes “where one party will suffer permanent market loss or irrevocable damage to its business reputation” (RJR MacDonald, at p. 341)
[42] Injunctions have certainly been granted in circumstances where a party solicits clients of their former employer, giving rise to the possibility of irreparable harm. See for example Merrill Lynch Canada Inc. v. Pastro, 2000 BCCA 243; MD Management Ltd. v. Dhut, 2004 BCSC 513.
[43] There is no doubt that Philcan Group was formed for the very purpose of competing directly with FS Group. The defendants’ actions threaten FS Group with the loss of clients, key employees and market share. It is also reasonable, in my view, to expect that if key employees and managers of a business are approaching the customers and other employees of that business to solicit them to give their trade or labour to a new entity being formed by those key personnel, then the original business will suffer reputational damage as well.
[44] Given the strength of the prima facie case, and given that the defendants’ intentions were, in effect, to harm the plaintiffs’ business, and the clandestine and deceitful way in which the defendants undertook their efforts and hid those efforts from the plaintiffs at every turn, I am persuaded that there is a likelihood of irreparable harm. While I am therefore satisfied that this evidence of irreparable harm can ultimately stand on its own, I note that given the strength of the prima facie case that I have found, it may be, relying on some of the cases cited above, that less emphasis can be given to irreparable harm and balance of convenience in any event.
[45] In terms of balance of convenience, whereas the plaintiffs’ business has been operating for over 30 years, the defendants have been creating and planning their business for less than a year and operating that business for only a few months. While the defendants would argue that therefore the balance of convenience favours allowing them the opportunity to develop their business without impediment, since the plaintiffs’ business is well-established, I find instead that there is no imperative, particularly given the secretive and dishonest way in which the defendants have conducted themselves to date, to allow them unfettered opportunity to compete for the plaintiffs’ customers.
Interim Order
[46] As such, I order, on an interim basis pending a disposition of this matter, that:
(a) The defendants, and each of them, are prohibited from approaching, contacting or soliciting any current or pipeline customers of the plaintiffs, or any customers to which or to whom the plaintiffs have provided services during the past three years (from the date of this decision);
(b) The defendants, and each of them, are prohibited from approaching, contacting or soliciting any current employees of the plaintiffs;
(c) The defendants, and each of them, are prohibited from possessing, divulging or making any use of confidential information of the plaintiffs, including customer lists and proprietary or confidential technical information used in the plaintiffs’ business operations.
[47] I decline to preclude the defendants, as requested by the plaintiffs, from competing with the plaintiffs at all. While the defendants’ conduct has been unacceptable, in my view prohibiting them from operating in this space at all, even on an interim basis, goes further than necessary. While the defendants cannot approach, contact or solicit customers or employees of the plaintiffs, and cannot make use of confidential information of the plaintiffs, the defendants can operate a website and/or advertise their services in a general way (i.e., without targeting customers of the plaintiffs), and, to the extent that the defendants are approached by prospective customers, can provide services to those customers. To be clear, I am prohibiting the defendants, as part of the scope of paragraph 46(a) above, from contacting general contractors from whom or which FS Group has received referral business in the past (or on an ongoing basis). It is clear that these contacts are an important source of business in this industry and I am prepared to prohibit the defendants from exploiting contacts made while in the service of the plaintiffs in order to generate revenue for the new business.
[48] I understand from counsel that in some instances there is a bidding process for new work which necessitates contact with general contractors. In those instances, the defendants may have contact with general contractors if and when invited to bid, but as set out above the defendants are prohibited from approaching general contractors from whom or which FS Group receives work, and may only participate in bidding for work if invited to do so, and provided that the defendants make no use of pricing or other confidential information of the plaintiffs.
[49] I appreciate that some of the prohibitions will be difficult to police and enforce. Nonetheless I certainly expect that the defendants will comply with the terms set out in paragraphs 46-48. If there is any evidence in future showing that the defendants have failed to do so, I caution that the court is likely to take a very dim view of any such failures.
[50] Finally, I repeat Justice Myers’s encouragement to the parties to negotiate or mediate towards a solution. Litigation in circumstances like these is never beneficial to business, and the ongoing breakdown of family relationships is all the more regrettable. If the parties can find a way to solve their dispute it will be to the benefit of all concerned.
[51] The plaintiffs are entitled to their costs.
[52] If the parties cannot agree on costs, I am prepared to receive the plaintiffs’ brief submissions (no more than 3 pages) on costs within 20 days (October 4, 2021); and the defendants’ brief submissions within 10 days thereafter (October 14, 2021). The submissions may be emailed to my assistant lorie.waltenbury@ontario.ca.
W.D. Black J.
Date: September 8, 2021