Alberta Court of Queen's Bench clarifies the legal test employers must meet to restrain former employees from competition and solicitation

A recent decision from the Alberta Court of Queen's Bench has clarified the test to be used in an application for an injunction in the employment context. Justice Eamon explained that the employer must prove a strong prima facie case where it seeks to restrain employees from competition and solicitation through allegations of breaches of fiduciary or other common law or equitable duties. Previously, the strong prima facie case applied mostly in cases involving written restrictive covenants.

Facts

GG&HH Inc. (GG) operated a number of pharmacies in Calgary. The Defendants opened two competing pharmacies, one located across the street from one of GG's. Two of the individual Defendants were pharmacists, who left their employment with GG over two years prior to the start of the action. The third was a pharmacy assistant, who left his employment shortly before the action began.

GG brought an application for an interlocutory injunction restraining the Defendants from competing with GG and soliciting its patients. GG alleged that the Defendants breached fiduciary and common law employment duties, stole confidential information, and conspired to harm GG.

Issues

The Court considered two key issues:

1. What is the correct legal test for an injunction: serious issue to be tried (low threshold: prove that the claim is not frivolous or vexatious) or strong prima facie case (show that the applicant will probably prevail at trial), and was it met in this case?
2. Exclusion of evidence: should secretly-recorded conversations be admitted into evidence?

Reasons

1. Does the Applicant satisfy the test for an injunction?

a. What standard applies?

While it has long been established that the strong case standard applied to the enforcement of restrictive covenants where the employer seeks to place restrictions on the employee's ability to earn a livelihood, the case law was conflicting on whether it should also apply to allegations of breaches of common law and fiduciary duties.

The Court noted that the Supreme Court of Canada in RJR found that the strong case standard will apply where the result of the injunction will impose such hardship on one party as to remove any benefit from proceeding to trial. In BrettYoung Seeds, Justice Wakeling recognized that there is a public policy rationale for a higher standard in the employment context – an interlocutory injunction can have wide-reaching consequences on the employee's ability to earn a livelihood.

Justice Eamon found that a non-solicitation order would significantly impact the respondents' ability to grow their business, and restrict their ability to earn a livelihood. Ultimately, he saw no reason to differentiate between the application of the higher standard to restrictive covenants simply because they arise from written agreements as opposed to other sources of obligations.

b. Application

i. Did the applicant meet the strong prime facie case?

The Court declined to find that any of the Defendants were fiduciaries, stating that low-level employees with mere access to or knowledge of customer information, and having day to day dealings with the customers, do not become fiduciaries simply by virtue of the relationships that they build.

When it came to allegations that the Defendants stole confidential information, there was no evidence on the record that anything was taken: no surveillance footage, no forensic records of client lists being downloaded, or any emails of the Defendants taking that information. The applicants had names of some patients on their phone, but this information was collected over the years. While the Court saw it as suspicious that patients moved their files over to the Defendants' pharmacies, there was simply no evidence that confidential information was stolen and used in solicitation efforts.

GG also argued that there was a breach of duty of fidelity and loyalty by one of the employees, who became involved as a shareholder in another pharmacy while also continuing to be employed by GG. Court found that this conduct – being involved in a competing pharmacy and soliciting friends/family away from the employer and to the other venture – met the strong prima facie standard. Nevertheless, the duty of loyalty is only owed during employment. As such, there was no continued obligation not to complete or solicit after the employment ended.

The Court also dismissed GG's allegations that there was a conspiracy to injure. The only evidence on this point was an affidavit from a third party attesting to one of the Defendants indicating that he did not care if the pharmacy was successful, and that his motivation for opening a competing business was to harm GG's principal director. Justice Eamon did not see this evidence as establishing anything other than possibly a personal dislike towards the director. He concluded that the allegations of conspiracy did not rise above speculation.

ii. Is there irreparable harm?

The Court found that loss of patients due to solicitation would be compensable in damages and did not constitute irreparable harm. Nevertheless, it found that damage to goodwill, in the form of loss of patient relationships and referrals, could constitute harm that was impossible to quantify. If the applicant had demonstrated a case of misuse of confidential information to the required standard, Justice Eamon indicated that he would have found irreparable harm from loss of customer referrals.

iii. Does balance of convenience favour the applicant?

The evidence was that only a small fraction of GG's client base left for the Defendants' pharmacies. At the same time, prohibiting the Defendants from soliciting customers would significantly impact their ability to grow their business. The Court found that GG was better equipped to withstand the absence of an injunction given that its business was well-established. Further, due to the relative weakness of GG's case, restrictions on the Defendants' ability to earn a livelihood were not warranted.

2. Exclusion of evidence: should secret recordings be permitted into evidence?

Both sides filed evidence in the form of conversations that were covertly recorded. GG applied to strike the affidavits containing this evidence, arguing that illegally obtained evidence is inadmissible. The Court confirmed that illegally or surreptitiously obtained evidence is admissible in civil proceedings.

Conclusions and lessons

Employers seeking to enjoin competition and solicitation by former employees will be required to establish a strong prima facie case, meaning that they are likely to prevail at trial. The evidence required to do so needs to be more than mere speculation; one would expect to see forensic records, emails, or third-party affidavits attesting to solicitation. While reliance on inferences is possible, such as in cases where a substantial portion of a client base transfers its business, an employer seeking to rely on mere inferences, in the absence of any hard evidence, will face a significant uphill battle.

Where an employer has no restrictive covenant in place with an employee that has significant client relationships, but no managerial duties or other "high-level" responsibilities, such an employee is unlikely to be found to owe any fiduciary duties and thus, will not owe any obligation not to compete upon departure.

Employees that become involved in a competing business during their employment may be found in breach of their duty of loyalty by soliciting friends and family to their new venture.

If you have any questions about the decision please contact Daria Pankratyeva or Trevor McDonald.