The Confusing Law of Employment Injunctions
There's a fairly common scenario in employment law: An employee leaves his or her former employer, and either joins a competitor or starts up a competing business.
The default position is that most employees are perfectly entitled to engage in competitive activities, including but not limited to soliciting customers of the former employer. Understandably, a lot of employers take issue with this, and argue that there is some obligation on the employee to not do so.
These obligations can arise from a couple different places. Firstly, employers often require employees to sign restrictive covenants, limiting their ability to compete and/or to solicit customers and/or other employees of the business. These agreements can be difficult to enforce, but in certain circumstances, reasonable restrictions may be enforceable.
Secondly, certain kinds of employees owe "fiduciary" obligations to an employer, including an obligation not to compete 'unfairly'. There are certain categories of fiduciaries, but the ones we're usually talking about are senior managers, and 'key employees'. (The exact scope of the 'key employee' category is a bit amorphous, turning on a high degree of employer vulnerability to competition by the employee. It sometimes seems that the courts use this 'key employee' category as a remedial solution for factual scenarios where the employee's competitive activity just seems unfair, but the employer has not implemented any enforceable covenants to restrain it.)
Litigation over this type of competition is probably the second-most popular type of court proceeding in employment law (second to wrongful dismissal). Most of the time, the employer commences an action against the employee, and then immediately seeks an 'interlocutory' (as in, one during proceedings) order blocking the competitive activity.
In practice, win or lose, most of those actions stop there. If the employer loses, it's seldom a claim worth litigating to trial. If the employer wins, then the result is that the injunction will be effective until trial (or some earlier point in time), and that's usually the point - so the employer will often not move the proceedings further forward. The 'interlocutory' process effectively determines the rights as between the parties. (In theory, if such a matter goes to trial, and the employer wins, there may be additional damages; if the employee wins, then the employer may be liable for losses flowing from the injunction. But while these interlocutory proceedings are really common, trials of these matters are almost unheard of.)
There's a very well-established test for interlocutory injunctions, known as RJR-MacDonald. In most classes of cases, the plaintiff needs to establish three things: Firstly, that there's a 'serious issue to be tried'. This is a low threshold, basically establishing that the underlying action isn't hopeless from the outset. Secondly, that 'irreparable harm' would flow if the injunction is not granted - that if the responding party can continue with its activities, the plaintiff will suffer losses that can't be compensated through money. Thirdly, that the 'balance of convenience' favours the plaintiff: That the consequences of wrongly denying the injunction are worse than the consequences of wrongly granting it.
In certain classes of cases - fairly uncontroversially in cases where the order would interfere with a person's ability to earn an income - the first stage of the test is higher, requiring a "strong prima facie case" instead of just a "serious issue to be tried". The higher test essentially requires the the plaintiff to establish that the action will almost certainly be successful.
There's a very recent case out of the Ontario Superior Court of Justice, Stress-Crete Limited v. Harriman (hat-tip to Devan Marr for pointing it out), that has several unusual features.
The facts are relatively common: Harriman was employed by Stress-Crete, and he apparently signed an agreement that he wouldn't compete for 2 years within 750 miles of any Stress-Crete facility, as well as a 2-year non-solicitation clause and confidentiality clause. He then resigned, and went to work for the competition.
Justice Andrew Goodman concluded that the language of the non-comp was overbroad, because it encompassed all of Stress-Crete's North American operations. This decision is well in line with the established case law. He also noted that non-solicitation clauses and confidentiality clauses don't require reasonable geographical limitations - a conclusion also in line with reported case law, and proceeded to enforce the terms of the non-solicitation and confidentiality clauses.
But there are a few issues here that seem unusual.
(1) Serious Issue to Be Tried
Justice Goodman was clearly alive to the distinction between 'serious issue to be tried' and 'strong prima facie case'...but it's not entirely clear how he applied that distinction.
He referred to some case law which suggests that the party seeking the injunction might be held to a lower standard on the second and third branches of the RJR-MacDonald test if it established a higher degree of certainty on the first stage. (For instance, if we're very confident that the plaintiff will succeed in its case, maybe we're a little less concerned about 'balance of convenience', and how bad the consequences would be to the defendant.)
The choice of standard is important. There are reasons why plaintiffs are usually required to meet the higher threshold in employment law injunction cases: While you sometimes see discussion, as in this case, that suggests that the higher standard is necessary because of the hardship it imposes on employees, the real reason is more fundamental, and transcends transcends employment law.
In RJR-MacDonald, the Supreme Court recognized two categories of cases where the higher standard would apply: "The first arises when the result of the interlocutory motion will in effect amount to a final determination of the action. This will be the case either when the right which the applicant seeks to protect can only be exercised immediately or not at all, or when the result of the application will impose such hardship on one party as to remove any potential benefit from proceeding to trial." The second category arises where the facts are not substantially in dispute.
Post-employment injunctions fall within the first category. It's not simply an issue that we're reluctant to impose restraints of trade (though we are), and it's not simply an issue that we should be reluctant to keep people from being able to earn a living (though that's a real concern, too). In these cases, the core question is whether or not the employee is entitled to engage in certain competitive activities in the immediate period post-employment. By the time a trial is plausible, that entire period will usually have elapsed.
It appears that Justice Goodman applied the 'serious issue to be tried' standard here. If we were talking about a 'conventional' case of a plaintiff seeking an interlocutory injunction, this might arguably be a reversible error. But for other reasons, it's even more problematic than that.
(2) Permanent Injunctions
There is surprisingly little case law on the test for permanent injunctions, but one thing is pretty clear: It's not the RJR-MacDonald test. RJR-MacDonald is about the adjudication of rights on an interim basis, prior to the courts having an appropriate opportunity to give the issue a full and fair hearing on the merits. Tests like "serious issue to be tried" reference a possible later trial, and attempt to divine what the outcome of such a trial is likely to be. Following a trial, the interlocutory injunction will expire - replaced, or not, by a permanent injunction imposed by the trial court.
The test for a permanent injunction is that the party seeking it is required to establish its legal rights, prove that damages would be an inadequate remedy, and show that there is no impediment to the Court's jurisdiction to grant an injunction.
Permanent injunctions are what we call an 'equitable remedy'. Traditionally, courts of law will just award damages. But ordering a person to do an act, or refrain from doing an act, is a power that the courts have through doctrines of equity. The fundamental question as to whether or not an equitable remedy is appropriate is whether or not an award of damages will adequately compensate the plaintiff - in other words, whether or not the plaintiff will suffer 'irreparable harm'. The second stage of the tests for interlocutory and permanent injunctions are effectively identical.
But the first and third stages of the RJR-MacDonald test contemplate that there will be some future hearing on the merits of the issue, and look at the likelihood of different results, and the severity of the consequences of those results. A permanent injunction can be issued only after that hearing on the merits, at which point there's no reason to speculate: If the plaintiff has established a right calling for a remedy, then there's no need to ask whether or not the plaintiff will succeed; he has succeeded.
That Justice Goodman issued a permanent injunction on the basis of a 'serious issue to be tried' is, with all due respect, a straightforward error of law.
(3) Procedural Questions
As a terminological note...in Ontario, an "action" is a proceeding usually commenced by a statement of claim - basically, your conventional 'law suit', which can culminate in a trial. An "application" is something different and distinct, a more summary proceeding to determine certain types of disputes, designated by statutes or the Rules of Civil Procedure themselves. A "motion" is an interlocutory proceeding within an underlying action or application.
I note this because Albertan readers have something a simpler lexicon: All court proceedings are "actions"; an Ontario 'application' is equivalent to an "originating application" in Alberta; and an Ontario 'motion' is equivalent to an "application" in Alberta. So there's a nuance that might be lost on Alberta lawyers, in that the parties are referred to as "applicant" and "respondent".
That terminology is only appropriate if Stress-Crete proceeded by way of application, which largely appears to be the case. (Otherwise, Stress-Crete might be a 'plaintiff' or a 'moving party', but not an 'applicant'.)
This is highly unusual, and there's a real question as to whether it's an appropriate process at all for this type of issue. The only arguable basis that I can see would be by characterizing it as a "matter where it is unlikely that there will be any material facts in dispute requiring a trial", per Rule 14.05(3)(h).
It's complicated. In 2010, Ontario changed its summary judgment rules to broaden the scope of the powers of a judge on a motion for summary judgment (in an action). In 2014, the Supreme Court interpreted this new language broadly, arguing for a 'culture shift' toward summary adjudication. The new phrase in the summary judgment rule, asking whether there is a genuine issue "requiring a trial" was interpreted to give judges a broad discretion to determine whether or not a factual dispute 'requires' a trial, or if the interests of justice can be better served by determining the factual dispute summarily.
In January 2019 - just over 4 months ago - the phrase "requiring a trial" was added to Rule 14.05(3)(h). Which probably has a similar effect, and probably gives courts a broader jurisdiction to hear matters by way of application if it might otherwise be suitable for summary adjudication.
If this was, in fact, an application, then there should have been some analysis of whether or not it was appropriate to decide the matter as an application under the new Rule 14.05(3) - i.e. whether or not a final determination of the issues was possible without 'requiring a trial'; then a final determination should have been reached.
This is a complex area of law, always containing a number of complicated factual and legal questions.
I mentioned earlier that I am sceptical of the doctrine that a strong prima facie case allows for a relaxed standard of 'irreparable harm' - this is because irreparable harm is an inherent part of the test for equitable relief, even after a full hearing on the merits: Even if we can say, "Yes, we've had a full and fair hearing, and the courts have concluded finally that the plaintiff's rights have been violated", it's still not appropriate to grant equitable relief absent proof of irreparable harm. Indeed, even in RJR-MacDonald itself, the Supreme Court was less than enthusiastic about the proposition, finding that "To the extent that this exception exists at all," it wasn't applicable in the circumstances of that case.
While most of these cases tend toward adopting the "strong prima facie case" standard, there are endless permutations that get debated: What about fiduciary obligations? Non-solicitation clauses only? Most of the case law applies the higher threshold in a pretty comprehensive way in all cases "involving injunctions seeking to restrain a former employee from competing with, or soliciting customers of, his former employer".
As well, the results in these cases still seem overwhelmingly contextual. Legal and relevant factual considerations aside, the question of whether or not to enforce a non-comp, or to find and enforce fiduciary obligations, tends to turn more on just how unfair the employee's conduct has been.
It remains important for employees and employers to get legal assistance to navigate this system. Employers who want to protect their interests against departing employees should consult with qualified lawyers about it - preferably at the outset of the employment relationship. Employees who are considering competing with their previous employer, who might arguably be bound to restrictive covenants or fiduciary duties, should get legal assistance before they even leave, to help them manage their departure and maximize their chances of defending a later injunction proceeding.
The default position is that most employees are perfectly entitled to engage in competitive activities, including but not limited to soliciting customers of the former employer. Understandably, a lot of employers take issue with this, and argue that there is some obligation on the employee to not do so.
These obligations can arise from a couple different places. Firstly, employers often require employees to sign restrictive covenants, limiting their ability to compete and/or to solicit customers and/or other employees of the business. These agreements can be difficult to enforce, but in certain circumstances, reasonable restrictions may be enforceable.
Secondly, certain kinds of employees owe "fiduciary" obligations to an employer, including an obligation not to compete 'unfairly'. There are certain categories of fiduciaries, but the ones we're usually talking about are senior managers, and 'key employees'. (The exact scope of the 'key employee' category is a bit amorphous, turning on a high degree of employer vulnerability to competition by the employee. It sometimes seems that the courts use this 'key employee' category as a remedial solution for factual scenarios where the employee's competitive activity just seems unfair, but the employer has not implemented any enforceable covenants to restrain it.)
Litigation over this type of competition is probably the second-most popular type of court proceeding in employment law (second to wrongful dismissal). Most of the time, the employer commences an action against the employee, and then immediately seeks an 'interlocutory' (as in, one during proceedings) order blocking the competitive activity.
In practice, win or lose, most of those actions stop there. If the employer loses, it's seldom a claim worth litigating to trial. If the employer wins, then the result is that the injunction will be effective until trial (or some earlier point in time), and that's usually the point - so the employer will often not move the proceedings further forward. The 'interlocutory' process effectively determines the rights as between the parties. (In theory, if such a matter goes to trial, and the employer wins, there may be additional damages; if the employee wins, then the employer may be liable for losses flowing from the injunction. But while these interlocutory proceedings are really common, trials of these matters are almost unheard of.)
There's a very well-established test for interlocutory injunctions, known as RJR-MacDonald. In most classes of cases, the plaintiff needs to establish three things: Firstly, that there's a 'serious issue to be tried'. This is a low threshold, basically establishing that the underlying action isn't hopeless from the outset. Secondly, that 'irreparable harm' would flow if the injunction is not granted - that if the responding party can continue with its activities, the plaintiff will suffer losses that can't be compensated through money. Thirdly, that the 'balance of convenience' favours the plaintiff: That the consequences of wrongly denying the injunction are worse than the consequences of wrongly granting it.
In certain classes of cases - fairly uncontroversially in cases where the order would interfere with a person's ability to earn an income - the first stage of the test is higher, requiring a "strong prima facie case" instead of just a "serious issue to be tried". The higher test essentially requires the the plaintiff to establish that the action will almost certainly be successful.
Stress-Crete Limited v. Harriman
There's a very recent case out of the Ontario Superior Court of Justice, Stress-Crete Limited v. Harriman (hat-tip to Devan Marr for pointing it out), that has several unusual features.
The facts are relatively common: Harriman was employed by Stress-Crete, and he apparently signed an agreement that he wouldn't compete for 2 years within 750 miles of any Stress-Crete facility, as well as a 2-year non-solicitation clause and confidentiality clause. He then resigned, and went to work for the competition.
Justice Andrew Goodman concluded that the language of the non-comp was overbroad, because it encompassed all of Stress-Crete's North American operations. This decision is well in line with the established case law. He also noted that non-solicitation clauses and confidentiality clauses don't require reasonable geographical limitations - a conclusion also in line with reported case law, and proceeded to enforce the terms of the non-solicitation and confidentiality clauses.
But there are a few issues here that seem unusual.
(1) Serious Issue to Be Tried
Justice Goodman was clearly alive to the distinction between 'serious issue to be tried' and 'strong prima facie case'...but it's not entirely clear how he applied that distinction.
He referred to some case law which suggests that the party seeking the injunction might be held to a lower standard on the second and third branches of the RJR-MacDonald test if it established a higher degree of certainty on the first stage. (For instance, if we're very confident that the plaintiff will succeed in its case, maybe we're a little less concerned about 'balance of convenience', and how bad the consequences would be to the defendant.)
One line of cases in Ontario has found that the higher standard of a strong prima facie case should be met where parties are seeking to enforce restrictive covenants. In these cases, if the higher standard is met, less emphasis is placed on the second and third parts of the injunction test. Still, other jurisprudence provides that a court need not choose between a higher or a lower threshold but, depending on the strength of a plaintiff’s case, irreparable harm and the balance of convenience will be given either more or less weight; less if a strong prima facie case, more if it is simply a serious issue to be tried.It's true that irreparable harm and balance of convenience tend to be given less weight if the case is proven on a strong prima facie case. (I have my doubts about the appropriateness of relaxing the requirement for irreparable harm, frankly. I'll come back to that later.) But I'm not at all familiar with any authorities supporting the proposition that the court can just treat it as a sliding scale of weight, without picking a standard.
The choice of standard is important. There are reasons why plaintiffs are usually required to meet the higher threshold in employment law injunction cases: While you sometimes see discussion, as in this case, that suggests that the higher standard is necessary because of the hardship it imposes on employees, the real reason is more fundamental, and transcends transcends employment law.
In RJR-MacDonald, the Supreme Court recognized two categories of cases where the higher standard would apply: "The first arises when the result of the interlocutory motion will in effect amount to a final determination of the action. This will be the case either when the right which the applicant seeks to protect can only be exercised immediately or not at all, or when the result of the application will impose such hardship on one party as to remove any potential benefit from proceeding to trial." The second category arises where the facts are not substantially in dispute.
Post-employment injunctions fall within the first category. It's not simply an issue that we're reluctant to impose restraints of trade (though we are), and it's not simply an issue that we should be reluctant to keep people from being able to earn a living (though that's a real concern, too). In these cases, the core question is whether or not the employee is entitled to engage in certain competitive activities in the immediate period post-employment. By the time a trial is plausible, that entire period will usually have elapsed.
It appears that Justice Goodman applied the 'serious issue to be tried' standard here. If we were talking about a 'conventional' case of a plaintiff seeking an interlocutory injunction, this might arguably be a reversible error. But for other reasons, it's even more problematic than that.
(2) Permanent Injunctions
There is surprisingly little case law on the test for permanent injunctions, but one thing is pretty clear: It's not the RJR-MacDonald test. RJR-MacDonald is about the adjudication of rights on an interim basis, prior to the courts having an appropriate opportunity to give the issue a full and fair hearing on the merits. Tests like "serious issue to be tried" reference a possible later trial, and attempt to divine what the outcome of such a trial is likely to be. Following a trial, the interlocutory injunction will expire - replaced, or not, by a permanent injunction imposed by the trial court.
The test for a permanent injunction is that the party seeking it is required to establish its legal rights, prove that damages would be an inadequate remedy, and show that there is no impediment to the Court's jurisdiction to grant an injunction.
Permanent injunctions are what we call an 'equitable remedy'. Traditionally, courts of law will just award damages. But ordering a person to do an act, or refrain from doing an act, is a power that the courts have through doctrines of equity. The fundamental question as to whether or not an equitable remedy is appropriate is whether or not an award of damages will adequately compensate the plaintiff - in other words, whether or not the plaintiff will suffer 'irreparable harm'. The second stage of the tests for interlocutory and permanent injunctions are effectively identical.
But the first and third stages of the RJR-MacDonald test contemplate that there will be some future hearing on the merits of the issue, and look at the likelihood of different results, and the severity of the consequences of those results. A permanent injunction can be issued only after that hearing on the merits, at which point there's no reason to speculate: If the plaintiff has established a right calling for a remedy, then there's no need to ask whether or not the plaintiff will succeed; he has succeeded.
That Justice Goodman issued a permanent injunction on the basis of a 'serious issue to be tried' is, with all due respect, a straightforward error of law.
(3) Procedural Questions
As a terminological note...in Ontario, an "action" is a proceeding usually commenced by a statement of claim - basically, your conventional 'law suit', which can culminate in a trial. An "application" is something different and distinct, a more summary proceeding to determine certain types of disputes, designated by statutes or the Rules of Civil Procedure themselves. A "motion" is an interlocutory proceeding within an underlying action or application.
I note this because Albertan readers have something a simpler lexicon: All court proceedings are "actions"; an Ontario 'application' is equivalent to an "originating application" in Alberta; and an Ontario 'motion' is equivalent to an "application" in Alberta. So there's a nuance that might be lost on Alberta lawyers, in that the parties are referred to as "applicant" and "respondent".
That terminology is only appropriate if Stress-Crete proceeded by way of application, which largely appears to be the case. (Otherwise, Stress-Crete might be a 'plaintiff' or a 'moving party', but not an 'applicant'.)
This is highly unusual, and there's a real question as to whether it's an appropriate process at all for this type of issue. The only arguable basis that I can see would be by characterizing it as a "matter where it is unlikely that there will be any material facts in dispute requiring a trial", per Rule 14.05(3)(h).
It's complicated. In 2010, Ontario changed its summary judgment rules to broaden the scope of the powers of a judge on a motion for summary judgment (in an action). In 2014, the Supreme Court interpreted this new language broadly, arguing for a 'culture shift' toward summary adjudication. The new phrase in the summary judgment rule, asking whether there is a genuine issue "requiring a trial" was interpreted to give judges a broad discretion to determine whether or not a factual dispute 'requires' a trial, or if the interests of justice can be better served by determining the factual dispute summarily.
In January 2019 - just over 4 months ago - the phrase "requiring a trial" was added to Rule 14.05(3)(h). Which probably has a similar effect, and probably gives courts a broader jurisdiction to hear matters by way of application if it might otherwise be suitable for summary adjudication.
If this was, in fact, an application, then there should have been some analysis of whether or not it was appropriate to decide the matter as an application under the new Rule 14.05(3) - i.e. whether or not a final determination of the issues was possible without 'requiring a trial'; then a final determination should have been reached.
Concluding Remarks
This is a complex area of law, always containing a number of complicated factual and legal questions.
I mentioned earlier that I am sceptical of the doctrine that a strong prima facie case allows for a relaxed standard of 'irreparable harm' - this is because irreparable harm is an inherent part of the test for equitable relief, even after a full hearing on the merits: Even if we can say, "Yes, we've had a full and fair hearing, and the courts have concluded finally that the plaintiff's rights have been violated", it's still not appropriate to grant equitable relief absent proof of irreparable harm. Indeed, even in RJR-MacDonald itself, the Supreme Court was less than enthusiastic about the proposition, finding that "To the extent that this exception exists at all," it wasn't applicable in the circumstances of that case.
While most of these cases tend toward adopting the "strong prima facie case" standard, there are endless permutations that get debated: What about fiduciary obligations? Non-solicitation clauses only? Most of the case law applies the higher threshold in a pretty comprehensive way in all cases "involving injunctions seeking to restrain a former employee from competing with, or soliciting customers of, his former employer".
As well, the results in these cases still seem overwhelmingly contextual. Legal and relevant factual considerations aside, the question of whether or not to enforce a non-comp, or to find and enforce fiduciary obligations, tends to turn more on just how unfair the employee's conduct has been.
It remains important for employees and employers to get legal assistance to navigate this system. Employers who want to protect their interests against departing employees should consult with qualified lawyers about it - preferably at the outset of the employment relationship. Employees who are considering competing with their previous employer, who might arguably be bound to restrictive covenants or fiduciary duties, should get legal assistance before they even leave, to help them manage their departure and maximize their chances of defending a later injunction proceeding.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
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