Non-Solicitation Injunctions - Issue to be Tried

 In a recent KB decision, Badger Infrastructure v. Parent-Walker, the Court took an odd perspective in relation to the burden of a plaintiff seeking an injunction against a former employee and their new organizations. 

The injunction application was ultimately dismissed, and probably rightly so, but there are reasons to doubt the analysis the court used to achieve its outcome. 

The employee ("Walker") was dismissed on allegations of just cause; a separate action is ongoing in Ontario small claims court for wrongful dismissal. Walker went on to work for a competitor, and the former employer ("Badger") brought this action arguing that Walker was misusing confidential information and breaching non-solicitation and fiduciary obligations. 

Walker took the position that Badger had waived any restrictive covenants. The context for this waiver dealt with the wrongful dismissal action: a wrongfully dismissed employee generally has an obligation to take reasonable steps to find replacement employment, and standing on the restrictive covenants would basically eliminate any hope the employer might have of getting a damage reduction for mitigation. By contrast, taking new employment with a competitor (as he did) reduces Walker's claim against Badger.

To facilitate his mitigation efforts, Badger expressly waived enforcement of "any restrictive covenants" - they later argued that this should be understood as being limited to non-competition obligations, but the court rejected this argument. It's actually a pretty good analysis of how promissory estoppel applies in this sort of situation.

There are a range of factual and legal issues considered in the case, such as Badger arguing that Walker had misused confidential information. The court rejected all these arguments on bases that largely make sense.

The entire application was disposed of on the basis that the employer had not met the first stage of the RJR-MacDonald test. However, it's formulation of the test was problematic.

Issue to be Tried or Strong Prima Facie Case?

In particular, the court found that Badger had to establish a "strong prima facie case" as against Walker; but, because there was no employment relationship with the other defendants (the organizations Walker was now working for), Badger only needed to establish a "serious issue to be tried" as against them.

The 'serious issue to be tried' threshold is the general standard under RJR, applied in most cases, and it's a very low threshold - basically just requiring a plaintiff to show that the claim isn't obviously and fatally flawed. (If a plaintiff meets the first stage of the injunction test, it goes on to the other two stages - proving irreparable harm and balance of convenience - which are often more difficult.)

In some categories of injunction applications, however, the higher threshold of "strong prima facie case" is required. This requires more than proving a possible claim, and requires a judge to be satisfied that there's a high likelihood of the plaintiff succeeding in the claim.

When pursuing an injunction trying to keep a former employee from competing, it's reasonably well-established that the higher threshold of "strong prima facie case" applies, but there is some disagreement as to why.

I explored this issue to a limited extent in my paper, Palm Tree Fiduciaries. The most authoritative doctrinal basis for this treatment is laid out in NWL v. Woods, and adopted in RJR, that the higher threshold is appropriate where "the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action." The logic, applied to employment cases, is that the injunction is dispositive: In most of these cases, the question is whether the employee should be allowed to engage in specified competitive activity for a relatively short period - 6 months, 12 months, 24 months, etc. The final disposition of the case, years down the road, will almost invariably come after any question of ongoing restriction is a moot point.

In practice, very few of these types of cases go to trial. The main concern of both parties is going to surround the injunction itself - far more than a possible damage award for improper competition.

So the NWL exception makes sense for these types of cases.

However, there are a number of cases from lower courts suggesting that this treatment in injunction applications is driven by public policy considerations relating to restraints of trade, the vulnerability of employees, and the inability of the employee to earn a livelihood. This case appears to be in that category, with the court regarding the "strong prima facie case" test as an employment rule that couldn't be applied to the case against the new employer.

My view is that the NWL treatment is the preferred one, and this case emphasizes why that must be so.

On the facts of this case, the court found that Badger had completely failed to establish its burden against any of the defendants; however, it would be easily conceivable on the court's formulation of the test that it might find that the injunction cannot be granted as against the former employee, but can be granted as against their new employer. This would be plainly absurd, prohibiting the organization but not the individual from soliciting the former employer's customers, and effectively amounting to a restraint of trade applying to the individual anyways.

(Pursuing an injunction against both the departing employee and their new company is not at all unusual; the premise is that the new employer can be liable for inducing the employee to breach their obligations to the old employer. While these injunctions are generally difficult to obtain in the first place, when they succeed, it's not uncommon to see relief granted against the new employer. I don't believe I've ever seen a case, however, where relief is granted against the new employer but not against the individual employee.)

Treating the "strong prima facie case" threshold as deriving from the subject matter of the injunction application - that is, that it's an attempt to enforce time-limited restrictions on a person's ability to compete - gives clarity, predictability, and consistency.

By contrast, treating it as an employment-specific rule invites challenging questions and potentially inconsistent treatments relating to how other defendants get treated (as here), and also raises questions over whether it should be easier to enforce restrictive covenants against individuals in other employment-like structures, such as independent contractors or dependent contractors. (If anything, I would argue that it should, in fact, be harder to restrict competitive activity of another business. As I argued in my paper, I think the fiduciary 'key employee' doctrine is completely incompatible with a contractor relationship; and when it's understood that the contractor is operating their own business, restrictions that prevent the contractor from serving other clients should be closely scrutinized.)

Additional Note: Just Cause and Injunctions

There's an important legal and factual issue that attracted no discussion in the decision. In light of the outcome, it's moot, but the employer's burden in this case ought to have been seen as being extraordinarily high, as a result of the dismissal.

The law in Alberta is clear (if not entirely uncontroversial): When you wrongfully dismiss an employee, they are relieved of any non-competition/non-solicitation covenants. This is referred to as the "General Billposting" rule, and the Alberta Court of Appeal has repeatedly affirmed that it applies in Alberta.

If the employer can prove cause, that means that General Billposting doesn't apply, but the burden of proof for just cause is on the employer, and it's a high burden.

That means that, in order to meet its burden, Badger didn't just need to lead a strong prima facie case that Walker owed and breached obligations not to solicit its customers; it also needed to lead a strong prima facie case for just cause.

The fact that this attracts basically no discussion in the decision makes me wonder if Badger even attempted to show its case for cause.

Jurisdiction

Another unusual piece here is that the employment relationship, and the competitive activity, is all in Ontario. I gather that Badger is based in Alberta, and used a contract that conferred "exclusive jurisdiction" for all disputes on the Alberta courts.

This application was heard on an urgent basis, and it sounds like the jurisdictional issues aren't all that well fleshed out - and Walker hadn't yet brought a cross-application of any sort to challenge the court's jurisdiction. The court accepted jurisdiction, seemingly in part because of the urgency.

However, it strikes me that there are potential enforceability concerns about an employment contract in Ontario that confers exclusive jurisdiction on the Alberta courts. Further, beyond the 'jurisdiction simpliciter' question as to whether the Alberta courts can hear the case (which is a low test), there's a further question in my mind about forum non conveniens: Especially in light of my observations about the impact of 'just cause', and the fact that there was an ongoing wrongful dismissal action (litigating, precisely, the just cause question) in the Ontario courts, I don't believe it was appropriate for the employer to commence the action in the Alberta courts.

This leaves the parties in the position that they're litigating two separate actions in two separate Provinces where the question of "did the employer have just cause" is fundamental to both. That's inefficient for the parties and the courts. (It's also practically very weird. While the KB action carries substantial rights of discovery - usually entailing a comprehensive affidavit of records and oral questioning - the Ontario Small Claims Court action would not. But while good many says the Ontario action gets tried first, the parties would not by default be entitled to use evidence gathered through the Alberta discovery process in the Ontario action.)

The more appropriate approach for Badger would have been to commence an action in the Ontario Superior Court of Justice, bring its injunction motion there, and subsequently move to consolidate it with Walker's Small Claims Court action.

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The author is an in-house lawyer in Alberta. Views are the author's alone. This article does not contain legal advice, but general legal information. If you have a legal issue, consult a lawyer.