A waste management company brought an application for an interlocutory injunction against a former employee and his new employer. The company claimed the employee was its managing partner, a director, and a key employee who owed it a fiduciary duty.
The company alleged the employee resigned from his employment, became a senior executive of a competing business, and solicited its customers, resulting in the loss of 90% of its business.
The company sought to prohibit the employee and competing businesses from using confidential information, including client lists and pricing lists, as well as knowledge of clients’ needs and other information unique to each client.
Background and employment relationship
The applicant is a waste management company operating in Calgary. The respondent company carries on a similar, competing business.
The employee was associated with the applicant and is now associated with the respondent company.
The applicant asserts the employee was its managing partner, a director, and a key employee.
The company claims the employee resigned from his employment and became a senior executive of the competing business. The company alleges the employee solicited its customers.
The applicant sought an interlocutory injunction to prohibit the employee and the competing business from using confidential and proprietary information. This included client lists and pricing lists.
The company also sought to prohibit the use of knowledge of clients’ needs and how clients conduct their business.
Claims and defences
The applicant’s claim asserts the employee was employed as its managing partner and a director starting in early 2022.
Accordingly, the company claims the employee was a key employee and owed it a fiduciary duty. The company alleges this duty continued after the termination of his employment.
The applicant alleges it has suffered damages, including lost profits and loss of reputation. The company also claims interference with its economic relations and breach of privacy. The company seeks a declaration that the respondents are in breach of their fiduciary duty.
In his defence, the employee denies that he was a director and key employee. He claims he did not owe a fiduciary duty. The employee asserts his duties were much more limited than alleged.
The employee claims his employment was wrongfully terminated in early 2023. He has commenced an action for wrongful dismissal. The employee denies that he owed a fiduciary duty, but asserts that if he did, that duty was terminated when he was wrongfully dismissed.
Test for interim injunction
The test for an interim injunction is the tripartite test articulated by the Supreme Court. The applicant for an interim injunction must establish a serious issue to be tried.
The applicant must show irreparable harm if the injunction is not granted. The applicant must also show that the balance of convenience lies in its favour.
The first part of the tripartite test requires some assessment of the strength of an applicant’s case. The “serious issue to be tried” threshold merely requires that the issue not be frivolous or vexatious.
In some cases, however, the standard is “strong prima facie case”, requiring the applicant to show it will probably prevail at trial.
The higher standard applies where an employer seeks to place restrictions on a person’s ability to engage in their chosen vocation. These may include interlocutory applications to enjoin a former employee from solicitation or competition.
The higher standard also applies to cases involving alleged breach of fiduciary obligation or breach of confidence.
Right to compete after employment
Ordinarily, once an employment contract has ended, an employee has the right to compete with the former employer.
The law presumes against restraint on trade and commerce. Nevertheless, an ex-employee’s right to compete may be restricted by a restrictive covenant in the employment contract.
The situation is different, however, when the ex-employee owes a fiduciary duty. After the end of an employment relationship, a former fiduciary employee may not use a former employer’s proprietary information in a manner contrary to the former employer’s best interests.
A former fiduciary may not use a former employer’s corporate opportunity unless the former employer has unequivocally decided not to pursue it.
A former fiduciary may not solicit customers of a former employer until a reasonable period of time has elapsed.
A former fiduciary may not offer employment to employees of a former employer until a reasonable period has elapsed. A fiduciary’s duties to the employer do not cease following departure.
Analysis of employee status
According to the case, the applicant’s challenge is to make out a strong prima facie case that the employee had sufficient discretion and power to make business decisions.
The company must show that its legal or practical interests were vulnerable to the exercise of that power or discretion. Both the employee and the company president swore affidavits and were questioned thereon.
The company president claims the employee was hired to be the managing director. In questioning her affidavit, however, she took a different position. She says the employee approached her with the idea of forming what amounts to a joint venture or partnership.
The president says the decision was made to incorporate, with her contributing all the money to commence business.
The employee contributed knowledge and contacts. The president says she and the employee were going to be business partners.
Employment agreement and directorship
There was no written employment agreement with the employee when he started in early 2022. The president sent the employee a draft employment agreement months later that referred to him as operations manager. He never signed it.
The president claims the employee did not like certain features of the draft employment agreement.
She says he said he would tell her what he did not like, but never did. She sent him a draft shareholders agreement at the same time.
The president asserts the employee told her he was either buying her out or quitting.
She did not intend to accept the buyout offer. The president says the employee received a phone call from another company advising him that the president had hired someone to replace him.
Employee’s version of events
The employee asserts his former employer had decided to sell its business. He started looking for a job in late 2021. He claims he was approached and committed to joining the applicant company.
The employee confirms he was verbally told months later that he was to be entitled to 5% of the shares. He swears he was not involved in corporate management.
The employee claims his duties included dispatching disposal truck drivers, taking phone calls and orders from customers, and scheduling jobs.
The employee claims he was required to have prior approval for any important corporate decisions. He claims his spending authority was limited.
The employee denies that he was a director or officer of the applicant company.
Termination and subsequent employment
The employee states he first learned he was “out” when he was told the applicant had hired his replacement. The employee claims he was wrongfully dismissed. He dropped off the keys to the company truck and left the office.
The employee asserts that following his termination, he was contacted by several customers who wanted to know what he was doing.
He claims he told those customers to contact the applicant so they could continue to receive service. The employee started working at the respondent company shortly after his termination.
The employee asserts that after the respondent company started accepting jobs, he was contacted by several customers who advised that they wanted to move their business.
The employee denies taking the applicant’s pricing list or customer list. He says there was no official price list, and he never used one.
Court’s findings on fiduciary status
The employee asserts he was not properly elected or appointed as a director. He appears to have been made aware that incorporation documents designated him a director. The employee argues he did not consent to act as a director as required by legislation.
The court noted that legislation stipulates that a person who is elected or appointed a director is not a director unless the person has acted as a director pursuant to the election or appointment.
The court was not convinced that the parties cared much about the formalities of electing or appointing directors. They did not direct meaningful attention to the legal ramifications of describing the employee as a “director”.
The evidence indicates the employee was aware he had been identified as a director in incorporation documents. He held himself out as managing director on his business cards and in his emails. When the employee ceased working for the applicant, he tendered a written resignation as director.
Employee’s influence and relationship
As operations manager, the employee appears to have been the “face” of the applicant. He dealt directly with clients and appears to have been in a position to significantly influence the applicant’s goodwill.
He may not have handled the money, but his relationship with clients and the influence he wielded, as evidenced by their migration to the competing company, suggests a high degree of vulnerability.
The fact that the applicant was able to continue in business after the employee’s departure does not suggest that it was not vulnerable. The court suspects the president had to adapt quickly and dramatically to the employee’s departure. The evidence satisfies the court that the president would have assumed most of the employee’s responsibilities.
The court concluded that what the employee was doing for the applicant made it vulnerable to his actions. If he was an employee, he was a key employee. The court found the president and employee came together in an environment of mutual interdependence to carry on business.
Confidential information claims
The court examined whether the employee used confidential information. Following termination of employment, an employee is not permitted to use confidential information acquired during employment for their own benefit. An employee is not permitted to use information that is special or peculiar to the ex-employer.
The applicant must do more than assert there is a reasonable inference that the employee must have utilised proprietary, confidential information.
The evidence does not satisfy the court that the applicant is likely to succeed at trial in doing so. It appears that there is common ground that the applicant placed its name on items that it placed on clients’ job sites.
The applicant argues that there is more to confidential information than merely the name and address of its clients. It asserts that the clients’ unique needs and the particular way they conduct their business are confidential information.
Perhaps, but it is also possible that the employee simply knew how to do certain things better.
Application dismissed
The case noted that the waste management business is very competitive. The applicant cannot reasonably be heard to complain that the competing business is using its price lists from over two years ago to unfairly compete.
Changing circumstances in the waste disposal business are likely to have led to modifications in both parties’ pricing protocols.
The customers’ right to choose their service provider is an important consideration in this case.
To tell former customers at this late stage that they cannot deal with the employee accomplishes nothing. It does not ensure those customers will return to the applicant.
The applicant has failed to satisfy the court that it is likely to succeed at trial on the issue of breach of fiduciary duty.
The company has not shown that it will suffer irreparable harm if the request is denied. The balance of convenience does not favour the applicant. The application is dismissed.