June 28, 2012

Court Confirms High Threshold to Enjoin a Former Employee from Engaging in Competition

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In Survival Systems Training Ltd. v. Survival Systems Ltd., 2012 NSSC 202 (“Survival Systems”), the Nova Scotia Supreme Court recently dismissed a company’s motion for a injunction to prevent former employees from engaging in competitive activities. The Court confirmed that employers must meet a high threshold in order secure an injunction which would effectively prevent a former employee from working in their chosen vocation.

In the case, Survival Systems Training Limited (SSTL) terminated its Chief Operating Officer and several other employees subsequently resigned from the company. These former employees then began working for Survival Systems Limited (SSL), which is in direct competition with SSTL. Both businesses provide safety training services. The Court found that the former employees were developing and offering training courses which were substantially the same as the services they provided at SSTL.

A significant amount of SSTL’s business transferred to SSL and SSTL brought an action against SSL and the former employees. SSTL then sought an interlocutory injunction to restrain the defendants from contacting SSTL customers, encouraging SSTL employees to compete with SSTL and otherwise competing with SSTL. An interlocutory injunction is a temporary remedy which prevents a party from engaging in specified activities until the end of the trial of a court action. The test for an interlocutory injunction is well established. Justice Edwards stated the test as follows:

1. Is there a serious issue to be tried?
2. Will the Plaintiff suffer irreparable harm if the injunction is not granted?
3. Does the balance of convenience favour the granting of an injunction?

The issue in Survival Systems was whether a higher threshold should be applied in the first stage of the test. The defendants argued that SSTL should be required to show that it has a strong prima facie case rather than that there is a serious issue to be tried. The strong prima facie case requirement is a much more difficult threshold to meet. It requires the party seeking the injunction to show that they will likely succeed at trial. Under the serious issue to be tried requirement, the court does not conduct a detailed review of the merits of the case because the party only needs to show that the claim is not frivolous or vexatious.

Justice Edwards concluded that “it is clear that the application of a more stringent standard is required” in the case. He agreed with the proposition that, absent an enforceable restrictive covenant (i.e. a non-solicitation or non-competition clause), an injunction should only be granted against former employees in the clearest of circumstances.

Some, but not all, of the employees had non-competition clauses in their employment contracts. However, Justice Edwards summarily dismissed any argument that the clauses could be used against the former employees. He found that they are “clearly not enforceable” because they were for five years without any geographic limitation. Therefore, he concluded that SSTL had to establish a strong prima facie case in order for the Court to grant the injunction.

The key issues in the main action were whether the defendants breached their fiduciary obligations to SSTL and whether they are unfairly competing with SSTL. Justice Edwards reviewed the evidence and the law on these issues in detail. He ultimately concluded that while there was a serious issue to be tried, “the evidence stops just short of establishing a strong prima facie case.”  As a result, the motion for an injunction was denied and the former employees are able to continue to compete with SSTL.

This case illustrates one of the challenges in attempting to restrain former employees from engaging in competition. As it can take years for an action to proceed to trial, an injunction is an important remedy to protect the former employer’s interests during that period. Without an injunction, the former employees can compete with their former employers until the trial. This can significantly harm the former employer’s business interests. The courts have held that this risk must be balanced with the former employees’ interest in working in their chosen vocation. An injunction prevents those individuals from working in their profession for a number of years. This could be very unfair if the trial ultimately found that they did not engage in misconduct. As a result the courts have determined that it is appropriate to apply the rigorous strong prima facie case standard to injunctions against former employees. Unfortunately for former employers, this means that they must effectively prove their case before trial in order to protect their interests.

If you have any questions or would like to discuss this topic further, please contact Alison Bird at coxandpalmer.com.


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