BC Court of Appeal Raises Bar on Injunctions to Enforce Non-Solicit Clauses

The British Columbia Court of Appeal has raised the bar considerably for employers hoping to obtain an injunction to enforce a non-solicit clause pending trial.

In Edward Jones v. Voldeng, 2012 BCCA 295, released July 3, 2012, the court held that Edward Jones, a securities firm that sought to enforce a six-month non-solicit clause against Voldeng, had not established it would suffer irreparable harm if the interim injunction was not granted.

The decision is one of few Canadian appellate court decisions addressing whether interim injunctions should be granted to restrain alleged breaches of non-solicit and non-compete clauses and hence will be very influential in future cases, particularly in B.C.

Voldeng was subject to a six-month non-solicit provision in his employment contract. He left employment with Edward Jones and took up employment with RBC Dominion Securities. He immediately sent out a communication to his clients announcing his move and indicating he would personally call his clients in coming days to answer any questions they may have.

The B.C. Supreme Court granted an interim injunction, finding, amongst other things, that if the injunction were not granted, Edward Jones could suffer irreparable harm. It also found there was an arguable case that his communication to clients breached the non-solicit clause.

Voldeng sought leave to appeal, obtained it and, remarkably, was able to have his application heard by the Court of Appeal a mere six weeks after the initial order was granted by the Supreme Court.

The Court of Appeal overturned the decision to grant the interim injunction on the basis that Edward Jones had not established it would suffer irreparable harm if the injunction was not granted. In doing so, the Court distinguished a decision by Mr. Justice Groberman, as he then was, in MD Management Limited v. Dhut, 2004 BCSC 513.

In Dhut, Mr. Justice Groberman (who now sits on the Court of Appeal), held that damages would not be an adequate remedy for a breach of a non-solicitation clause by a financial consultant, stating:

I have some sympathy for (the) argument that the arrangements at issue in this case are purely concerned with financial services and that the only losses that might accrue to the plaintiff are financial.  I am, however, not persuaded that damages will prove an adequate remedy.  If the plaintiff succeeds at trial, it will be virtually impossible to unscramble the egg and determine how much the plaintiff lost as a result of violations of the agreement.  Mr. Dhut will argue, as he did before me, that many clients will follow him to ScotiaMcLeod not because of any solicitation but because they value his services.

(at para. 42)

In Voldeng, Mr. Justice Chiasson, on behalf of the Court of Appeal, distinguished Dhut on the basis that in Dhut the client list was provided to the defendant financial advisor by his employer, that the employer was a specialized venture that dealt only with members of the medical profession and that there may have been issues of lost reputation at stake.

The Court did not directly address, however, the passage quoted above addressing the irreparable harm component. Perhaps out of deference to Mr. Justice Groberman, who now sits as a colleague on the Court of Appeal (but was not on this panel), the Court declined to simply say that it disagreed with his decision in Dhut. In my respectful view, it would have been preferable for the Court to do so rather than attempt to distinguish the case on grounds unrelated to the issues raised by Mr. Justice Groberman in the cited passage.

The Court also attempted to distinguish between irreparable harm in the context of a non-solicit agreement and irreparable harm flowing from a non-competition agreement. With respect, the attempted distinction is not persuasive. Here is what the court said about non-solicit agreements:

The respondent asserts that it may not be possible to link a defendant’s breach to damages sustained by a plaintiff.  In my view, in this case, at best, that argument raises an issue of causation; of liability, rather than the difficulty of calculating damages.  The authorities repeatedly have held that difficulty in calculation is not a bar to awarding damages.  Even where irreparable harm is in issue, a plaintiff must establish a link between the conduct of the defendant and potential damages.

(at para. 40)

And here is what the court said about non-competition clauses:

Non-competition covenants restrict a departing employee from seeking business generally.  It usually will not be possible to tell whether business is lost to the employee’s new employer as a result of prohibited competition as opposed to legitimate competition.  Such damages, not being calculable, generally do constitute irreparable harm. 

(at para. 37)

With due respect to the Court, it is difficult to see how the difficulty of proving damages is solely an issue of causation when it comes to non-solicit clauses, but amounts to irreparable harm when it comes to non-competition agreements.

In both cases, there are elements of legally permissible and legally impermissible activity which may each attract clients from the employee’s former employer, making it difficult, in Mr. Justice Groberman’s words from Dhut, to  “unscramble the egg and determine how much the plaintiff lost as a result of violations of the agreement.”

In the case of breach of a non-competition agreement, the new employer’s own business activity (legally permissible) may be the cause of some of the shift in business. In the case of breach of a non-solicit clause, the mere fact of the departing employee leaving to set up business (legally permissible) may in itself, without solicitation, cause a shift in business. Both cases cause difficulty in determining damages but to say that in one case the issue is causation and in the other it amounts to irreparable harm is difficult to accept.

Finally, one wonders if the Court was asked to consider whether it is sending a signal to employers and their legal counsel to use non-compete clauses as opposed to non-solicit clauses. For that likely will be an unintended consequence of this decision.

There is a long line of cases in Canada holding that restrictive covenants should go no further than necessary to restrict an employer’s legitimate proprietary interests. Applying this rule, courts have held that non-compete clauses, being more intrusive on an individual’s right to earn a livelihood, should not be enforced where a non-solicit clause would be sufficient.

Voldeng, it is submitted, may well have the effect of employers inserting non-competition clauses in their employment agreements as opposed to non-solicitation clauses. Given the apparent greater likelihood of the Courts finding irreparable harm for breach of a non-compete agreement as opposed to a non-solicit clause, employers will need to consider including non-compete clauses in their agreements where previously they may have been content with a non-solicit clause.

 

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