Alberta Court Finds Irreparable Harm in Trade Secret Case – Did it also Apply Doctrine of Inevitable Disclosure?

Author: Dean Crawford, KC

SHAC Solutions Inc. v. Guenther, 2024 ABKB 145

Employers seeking interlocutory injunctions to prevent competition or solicitation by former employees often fail to meet the irreparable harm branch of the test for relief, with courts finding that damages can be readily quantified. In a recent decision, however, the Alberta Court of King’s Bench was persuaded that an applicant would suffer irreparable harm if several of its former employees who were using its trade secret were allowed to continue to compete. The decision also raises the question of whether the court, in effect, applied the doctrine of inevitable disclosure. 

Once a trade secret is lost, “money cannot make it a secret again.” With that observation in hand, Justice Hollins of the Alberta Court of King’s Bench held that an applicant company would suffer irreparable harm if not granted an interlocutory injunction prohibiting several of its former employees and directors from competing with it pending trial.

The court’s decision in SHAC Solutions Inc. v Guenther, 2024 ABKB 145 also raises whether the court, without stating it, applied the doctrine of inevitable disclosure, heretofore not known to Canadian law.

SHAC Solutions Inc. manufactures humic acid for use in agricultural, resource extraction and environmental applications. It filed an action against several of its former employees and directors who left SHAC to form and/or work for the corporate respondent, Envirotech Humics Inc. (“EHI”). Amongst other things, SHAC alleged breaches of contractual and common law duties of confidence, breach of fidelity and fiduciary duty and violation by its former CEO of a 12-month non-competition covenant.

Shortly after its establishment, EHI began manufacturing and selling humic acid. SHAC alleged its own process for making the acid was a trade secret and that the respondents were in breach of several post-employment duties in utilizing it.  Justice Hollins agreed.

While information existed in the public domain about possible ingredients and what proportions might yield the best results, the court held that the actual “process of how those ingredients are combined, for example, in what precise proportions, in what order or with what amount of time between steps”, was not public.

All of the individuals familiar with SHAC’s process for manufacturing humic acid were taught how to do so by one of its founding shareholders or someone she had trained. SHAC’s process, the court found, was not written down, “but was taught by one person to another without exception.” Further, SHAC “went to some lengths to protect the actual process it used to make the humic acid.”

A critical piece of evidence was an acknowledgment by one of the individual respondents that he relied on some of the knowledge he obtained form SHAC when he moved to EHI to manufacture humic acid. “Certainly,” the court noted, “the speed with which four people with no real prior experience in manufacturing humic acid were able to incorporate and get a competing product to market implies that they were not learning a brand new manufacturing process from scratch.” (at para. 42)

Applying the strong prima facie test, the court held that:

  1. The SHAC process for manufacturing humic acid was confidential information; 
  2. SHAC’s former CEO had an enforceable non-competition covenant, which he breached;
  3. The former CEO also breached his duties of confidence;
  4. The other respondents, with the exception of one individual, had confidentiality agreements which were not challenged as unenforceable; and
  5. Three of the respondents who formed EHI owed fiduciary duties to SHAC, which they also breached.  

The fact that EHI had been able to “jump-start production of humic acid virtually immediately, with all of SHAC’s former employees, making and selling a product … to the same client base”, spoke to the importance of enforcing the non-competition covenant against SHAC’s CEO. The court held it need not do so, however, as SHAC’s stronger case was based on breach of confidentiality and fiduciary duty.

The court applied the tri-parte test for injunctive relief as set out by the Supreme Court of Canada in RJR –MacDonald Inc. v. Canada, 1994 CanLII 117 (SCC):

  1. Is there a serious question to be tried?
  2. Will the applicant suffer irreparable harm if the injunction is not granted?; and
  3. Does the balance of convenience favour the applicant or respondent?

On the first branch, the court elevated the test to a “strong prima facie case” given the impact on the respondents’ livelihood, though was not persuaded it need do so.  In any event, the applicant readily satisfied the elevated requirement.

Irreparable Harm Established

Meeting the irreparable harm branch of the test often is difficult in employee competition litigation, where the applicant must satisfy the court that an award of damages following trial would not be a sufficient remedy. Here, however the court was satisfied SHAC had met the burden.

While the defection of existing customers “is the definition of quantifiable damages”, the court held that SHAC’s damages went well beyond this. It reasoned:

…for a business in peril, there are other ramifications of this dynamic. For example, SHAC has lost all or virtually all its active employees to EHI. The process of hiring and training new employees or scrambling to cover the operations and administration of a small company are damages that are not easily calculable. That situation, particularly competing against a company that was ready to launch virtually immediately, has put SHAC in an extremely defensive position where it is susceptible, not just to losing existing business but to losing prospective customers to EHI as well (see Enviro Trace at para. 37).
(at para. 86)

Referring to Enviro Trace Ltd v Sheichuk, 2014 ABQB 381, Justice Hollins also observed that “The fundamental basis of the lawsuit is the misuse of SHAC’s trade secret. … once a secret is divulged, money cannot make it a secret again.” 

The court held that SHAC had established it would suffer irreparable harm if the injunction were not granted, accepting evidence that it otherwise would be put out of business. The balance of convenience also favoured SHAC.

Application of Doctrine of Inevitable Disclosure?

It is worth noting that the interlocutory injunction sought in Enviro Trace, relied on by the court in SHAC, only sought to prevent the respondents from using the applicant’s trade secrets and confidential business and did not seek to prevent them from doing business. 

Similarly, a more restrained approach in SHAC would have been to prohibit any of the individual respondents from passing on any knowledge or participating in the process of manufacturing humic acid, while permitting the corporate respondent, EHI, to hire others not connected to the action to do so. Proceeding in this way would have enabled the respondents to earn a livelihood and EHI to continue operating, while protecting SHAC’s trade secret. 

It does not appear the respondents offered this type of nuanced concession. Moreover, all of EHI’s key personnel were originally connected to SHAC and had committed multiple breaches of their post-employment obligations. Given this, the court may have had in mind that they inevitably would have disclosed the secret process to EHI’s other employees, even if they were not directly involved in its manufacture. In effect, it may have applied the inevitable disclosure doctrine.

Prohibition of competition on this basis has been accepted in several American states under the doctrine, through which a plaintiff may show that a defendant’s new employment will inevitably cause their employer to utilize the plaintiff’s trade secrets. To date, however, the inevitable disclosure doctrine has not been applied in Canada. One can hardly envision a better set of facts, however, to argue for its introduction to Canadian law. Arguably, the Alberta Court of King’s Bench has done so with its decision.