Courts Differ on Standard to Establish Fiduciary Status in Applications to Restrain Solicitation of Clients
Courts in BC and Saskatchewan come to opposite conclusions on whether the strong prima facie case threshold is applicable to establishing breach of fiduciary duty in claims for injunctive relief to prevent solicitation pending trial. Differing approaches are determinative in decisions whether to grant relief.
One of the biggest hurdles to obtaining an interlocutory injunction before trial to restrain employee competition is the requirement to establish a strong prima facie case that a restrictive covenant is enforceable. The courts require an employer to establish enforceability on the basis of a strong prima facie case, given the injunction has the effect of restricting an employee’s ability to earn a living.1
The hurdle is steep. Drawing on prior articulations, the Supreme Court of Canada characterized the test in this way:
Common to all these formulations is a burden on the applicant to show a case of such merit that it is very likely to succeed at trial. Meaning, that upon a preliminary review of the case, the application judge must be satisfied that there is a strong likelihood on the law and the evidence presented that, at trial, the applicant will be ultimately successful in proving the allegations set out in the originating notice.
The reported cases in which employers have failed to satisfy this test are legion. In many other instances, employers have failed to include any restrictive covenants in employment agreements.
But what if the former employee is a fiduciary? Under Canadian law, a fiduciary is prohibited from soliciting clients of the former employer for a reasonable period of time after departure. The employer need not rely on a restrictive covenant.
An important question is the strength of the case the former employer needs to establish if it seeks interlocutory relief pending trial to prevent solicitation by the alleged fiduciary. Must there be a strong prima facie case or simply a serious issue to be tried?
The distinction is important and potentially determinative in a given case. While a strong prima facie case entails the employer showing a “strong likelihood” of success, the threshold for meeting a serious issue to be tried is a low one, i.e. the application is not “vexatious or frivolous” and “a judge should not engage in an extensive review of the merits.”3
Two 2019 decisions, one from British Columbia and another from Saskatchewan, reached opposite conclusions on the required standard to establish breach of fiduciary duty on applications for interlocutory injunctions. Predictably, they also came to opposite decisions on fiduciary status, given the different burdens imposed on the former employer by each court.
The BC Supreme Court required a strong prima facie case in Capital Direct Lending Corp. v Blanchette, 2019 BCSC 1068. There, Capital Direct sought to restrain its former employee, a mortgage broker, from soliciting clients or active prospects based on her alleged fiduciary status.
Citing RJR-MacDonald, the Court noted that the standard of a serious question to be tried will be modified:
“…when an injunction would in effect amount to a final determination of the action. This will happen “when the right which the applicant seeks to protect can only be exercised immediately or not at all, or when the result of the application will impose such hardship on one party as to remove any potential benefit from proceeding to trial”: RJR at p. 338. In such a situation, “a more extensive review of the merits of the case is required”: RJR at p. 339.”
(at para. 30)
Following a review of case law both in BC and Ontario, the Court applied the heightened standard on the basis that:
“a) the request for injunctive relief at trial will likely become moot by the time the matter reaches that stage, as any duties Ms. Blanchette may owe to Capital Direct not to solicit former clients, even at a fiduciary level, will likely have expired;
b) an injunction will clearly affect Ms. Blanchette’s ability to earn a living. The case law acknowledges that it can be more difficult for an individual to find work as they age, as unjust as that may be: Kerr v. Arpac, 2018 BCSC 704 at paras. 97-102. The plaintiff is almost 64 years old. An injunction against any communication with individuals with whom she has worked over many years will clearly be detrimental to her ability to earn a living.”
(at para. 37)
Having determined the applicable threshold, the Court went on to find that Capital Direct had not established a strong prima facie case and dismissed the application for an interlocutory injunction.
Six months later, the Saskatchewan Court of Queen’s Bench, came to an opposite conclusion on the law. It applied the serious issue to be tried test to the question of fiduciary status, found the threshold had been met and issued an interlocutory injunction preventing solicitation of clients.
The two individual respondents in Brian L. Leipert Financial Services Ltd. v Reiter, 2019 SKQB 310, had been long time employees of a joint venture that provided investment, financial and insurance products to individual clients and group life and health insurance benefits to business clients. The respondents both resigned without notice and began working as partners in their own competing business.
The former employer sought an interlocutory injunction prohibiting solicitation based on the employees’ alleged fiduciary status and allegations that they already had solicited its clients.
The Court drew on an appellate decision from New Brunswick, Imperial Sheet Metal Ltd. v Landry and Gray Metal Products Inc., 2007 NBCA 51, which addressed the applicable threshold in a claim involving breach of fiduciary duty. As summarized the by Court in Leipert (at para. 21):
…The court (in Imperial Sheet Metal) held that the strong prima facie case threshold will apply when: (a) the central issue is based on a question of law; (b) oral cross-examination has been conducted; or (c) the decision whether to grant an injunction will cause the issue to become moot. The court concluded that in breach of fiduciary duty claims, the less onerous “serious issue” standard applies because an allegation of a breach of fiduciary duty does not fit into one of the prescribed exceptions.
From here, the Court in Leipert opined that, unlike a finding in respect of a restrictive covenant, “a preliminary finding of the existence of a fiduciary duty may or may not end a claim: fiduciary duties are of variable duration, scope and nature.” (at para. 23) Since some aspects of a post-employment fiduciary duty may be greater in duration than would be found in a restrictive covenant, the lower threshold, the Court said, is appropriate.
The Court further held that “The exceptions in Imperial Sheet Metal flow from the following principle: if, at the injunction stage, the nature of the dispute is such that it is easier to predict the result at trial, the applicant bears the onus of showing a strong prima facie case.” As restrictive covenants are prima facie void, with the result at trial being easier to predict, “it should be easier for the moving party to demonstrate that the injunction is appropriate, and the court will therefore require it to do so.” (at para. 22)
Having determined it would apply the lower serious issue to be tried standard, the Court then went on to find fiduciary status and issued an interlocutory injunction restraining solicitation for a varying duration, depending on whether the clients were purchasing investment/financial services (three months) or insurance and employee benefits (nine months).
These two decisions illustrate the quite different results an applicant may hope to achieve, depending on the threshold deemed applicable by the courts. The Leipert decision provides employers a basis, potentially, to restrain employee competition for a limited period, even in the absence of a restrictive covenant.
Yet Leipert is not without its problems. The Court did not seem concerned with the caution in RJR-Macdonald that the elevated standard is appropriate “when the right which the applicant seeks to protect can only be exercised immediately or not at all, or when the result of the application will impose such hardship on one party as to remove any potential benefit from proceeding to trial.” Indeed, there is no doubt that the trial in Leipert, should it take place, will commence long after three-month and nine-month injunctions issued in that case expire.
While the Court in Leipert did note that fiduciary obligations may be of variable duration, the Courts rarely restrain solicitation on the basis of fiduciary status for longer than 12 months. In the vast majority of cases, then, the decision at the interlocutory stage will amount to a final determination on the issuance of the injunction.