Court Grants Interim Injunction to Restrain Employees from Competing with their Former Employer

SHAC Solutions Inc v Guenther, 2024 ABKB 145

Background

Theapplicant, SHAC Solutions Inc., manufactures humic acid, which is a compound used in agricultural, resource extraction and environmental applications. The respondents were former employees and/or directors of SHAC that had left to start their own humic acid manufacturing company, Envirotech Humics Inc.

SHAC sued the respondents for breach of their duties of confidentiality and fidelity, as well as for breach of contractual obligations under their confidentiality and employment agreements, for unlawful interference with economic relations, passing off, and civil conspiracy.

SHAC applied for an interlocutory injunction seeking to stop the respondents from being involved in the manufacture of humic acid, pending the trial of its claim. The respondents argued that the information at issue was in the public domain, that the one respondent with a non-competition covenant could not be bound by that covenant because SHAC breached its obligations under the employment contract, and fiduciary obligations of the respondent directors or employees had expired prior to their involvement with the competing venture.

Issues

At issue was whether the applicants met the test for injunctive relief.

Decision

The test for injunctive relief was considered and applied:

1. Is there a serious issue 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 the respondent?

Generally, the first step of the test requires the court to determine whether there is a strong prima facie case to be tried. It was found that this threshold was met. Five of the individual respondents were directors and, as such, owed separate and higher obligations of fidelity than an employee. Of the five respondents, only one was alleged to have breached a non-competition covenant and he was a key employee that had fiduciary duties. It was found that all respondents had obligations of confidentiality to SHAC either by common law or through contract. This grounded the applicant’s prima facie case. It was found that confidentiality agreements should generally attract less strict scrutiny from the courts than agreements that restricted the ability to find employment.

The confidential information the respondents were alleged to have improperly disclosed was a patent (for the process used by SHAC to make humid acid). One of the respondents started a new company and confidential information about SHAC’s operations was used to compete with SHAC. The respondents argued the patent had expired and the information was in the public domain.

The court found the applicant had demonstrated a strong prima facie case that the SHAC process was prima facie confidential information, that the respondents breached their confidentiality obligations, and some of the respondents had breached their fiduciary duties.

The applicants were able to prove irreparable harm by pointing to the loss of customers and sales. The applicants produced an affidavit stating that SHAC would be out of business if the injunction was not granted.  

Finally, in addressing the balance of convenience, both parties argued they would go out of business if the court did not decide in their favour. The court found the balance of convenience favoured the applicant, because if someone had to go out of business it should be the business that should not have been created.

Takeaway

Pretrial injunctions are difficult to obtain, but they can be obtained in some circumstances, such as in this case. Regardless of whether an injunction is sought, employees starting work at a new place of business ought to be mindful of their continuing employment obligations from their former employment relationship (especially with respect to confidentiality). Employees would be well advised to seek advice from legal counsel before leaving their employment to work for a competing business in these circumstances. Also, employers would be well advised to seek legal counsel before hiring an employee who was working for a competitor.