Tuesday, 3 July 2012

BCCA on Interlocutory Injunctions: Difference between Non-Solicitation and Non-Competition Clauses

When seeking an interlocutory injunction, the heaviest burden on the applicant is usually to establish that it will suffer "irreparable harm" if the injunction is not granted - i.e., harm that either cannot be quantified or cannot be compensated.

For a while, there was a suggestion that irreparable harm can be presumed in case of a breach of a non-competition or non-solicitation covenant.  However, the Court of Appeal put this this idea to rest in Belron Canada Inc. v. TCG International Inc., 2009 BCCA 577, holding that "there is no basis for holding that the test [of irreparable harm] is not of general application".

Now, in Edward Jones v. Voldeng, 2012 BCCA 295, the Court of Appeal also rejected the proposition that damages may not be an adequate remedy for a breach of a non-solicitation covenant on the basis that it would be extremely difficult ... to separate damages for loss of business caused by the breach from those resulting from normal, fair competition."  This proposition was based on decisions of the BC Supreme Court in 6180 Fraser Holdings Inc. v. Ali and MDManagement Limited v Dhut.

The court engaged in a somewhat nuanced analysis and concluded that there is a fundamental difference, at least in regulated industries, between non-solicitation and non-competition clauses.  While breaches of the former usually result in calculable damages, breaches of the latter do not:
[36]         The cases illustrate the general rule that the harm flowing from the violation of non-solicitation clauses usually differs from that which flows from the violation of non-competition clauses.  The damages that flow from a violation of a non-solicitation covenant in the employment contract of an investment advisor generally are calculable because the industry is regulated heavily.  The value of the portfolio of a departing client is known, as is the return to the brokerage firm of managing that portfolio.  ...
[37]         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.  To similar effect are actions which may damage the reputation of a former employer, or the general use of confidential information.
[38]         It is important to recognize that, while these propositions may be true generally, the circumstances of each case must be considered.  That is, while most improper solicitations may result in calculable damages, it must not be assumed that all will.
The court also confirmed that difficulty of calculating damages, without the damages rising to the magnitude of potentially destroying the applicant's business, does constitute irreparable harm, whether or not there is a restrictive covenant:
[41]         In my view, the contention that the magnitude of the loss may result in irreparable harm is answered in two ways. One, the Supreme Court of Canada in RJR-MacDonald at para. 59 stated that “‘[i]rreparable’ refers to the nature of the harm suffered rather than its magnitude”.  Two, if an applicant were able to show that its business potentially would be destroyed by the conduct of a defendant it might be open to argue that such “magnitude” of damage would be irreparable.  ...
[42]         The respondent asserts that irreparable harm is less significant in cases involving a restrictive covenant.  The comments of Low J.A., to which I referred previously, are apt in this context.  In my view, the existence of a restrictive covenant is more significant to the first prong of the analysis than to irreparable harm.  It also comes into play when considering the balance of convenience.  The court clearly may take into account the fact that a defendant has covenanted not to undertake conduct a plaintiff seeks to enjoin when considering the relative positions of the parties.
It should be noted that the court's conclusion that a restrictive covenant is relevant to the balance of convenience rather than irreparable harm appears to be inconsistent with the court's earlier statement that irreparable harm is a part of the balance of convenience test:
[24]          Accepting the caution to avoid rigid compartmentalization, but recognizing that the components of the analysis require consideration, I shall address irreparable harm because, in my view, seldom will an interlocutory injunction be issued when there is no irreparable harm. The existence and extent of potential irreparable harm must be weighed in the balance of convenience analysis