Another year, another case dealing with the enforceability of restrictive covenants. This time, the Ontario Superior Court considers the matter in A Big Mobile Sign Company Inc. v. Marshall, 2014 ONSC 16 (CanLII) and granted an interim injunction based on an executed License Agreement between the plaintiff and defendant - it would seem that the relationship is not one of employment, though that is not clear.
The terms of the Non-Competition Covenant are set out in Schedule B to the Agreement and provides as follows:
- [the defendant] acknowledges that the terms and conditions of the restrictive covenants are reasonable for the protection of the plaintiff's business, including the protection of confidential information and goodwill;
- [the defendant] acknowledges that the consideration provided for in the Agreement is sufficient to fully compensate her for agreeing to such restrictions; and
- in the event of a breach of the restrictive covenants by [the defendant], the plaintiff shall be entitled to apply for injunctive relief in addition to other remedies.
Following unsuccessful negotiations of an extension to the Licensing Agreement, the defendant delivered a letter “advising that the Agreement would not be renewed. However, she attempted to dictate her own terms for terminating the Agreement.”
The Court applied the usual analysis with respect to the enforceability of these provisions found in RJR-MacDonald Inc. v. Canada, 1994 CanLII 117 (SCC), namely the “threefold test”:
- whether the applicant has presented a serious issue to be tried;
- whether the applicant would suffer irreparable harm if the application were refused; and
- an assessment must be made as to which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits.
In discussing the need to prove a strong prima facie case, the Court observed that:
The granting of an injunction would effectively terminate [the defendant’s] involvement in the mobile sign industry, pending any further decision that may be made on the enforceability of the restrictive covenants. In Quizno’s Canada, Perell J. explains his adoption of a "strong prima facie the case" to mean "a showing of a strong case with a high although not absolutely assured likelihood of success based on the material presently before the court": para. 42.
The Court found, on the evidence, that a strong prima facie case had been shown. The defendant “acknowledged the reasonableness of the terms of the restrictive covenants; although she stated that the Agreement was entered into without the benefit of legal advice, she does not give evidence that raises any grounds to set aside the Agreement. She has acknowledged receiving adequate consideration in exchange for her non-competition.”
So, notwithstanding that the Agreement was entered into without legal advice, on the evidence, this was not sufficient (absent more) to vitiate the enforceability, on an interlocutory basis, of the restrictive covenant. The company that the defendant planned to operate under was a competitor of the plaintiff.
The Court then went on to consider the evidence:
There is clear evidence that she is attempting, at a minimum, to lure "West's" customers to continue to use her services after she is done operating under the plaintiff's trade name. But in fact, there are no "West's" [the name that the plaintiff permitted the defendant to use while carrying out business activities governed by the Agreement] customers. There is nothing in the Agreement that gives rise to any right on the part of [the defendant] to consider client lists her as her own property, or to retain customers after the termination of the Term. A straightforward reading of the Non-Competition Covenant makes clear that she is not to solicit or entice any of the plaintiff's customers for the provision of services which are the same as, or similar to, or competitive with the plaintiff within 100 miles of a certain point. Finally, the injunctive relief requested is no more intrusive than that required under the terms of the Agreement upon expiration of the Term.
In terms of “irreparable harm” the Court found that “it is obvious” that soliciting customers to divert business to an existing or potential competitor could have irreversible consequences to the plaintiff’s business and, further, that this “is exactly the type of harm that the restrictive covenants were intended to protect against”.
The balance of convenience was found to favour the plaintiff and the granting of the interlocutory injunction. The Court commented:
The balance of convenience favours the injunction to ensure that Marshall does not continue to interfere with the plaintiff's customers, or to use the plaintiff's trade name to do so, and to help to ensure that she does not use the plaintiff's trade name to make derogatory comparisons to competitors as she is now doing.
The interim injunction was granted and the matter adjourned to January 14, 2014 ”for a review of the injunction on further and better material”.
While the test that the plaintiff has to meet to be granted an injunction is a probing and high one, it is not insurmountable. The evidence, in the end, will govern the outcome. Notwithstanding this, Courts in Canada continue to require clear evidence of the reasonableness of such provisions - a couple of relatively recent cases are Trapeze Software Inc. v. Bryans, 2007 CanLII 1882 (ON SC), IT/NET Inc. v. Cameron, 2006 CanLII 912 (ON CA) and Rhebergen v. Creston Veterinary Clinic Ltd., 2013 BCSC 115 (CanLII) (for a discussion or penalty vs. genuine pre-estimation of damages).