04 Sep Court offers guidance on injunctions for breaching non-solicitation covenant, Law Times ( September 17, 2012)
BREACHING NON-SOLICITATION COVENANT
Generally speaking, there are two types of injunctions: mandatory and prohibitory. Like the two-headed god Janus, these injunctions are looking in different directions. The former is looking to the past for a remedy in the sense that it requires a defendant to undo some wrong done. The latter is looking to the future in that it seeks to restrain, either permanently or temporarily, the defendant from committing a specified act.
In its recent decision, Edward Jones v. Voldeng, the British Columbia Court of Appeal considered the test for granting an interlocutory injunction in the context of the violation of a non-solicitation covenant contained in the employment contract of an investment adviser. The court discussed the effects of violating a non-solicitation and non- competition covenant and offered helpful observations with regards to the irreparable harm and balance of convenience components of the three-prong test. The test also requires an applicant to establish that there is a serious question to be tried.
In this case, an investment adviser, Randy Voldeng, resigned from Edwards Jones to join its competitor, RBC Dominion Securities Inc. Voldeng’s employment contract prohibited him from soliciting, directly or indirectly, sales to or from any of Edward Jones’ customers for six months following his departure. Prior to his resignation, Voldeng e-mailed a number of his clients informing of his departure and advising that he would call them “personally in the next few days to answer any questions and address any concerns you may have.” One month after he joined RBC, accounts valued at approximately $20.2 million had transferred to RBC. In response, Edwards Jones brought and obtained an interlocutory injunction that prohibited Voldeng from initiating any contact with any former client for six months. On appeal, the court held the prohibition was too broad and overruled it.
Voldeng successfully appealed on a number of grounds, chief among them that the chambers judge erred in finding that the apprehended financial injury to Edwards Jones constituted irreparable harm. Referring to the Supreme Court of Canada decision Wale v. British Columbia (Attorney General), the court observed that neither of the terms irreparable harm or balance of convenience has a precise meaning. They are more properly seen as guides that take colour and definition in the circumstances of each case. Recognizing that these elements of the test require consideration, the court rigorously considered them with a particular focus on irreparable harm, which is an essential factor in determining the appropriateness of an interlocutory injunction.
Relying on its earlier decision, Onkea Interactive Ltd. v. Smith, the court observed that irreparable harm comes in two types: harm that cannot be quantified in monetary terms, such as permanent market loss or irrevocable damage to business reputation, and harm that cannot be compensated, such as the inability to collect damages.
On injunction, the chambers judge accepted that the case before him fell within the first category and erroneously concluded that B.C. law differs from Ontario in that in the western province, “damages may not be an adequate remedy for a breach of a non-solicitation covenant on the basis that it would be extremely difficult for the plaintiffs to separate damages for loss of business caused by the breach from those resulting from normal, fair competition.”
On appeal, Voldeng successfully contended that the harm flowing from the violation of non-solicitation covenants differs from breaches of non-competition covenants. The appeal court agreed. “The damages that flow from a breach of a non-solicitation covenant in the employment contract of an investment advisor generally are calculable because the industry is regulated heavily,” the court stated. “The value of the portfolio of a departing client is known, as is the return to the brokerage firm of managing that portfolio.” Having determined that Edwards Jones was able to calculate its exact financial loss, the court concluded that Voldeng’s solicitation did not constitute irreparable harm. In doing so, the court cautioned that while most improper solicitations may result in calculable damages, “it must not be assumed that all will”.
In contrasting the effect of violating a non-competition covenant, the court observed that it usually would not be possible to tell whether business is lost to the employee’s new employer as a result of legitimate or illegitimate competition. Therefore, such damages, not being calculable, generally constitute irreparable harm.
Turning to the balance of convenience prong of the test, the court concluded that it favoured Voldeng when it noted that “in the context of a non-solicitation covenant, the interests of an individual investment adviser and his or her clients often tips the balance of convenience in favour of the investment adviser.”
In fact, the court was of the view that an interlocutory injunction may cause irreparable harm to Voldeng because, “if his conduct were found to be proper, it would not be possible to determine which of his client would have shifted to RBC if he had been able to inform them of his new contact particulars.” Having acknowledged that the interests of third parties should be taken into consideration when assessing the balance of convenience, the court stated: “Arguably, any contact with former clients is solicitation, but this court has made it clear that in certain relationships, some such conduct is not only proper, but is desirable.” This conclusion folds perfectly into the general proposition that nobody “owns” clients. Instead, they should be free to receive information from all competitive sources and have the ability to decide if they will follow an investment adviser.
I must sound a note of caution about Voldeng, however. It should not be taken as establishing a special “investment advisor” category of relationship to which the general principles governing the grant of an interlocutory injunction would not apply. While the interests of the clients of investment advisers are a legitimate factor to take into account, it is but one question in the overall context of the injunction analysis. It should not be considered as unique to that relationship because there are many other situations in which similar interests may be relevant.