Interlocutory injunctions protect employers from irreparable harm

What is an interlocutory injunction?


Interlocutory injunction. The ominous-sounding phrase is enough to give almost anyone the jitters. But it’s a fairly simple concept in the employment law realm, though courts are careful in granting one because of the restrictions it carries.

Employers will sometimes seek an interlocutory injunction when key employees leave the company and start working for a competing firm. In essence an interlocutory injunction prevents these employees from stealing business from their old employer until the court settles legal action between the two parties.

In the Pocket Dictionary of Canadian Law, published by Carswell, Daphne Dukelow defines interlocutory injunction as, “a measure intended to ensure that certain specified acts do not take place until the rights of the parties are finally determined by the court.”

A recent decision by the Ontario Superior Court of Justice shows an example of when a court will, without hesitation, grant an employer’s request for an interlocutory injunction.

The case: H.L. Staebler Co. v. Allan

H.L. Staebler, an insurance brokerage firm in Kitchener, Ont., filed an action for an interlocutory injunction against former employees and the competing brokerage they went to work for.

On Oct. 15, 2003, Tim Allan and Jeff Kienapple — two senior commercial line producers — tendered letters of resignation effective immediately to H.L. Staebler. Allan had been there since 1982; Kienapple since 1995. Over their tenure both had been recipients of clients and business relationships that had been given to them by predecessors in the company. Virtually simultaneously, on Oct. 13, 2003, three other employees tendered their resignations to the company, also effective immediately.

None of them told management where they were going. But H.L. Staebler soon received an e-mail from one of its insurance clients that the five former employees were opening a new insurance office for Stevenson and Hunt Insurance Brokers in nearby Waterloo, Ont., effective Oct. 15, 2003.

The court said it was apparent that “significant” planning and organization went into the new Waterloo branch office for Stevenson and Hunt prior to the resignations. As early as August 2003 Kienapple began meeting with a representative of Stevenson and Hunt to discuss the possibility of leaving H.L. Staebler to join their company.

Allan began such discussions in September. The court said it appears this planning included the drafting of letters of authorization to clients of H.L. Staebler authorizing a change of broker and waiving the usual 10-day waiting period for such change.

It seems that very shortly after the resignations, steps were taken by the former employees to approach customers of H.L. Staebler on behalf of Stevenson and Hunt, the court said. Evidence showed numerous letters of authorization to facilitate the change of brokerages were completed by former H.L. Staebler clients within weeks of the departure of the employees.

Both Allan and Kienapple signed employment contracts with H.L. Staebler on March 9, 1984, and Jan. 13, 1995, respectively. These contracts included the following terms:

“It is fully understood and agreed that all business and/or clients brought to the company and handled by you belong to the company. In this respect you are servicing and handling clients of the company for the purpose of maintaining the client and increasing the business of the company to your advantage and to the company’s advantage.”

The other defendants did not have employment contracts but were provided company manuals outlining specific guidelines related to client confidentiality.

It was apparent to the court that the defendants had a well orchestrated business plan in advance of their simultaneous departure. It said it was equally apparent that they and Stevenson and Hunt weighed the cost of the plan and decided the development of the new business office was a worthwhile economic investment.

Allan and Kienapple were well aware of the terms of their employee contracts, as was their new employer, the court said.

“The defendants seem to have read the employment contracts … as the ‘price tag attached’ to any clients/customers taken from Staebler,” said Justice Jane Milanetti in her decision. “Both (Allan and Kienapple) confirmed awareness of the ‘anti-comp’ clauses, but felt that they could breach the terms so long as they paid the price.”

The price set out in the employment agreement was one-and-a-half times the income received.

Based on the evidence, the court found it appropriate to grant an interlocutory injunction until the case proceeds to trial.

For more information see:

H.L. Staebler Co. v. Allan, 2004 CarswellOnt 3593 (Ont. S.C.J.)

RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CarswellQue 120 (S.C.C.)

Granting an interlocutory injunction

The 1994 Supreme Court of Canada decision in RJR-MacDonald Inc. v. Canada (Attorney General) set out the questions to be answered in considering whether an interlocutory injunction should be granted. Here’s a look at the three part test and how the Staebler case passed.

The strength of the case

The court ruled there was “no doubt” the strength of the case had been firmly established. Tim Allan and Jeff Kienapple fully understood that their employment contracts with H.L. Staebler specifically prohibited them from setting up a competing business by soliciting their former clients.

The court said 20 letters of change of broker were received by H.L. Staebler immediately after the defendants quit and went to work for Stevenson and Hunt. That number jumped to 64 very shortly afterwards. All of these change authorizations were from customers of H.L. Staebler that had, in many cases, been clients for years and whose accounts were managed exclusively by Allan or Kienapple.

Is there a danger of irreparable harm?

The court found abundant evidence of harm to H.L. Staebler, both monetary and otherwise. Justice Milanetti said it was “quite clear” that there was lost revenue, but that there were other factors as well.

“When a long-standing company loses a bolus of its key employees from one particular section of its operation, in a single sweep, it clearly will have some repercussions in terms of reputation and standing in the industry,” she said.

“The mass exodus of one particular Staebler team (all of whom were advertised to insurers as the nucleus of a competing operation elsewhere) would not go unnoticed in a competitive industry. Common sense would tell us that these things would be bound to cause some ripples in the industry.”

In fact, H.L. Staebler was contacted by one insurer with concerns — something the court said was evidence that there was damage to their reputation in the industry that could take years to repair.

The balance of convenience

The balance of convenience is often the toughest of the three-part test for an employer to pass when seeking an interlocutory injunction, because of its “Goliath” status in the David-and-Goliath employment contract struggle.

But in this case the court found it easy to side with the employer.

“While the defendants argue that their very livelihoods are at stake, the evidence presented from their cross-examinations do not reveal much financial exposure for them, at least in the short-term,” said Justice Milanetti. “In fact it appears that Allan and Kienapple are being well compensated by their new employers.”

Kienapple was being paid an annual draw of $200,000 by Stevenson and Hunt guaranteed for 18 months. Allan was receiving a $15,000 per month guaranteed draw for at least 15 months, or $180,000 per year.

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