Unable to establish a <i>prima facie</i> case

An employer must prove irreparable harm to restrain a former employer from competing against it

In 1993 Stephen Abott and Hersh Spiegelman founded Telehop Communications Inc., whose business consisted of providing long-distance telephone services. The company made a public offering of its securities in 1997, and in connection with the public offering Mr. Spiegelman and Mr. Abott signed employment agreements dated Dec. 30, 1996. Prior to this they did not have an employment agreement.

The employment agreement contained provisions dealing with non-competition, non-solicitation and use of confidential information. The non-competition clause provided that Mr. Abott would not provide consulting services or otherwise be concerned with any business which competed with the business of Telehop in Ontario for a period of two years “or such lesser amount of time as a Court of competent jurisdiction may determine is more reasonable” from the date of termination of his employment.

In early 2001 Mr. Abott ceased to be an employee of Telehop. He subsequently commenced an action against Telehop for constructive dismissal.

In January 2001 Mr. Abott’s fiancé incorporated Caztel Communications Inc. Shortly after it was incorporated Caztel commenced a “casual calling” long-distance telephone operation. Casual calling is one of the three types of long-distance telephone services that Telehop provided. Initially Caztel carried on business only in Quebec. Mr. Abott provided consulting assistance to Caztel with respect to its operations in Quebec. While the majority of its business was in Quebec, Caztel began soliciting customers in Ontario in December 2001. Caztel maintained a business address in Ontario at the home of Mr. Abott and his fiancée.

Telehop filed a motion for an interlocutory injunction seeking to restrain Mr. Abott from breaching the non-competition provision of his employment agreement. Telehop alleged that Mr. Abott provided consulting services and other assistance to Caztel with respect to its operations in Ontario.

The test for granting an interlocutory injunction has three parts. It must be established that:

• Telehop has a strong prima facie case;

• Telehop will suffer irreparable harm if the relief is not granted; and

• the balance of convenience favours Telehop.

In determining whether the first part of the test is met, being the strong prima facie case, case law has held that a temporal restriction in a restrictive covenant must be reasonable. Telehop argued that the two-year restriction is reasonable because Telehop required adequate time to replace Mr. Abott’s services following termination of employment. The Court was not satisfied that this restriction was reasonable, especially in light of the fact that Telehop was able to find a replacement for Mr. Abott almost contemporaneously with the termination of Mr. Abott’s employment. If the temporal restriction is not reasonable, the non-competition covenant may not be enforced, or a trial judge may elect to fix some lesser amount of time that is reasonable.

The Court noted that Mr. Abott was and continued to be a significant shareholder in Telehop and that there was no allegations of him using confidential information. The Court was of the view that Telehop was simply arguing that Mr. Abott should not be permitted to use his skill and knowledge to compete. Such a restriction is unenforceable because it is a covenant against competition in general.

Further, if Mr. Abott was successful in his constructive dismissal argument that would amount to a repudiation of the employment contract discharging him from future obligations under the contract. Telehop failed to demonstrate a prima facie case that there was no constructive dismissal.

Telehop also argued that Mr. Abott breached his fiduciary duty to Telehop. The test for an injunction can be met if a strong prima facie case for that breach is met. However, in this case Mr. Abott did not misappropriate a corporate opportunity and there was no allegation that Mr. Abott solicited Telehop’s calling clients.

The Court was not satisfied that Mr. Abott used an advantage over Telehop in his new venture other than additional non-proprietary skill and knowledge gained through his employment. In any event more than a year had passed since he ceased to be an employee. The Court was of the view that a reasonable period of time would not exceed one year.

For these reasons the motion of an interlocutory injunction to enforce a non-competition covenant against Mr. Abott was dismissed.

For more information:

Telehop Communications Inc. v. Abott, Ontario Superior Court of Justice, Docket No. 00-CV0188081CM, Apr. 29/02.

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