Employer Attempts to Enforce Restrictive Covenants & Fails Yet Again

By Rich Appiah on November 13, 2019

Every employer fears the moment that a high-level executive departs for a competitor. With such exits in mind, employers frequently rely upon restrictive covenants to protect their business interests. However, as affirmed by the Ontario Superior Court of Justice in Camino Modular Systems Inc. and Global Integrated Flooring Solutions Inc. v. Kranidis, broad and overly restrictive covenants that protect more than an employer’s proprietary interests may not be the answer.

Background

Antonios Kranidis worked for Camino Modular Systems Inc. (“Camino”) and Global Integrated Flooring Solutions Inc. (collectively “Global IFS”) from January 2015 until he resigned four and a half years later. At the time of his resignation he held senior vice presidential roles for Camino and Global IFS. While working for Global IFS, Kranidis became increasingly unhappy. He felt he was being marginalized within the company. For instance, although his employment agreement provided that he would report to the company’s President, in early 2018, his reporting lines were unilaterally changed four times and his seniority reduced.

In May 2019, Kranidis contacted Tate Asp Access Floors Inc. (“Tate”), a direct competitor of Global IFS, in response to a position Tate had posted. On July 22, 2019, after a successful recruit, Kranidis entered into an employment agreement with Tate. Kranidis was expected to start his new role as Director of Technical Marketing on August 26, 2019. On July 23, 2019, Kranidis submitted a resignation letter to Global IFS, noting that his “company supplied computer” was in the office. He neglected to mention that he still had possession of a company laptop.

After learning that Kranidis was soon to be employed at Tate, Global IFS retained counsel who reminded him that he was bound by the non-competition, non-solicitation and confidentiality clauses found in his employment agreement (the “Agreement”). When Global IFS became aware of the missing company laptop, counsel demanded for the return of the laptop. Kranidis returned the laptop on August 6, 2019 but only after attaching a USB device to the laptop, as noted in a forensic report commissioned by Global IFS. With all this information in mind, Global IFS brought a motion for injunctive relief to enforce the restrictive covenants against Kranidis and his new employer, Tate.

The court ultimately found against Global IFS and declined to grant the injunction, awarding costs to Kranidis and Tate on a partial indemnity basis. Justice O’Brien concluded that because the restrictive covenants were overly broad and did not protect only Global IFS’s proprietary interests, the restrictive covenants were unenforceable and as such, Global could not make a strong prima facie case for injunctive relief as was required by relevant jurisprudence. In spite of the fact that “Kranidis’ conduct on his resignation raised questions as to his intentions”, Justice O’Brien also found that the evidence did not support that Kranidis misused confidential information to Global IFS’s detriment. In short, Global IFS had not demonstrated irreparable harm, on a balance of probabilities, as was also required.

The non-competition clause

In this case, Global IFS failed to demonstrate that the non-competition clause in the Agreement was enforceable, in part because the company could not identify specific information, products or projects requiring protection. Global IFS also could not provide sufficient justification as to why the clause’s 12-month restriction made sense in the context of the industry.

To demonstrate proprietary interest, Global IFS argued that its integrated business approach created a “unique market advantage” against its competitor Tate and that Kranidis had direct knowledge of it. Notably, Global IFS had e-mail correspondence in its possession where Kranidis tried to sell himself to Tate by saying he could assist Tate with the integrated approach. Nevertheless, Justice O’Brien found that although Kranidis was promoting his knowledge of the integrated approach in the e-mail, Tate clearly did not find it to be useful nor valuable.

Justice O’Brien additionally found the non-competition clause to be “ambiguous and too broad” because it restricted Kranidis from taking any position at all in a competing business, including positions in which he would not actually be competing.

The non-solicitation clause

Global IFS also failed to demonstrate that the non-solicitation clause in the Agreement was enforceable. Global IFS did not have a proprietary interest with respect to Kranidis’ knowledge of customers, given industry practices. Through examinations, Justice O’Brien accepted that customers were not exclusive to Global IFS or Tate and did not always return to the same company. Contractors were large developers and would be known to everyone in the business. In the words of Justice O’Brien, the non-solicitation clause was “extremely broad” and did not clearly advise Kranidis “which customers were off limits”; instead, it exhaustively restricted solicitation of “all customers, suppliers, licensees, subcontractors or other business relations”. For the Justice, the fact that Kranidis did not “actively, directly and aggressively solicit” clients was also of utmost importance.

The confidential information clause

Lastly, Global IFS failed to demonstrate that the confidential information clause was enforceable. The clause was too broad and prohibited Kranidis from disclosing confidential information indefinitely. Most importantly, the clause covered information that would be considered part of Kranidis’ general experience and understanding of the industry. For these reasons, the clause was void.

Kranidis was not the most sympathetic defendant. Forensics evidence supported the fact that he misled Global IFS upon his departure and saved company information on his personal USB stick. Kranidis also went so far as to upsell himself to Tate by promising the very information that Global IFS considered a unique business strategy. While the court found Kranidis’ behaviour “questionable” at best, it still did not enforce the restrictive covenants against him, highlighting that employers are best advised to use carefully tailored restrictive covenants to protect their business interests.

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