In ARC Surveys Ltd v Ni, 2024 ABKB 629 (Horner), a surveying company failed to get a permanent injunction preventing the involvement of a former shareholder with a competitor.
This case is important because it illustrates how difficult it is to enforce a non-competition agreement, even in a commercial context. It also highlights the difference between how restrictive covenants are dealt with in the commercial and employment contexts.
Facts
The following were some of the pertinent facts summarized by the Alberta Court of King’s Bench:
- This was an application by Arc Surveys seeking a permanent injunction preventing the defendants from conducting surveys using knowledge an individual defendant Ha Dan Ni obtained while working for Arc Surveys
- Arc Surveys is a surveying services company in Alberta
- The Defendant Ha Dan Ni was one of the founders of Arc Surveys, and held substantial shares in Arc Surveys through his consulting corporation (though he was a minority shareholder)
- When Mr. Ni was with Arc, he signed a share purchase agreement containing a non-competition clause which restricted his involvement in competitive business for 7 years after termination
- At Arc, Mr. Ni reported to another shareholder. Ni’s job involved assigning and delegating work to surveying crews, managing surveying crews, and handling customer complaints
- Arc Surveys ultimately terminated the employment of Mr. Ni
- Ni found some investors and encouraged them to start a surveying business. A friend of his and Mr. Ni’s wife became shareholders of that surveying business, but Mr. Ni himself only became an employee
Analysis / Conclusion
Justice Horner explained that a permanent injunction is harder to get than an interim injunction. A permanent injunction requires the claimant to fully prove its rights and demonstrate that it is entitled to the equitable remedy of an injunction.
The Court went on to explain that non-comps and non-solicits contained in contracts for the sale of a business are treated differently than those in employment contracts, because they arise in the commercial context. The Court went on to provide the following guidance for assessing whether a non-competition clause in a commercial context is enforceable:
[29] Whether the clauses of a commercial contract are reasonable is assessed in relation to the rules that govern freedom of trade so as to favour the application of such restrictive covenants […]. Therefore, in the commercial context “a restrictive convenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable” […]. The threshold for establishing that a restrictive covenant is reasonable in the commercial context will be less onerous than in the employment context. A restrictive covenant for the sale of assets will only be unreasonable where the scope of the covenant is not limited to what is necessary to protect the purchaser’s interests.
The Court then considered whether the non-comp clauses Arc Surveys was actually trying to enforce were enforceable.
Interestingly, the Court found the restricted activities overly broad to achieve the purposes stated in the agreement, but found the restrictions were not unreasonable:
[62] Arc’s operational trade practises were well known and not unique. Arc appears to be mainly concerned that Ni would use his relationships with client’s who had used Arc to invest and build a competing business by obtaining work from Arc customers using Arc’s suppliers and engagement of former Arc employees. A review of the reasonableness of the restrictions should be made in light of this evidence.
[63] The prohibited activities under the Agreement are overly broad to achieve the desired protection of Arc’s interests. However, the terms as they pertain to a restriction on activity are not so broad as to render them unreasonable. […]
Although the clauses were found to be reasonable in terms of restricted activities, the Court struck them down as being unreasonable because they covered too long of a period – 7 years:
[65] Ni was an employee and founder of Arc. There was no evidence led that he was essential to running the business, that he had exceptional business talent or experience, or that he was an exceptional draftsperson such that Arc needed to be protected from his talents and connections for a period of over five years.
My Take
The result in this case is not surprising to me. Even in the context of the sale of a business, a 7 year prohibition on competition is very long.
However, despite the outcome of this case I think this one could be seen as a bit of a win for employers. The Court treated this restrictive covenant as one arising in the “commercial context” despite that the employee was a minority shareholder. Usually cases getting commercial treatment involve restrictions against a majority or sole shareholder. The difference in the treatment of a restrictive covenant by the Courts in the “employment” versus “commercial” context is very significant: it is much more difficult to enforce one in the context of employment. How this case will be used remains to be seen, but it could be helpful to employers attempting to enforce non-comps and non-solicits by suing employees with smaller shareholdings.
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