ONTARIO – Interlocutory Injunctions – Contracts – Sale of Software Solutions Business – Restrictive Covenants – Where a seller of a business commenced a competing business in breach of a non-competition provision, the Court held the covenant to be reasonable in the circumstances. The RJR-MacDonald test for interlocutory injunctions was met and the interlocutory injunction was granted.

ONTARIO – Interlocutory Injunctions – Breach of Negative Covenants – Irreparable Harm – Balance of Convenience – Where a plaintiff demonstrates a strong prima facie case of the breach of a negative covenant, the issues of irreparable harm and balance of convenience cannot be ignored, but they may become less of a factor in reaching the final determination.

Demand Science Group, LLC v. Gladish,
2024 ONSC 214 (CanLII), (January 10, 2024)
Ontario Superior Court (Centa J.)

In this case, Centa J. granted an interlocutory injunction to restrain the Defendant from continuing to breach a restrictive covenant in a business sale agreement, which prevented the Defendant from competing with his former business in Canada for a period of three years. (para. 7, para. 66)

Background and Facts

The Defendant sold his “sales enablement and engagement software solutions for work” business to the Plaintiff for USD$1.25 million in 2021. The agreement contained a restrictive covenant provision that prevented the Defendant from competing with the business in any manner in Canada for a period of three years. (para. 1, para. 26)

Following the sale of the business, the Defendant became an employee of the Plaintiff and eventually its Managing Director with responsibility to develop an email software program called ReplyForce on the platform the Defendant sold to the Plaintiff. In January 2023, unbeknownst to the Plaintiff, the Defendant incorporated a new corporation and appointed another employee of the Defendant as a director. (para. 2)

In May 2023, the Plaintiff terminated the Defendant’s employment and the parties signed a termination agreement, which did not alter the non-competition clause in the 2021 sale agreement. (para. 3)

In June 2023, the Defendant started a new sales enablement and engagement services business that was very similar to the ReplyForce project, which was based on the platform sold to the Plaintiff. The new business was operated by the corporation the Defendant clandestinely incorporated while he was employed by the Plaintiff. (paras. 4-6)

Legal Principles

Relying on RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), at p. 334, Centa J. held that the Plaintiff had to meet the following test to be granted an interlocutory injunction: (para. 9)

1. the action raises a serious question to be tried, in the sense that the claim is neither frivolous nor vexatious;
2. the moving party would suffer irreparable harm if the court does not grant the injunction until the completion of the trial; and
3. that the balance of convenience favoured granting the injunction because the moving party would suffer greater harm than the responding party if the injunction is not granted.

The Court also noted that “[s]trength in one part of the RJR-MacDonald test can make up for weakness in another. Where a plaintiff demonstrates a strong prima facie case of the breach of a negative covenant, the issues of irreparable harm and balance of convenience cannot be ignored, but they may become less of a factor in reaching the final determination.” (para. 12)

Reasonableness of the non-competition covenant

After holding that the evidence disclosed that the Defendant breached the non-competition clause by commencing a competing business, and thus, met the first element of the RJR-MacDonald test, the Court considered the reasonableness of the covenant.  (para. 14)

Centa J. noted that the covenant arose in a commercial transaction. There was no power imbalance between the parties. Relying on Payette v. Guay Inc., 2013 SCC 45, paras. 1 to 3, the Court noted that much more flexibility and latitude is required when interpreting restrictive covenants in a commercial transaction than one contained in an employment agreement. (para. 16)

The Court considered the legal principles applicable to the validity of non-competition clauses in the context of the sale of a business: (para. 18)

1. The court will treat a restrictive covenant as lawful unless it is shown to be unreasonable;
2. A non‑competition covenant will be found to be reasonable and lawful provided that it is limited, as to its term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted;
3. Whether a non‑competition clause is valid in a commercial context depends on the circumstances surrounding the transaction; and
4. The factors that can be taken into consideration include the sale price, the nature of the business, the parties’ experience and expertise and the fact that the parties had access to the services of legal counsel and other professionals.

The Court then conducted a detailed review of the circumstances of the sale and the agreements between the parties and concluded that the Plaintiff was very likely to establish at trial that the non-competition provision, restricting the Defendant from competing with Plaintiff for three years in Canada and the USA, was reasonable in the circumstances of this transaction. (paras. 19, 20-27)

Centa J. analyzed the elements of the non-competition covenant to support his conclusion that it was reasonable and enforceable and held that: (paras. 28-37)

1. The restrictive covenants were negotiated in a complicated commercial transaction that conferred significant benefits on the Defendant;
2. The plaintiff relied on the covenants and they were an integral part of the transaction;
3. Under the agreement of purchase and sale, over 90% of the purchase price was allocated to the acquisition of Airborne Apps’ intellectual property and goodwill, which Ontario Court of Appeal held to be a legitimate proprietary interest: MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168, at para. 38;
4. The restrictive covenant was not ambiguous; and
5. Three years was a reasonable time in the circumstances.

On the basis of these factors, the Court concluded that the Plaintiff made out a strong prima facie case that the Defendant breached the non-competition covenant and that “the plaintiffs are likely to prove at trial that Mr. Gladish has done the very things that he promised Demand Science he would not do.” (paras. 42-47)

Irreparable Harm and Balance of Convenience

Referring to Dr. Jack Newton Dentistry Professional Corporation v. Towell, 2005 CanLII 37351 (Ont. S.C.)] at paras 28-29, the Court noted that in cases dealing with enforcement of restrictive covenants, courts have placed less weight on irreparable harm and the balance of convenience test. The Court must respond where the Defendant promised not to do something and then, did precisely what he promised not to do. Justice Centa concluded that the Plaintiff would suffer irreparable harm, particularly, a loss of goodwill, if the injunction were not granted. (paras. 49-58)

The Interlocutory Injunction Order

The Court made an order that restrained the Defendant from the following until the determination of the action: (paras. 66)

(Editor’s Note: The details of the Court Order are included here as we considered it instructive to show the details of an interlocutory injunction order in such cases.)

1. Operating the SendNow platform in any capacity;
2. Disclosing or making use of any confidential or proprietary information relating to Airborne, Demand Science or Demand Science’s affiliates or customers for any purpose, and from encouraging or soliciting, directly or indirectly, anyone else from disclosing or making use of such information;
3. Making use of any intellectual property belonging to Demand Science or Airborne;
4. Being engaged in any capacity in the business of sales enablement and engagement software solutions for work in Canada and the United States;
5. Being engaged in any capacity in the collection, management, or sale of data for the purpose of business, revenue intelligence or demand generation for work within Canada or the United States;
6. Inducing any agent, salesperson, contractor, customer, supplier or dealer of or relating to Demand Science or Airborne to cease dealing with Demand Science or its affiliates;
7. Soliciting or transacting business with Demand Science’s or its affiliates’ customers, clients or vendors; and
8. Soliciting, or attempting to interfere with, any employees, contractors, customers, vendors or other staff of Demand Science or its affiliates.