In a significant legal battle involving trade secrets and fiduciary duties, the Alberta Court of King’s Bench has granted an interlocutory injunction against former employees and directors of SHAC Solutions Inc., who left to start a rival humic acid manufacturing company, Envirotech Humics Inc. (EHI).
The ruling, aimed at halting the manufacture of humic acid by EHI pending a trial, underscores the complexities of confidentiality and competition in the business world.
SHAC Solutions Inc., a company specialized in producing humic acid for various industries, accused the defendants — its former employees and/or directors — of breaching their duties of confidentiality and fidelity, among other allegations. The court’s decision, rooted in the principles of confidentiality agreements and fiduciary duties, highlights the stringent legal framework protecting corporate secrets and the obligations of those privy to them.
The court applied the three-part test for injunctive relief, which includes assessing whether there’s a serious question to be tried, if the applicant would suffer irreparable harm without the injunction, and where the balance of convenience lies. In this case, the court found in favor of SHAC Solutions, establishing a strong prima facie case against the respondents.
The court cited the ruling in IBM Canada Ltd. v. Almond, which stated that: “Interlocutory injunctions represent extraordinary relief.” It cited previous case law to emphasize the high stakes of granting such an injunction, especially against former employees potentially deprived of their livelihood.
However, the court also recognized the unique nature of confidentiality agreements that don’t necessarily restrict employment opportunities but protect sensitive information.
“In my view, confidentiality agreements should generally attract less strict scrutiny from the courts than agreements which clearly restrict the signatory’s ability to find employment elsewhere,” the Court said. “The parties to confidentiality agreements can work wherever they wish, they just cannot use their former employer’s confidential information in doing so.”
The ruling revealed that the respondents were accused of using SHAC’s secret process for manufacturing humic acid — a claim they contested by arguing the information was public domain. Despite these arguments, the court found SHAC’s manufacturing process to be a proprietary secret, not covered by expired patents or publicly available knowledge.
Further complicating the case was the involvement of C.G., a key respondent, who had a non-competition covenant with SHAC. The court examined the enforceability of this covenant, alongside the contractual and fiduciary obligations of the respondents, and concluded that there was a breach of these duties.
As for the harm suffered by SHAC, the court acknowledged the potential for irreparable damage, including the loss of customers and the difficulty in replacing skilled employees, which could not be remedied by monetary compensation alone.
The balance of convenience, a critical factor in granting the injunction, tilted in favor of SHAC, illustrating the court’s approach to safeguarding businesses from the illicit use of their proprietary information.
“This is a difficult decision because of the stakes. I also have a great deal of sympathy for the minority shareholders of SHAC, given the descriptions of its management,” the Court said. “I do not blame them for wanting out and I understand their frustration at seeing an opportunity to have the business succeed but watching that opportunity being thrown away by their co-owners.”
But the court ruled that SHAC had established a “strong prima facie” case for breach of contractual and other duties of fidelity and confidentiality. It also established a “likelihood of irreparable harm.”
In conclusion, the court granted the injunction to prevent the respondents from manufacturing humic acid, marking a temporary victory for SHAC Solutions in its quest to protect its trade secrets.
For more information, see SHAC Solutions Inc v Guenther, 2024 ABKB 145 (CanLII).
