Wild Rose Meats Inc. v. Andres, 2011 ABQB 681

Court of Queen ’ s Bench of Alberta Citation: Wild Rose Meats Inc. v. Andres, 2011 ABQB 681 Date: 20111104 Docket: 1101 05441 Registry: Calgary Between: Wild Rose Meats Inc. Plaintiff - and - Dean Andres and Andres Incorporated Defendants _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E.

Romaine _______________________________________________________ Introduction [ 1 ] The Plaintiff Wild Rose Meats Inc. seeks an interlocutory injunction prohibiting the Defendants Dean Andres and Andres Incorporated from competing with Wild Rose in the purchase and sale of bison and bison meat. The primary issue is whether, in meeting the strong prima facie case requirement of the tri-partite test for such an injunction, Wild Rose has established that the restrictive covenants it relies on are likely to be determined to be valid and reasonable. Background

[ 2 ] Wild Rose is in the business of procuring, packaging and selling bison meat to customers in Canada, the United States and Europe. It was incorporated in 2001 with three shareholders: Kelly Long and Pieter Spinder, who hold 45.5% of the shares, and Andres Incorporated, which holds 9% of the shares. Andres Incorporated is owned 50% by Mr. Andres and 50% by his wife. Ms. Long is the President of Wild Rose, Mr. Spinder is the Secretary and Mr.

Andres was from January, 2003 until December, 2010 designated as Chief Operating Officer. [ 3 ] It is a challenge in the industry to find sufficient supplies of bison meat, and Mr. Andres’ primary responsibility as Chief Operating Officer was to source bison and bison meat from producers. Wild Rose submits that he was the face of the company to producers and there is no dispute that he was in charge of supplier lists, contacts among producers and pricing lists. Wild Rose sometimes bought live bison for slaughter, but more often purchased slaughtered animals.

It would then butcher, package and sell the meat to retailers. [ 4 ] Wild Rose says that Mr. Andres worked full-time for Wild Rose and was paid on a hourly basis for 40 hours a week plus his expenses and the use of a car. He was offered further shares in Wild Rose, but preferred, and was granted, an option to purchase such shares. Ms. Long submits that Mr. Andres did not want to increase his shareholding in Wild Rose above 10% to avoid the necessity of giving a personal guarantee to Wild Rose’s financial institution, as was required of her and Mr.

Spinder. [ 5 ] The parties entered into two key agreements in December, 2005: the Shareholders’ Agreement and the Consulting Agreement. The Shareholders ’ Agreement [ 6 ] The parties to the Shareholders’ Agreement are Mrs. Long, Mr. Spinder and Andres Incorporated. It includes a confidentiality provision,

Section 8.1, that precludes each of the shareholders from using any information that such shareholder may have relating to the business of Wild Rose for its own purposes or for any purposes other than those of Wild Rose. Such information includes suppliers’ lists, the identity of Wild Rose’s clients and price lists. [ 7 ]

Section 8.2 provides that as long as a shareholder holds any shares: . . . such shareholder shall not, directly or indirectly, in any manner whatsoever including . . . as employee, principal, agent, director or, shareholder: (

a) be engaged in any undertaking, . . . in the designated areas, which competes with the business carried on by the Corporation . . . [ 8 ] The “designated areas” mean any area within a province of Canada, state of the United States or European country where Wild Rose carries on business. If the shareholder ceases to hold shares, this restriction applies on a graduated basis for one to four years depending on how long the shareholder has held shares. [ 9 ] Andres Incorporated still holds 9% of the shares of Wild Rose. If it ceased to hold shares,

Section 8.2 would purport to restrict it for three years, since Andres Incorporated has held shares for more than five years since the anniversary date of the agreement. [ 10 ]

Section 8.3 of the agreement provides that, for three years after a shareholder ceases to hold shares, it shall not contact any customer of Wild Rose for the purpose of selling “any products or services which are the same as or substantially similar to, or competitive with the products or services sold by [Wild Rose] at the time the shareholder ceases to hold any shares.” [ 11 ]

Section 8.4 of the agreement provides an acknowledgement by the parties that the restrictions are necessary, reasonable and fundamental to the protection of the business. It includes a waiver of defences and an acknowledgment of the inadequacy of damages as a remedy for breach. The non-breaching shareholders are entitled as of right to apply for an injunction.

[ 12 ] Mr. Andres guaranteed the obligations of Andres Incorporated under the agreement. Consulting Agreement [ 13 ] This agreement is between Wild Rose and Andres Incorporated. It provides in

Section 7 that Wild Rose will engage Andres Incorporated as an independent contractor and not an employee. The scope of services was to be set out in a

schedule that was never prepared. As noted earlier, the parties treated Mr. Andres as the Chief Operating Officer, even though the Consulting Agreement was with Andres Incorporated. Andres Incorporated agrees to assign “its employee” Mr. Andres to perform services, and agrees to perform services: (

f) without conflicts which may impair the Consultant’s duty to act in the best interests of Wild Rose, or which impair the Consultant’s ability to perform the services to the best of the Consultant’s abilities. [ 14 ] In

Section 8, Andres Incorporated agrees to advise Wild Rose of any existing or potential conflicts of interest. [ 15 ]

Section 6 of the agreement provides that Andres Incorporated may offer its services to other companies as long as it complies with the terms of the agreement, particularly the sections dealing with confidentiality, intellectual property and non-competition. [ 16 ]

Section 17 of the agreement relates to confidential information and provides that such information not be disclosed or used without Wild Rose’s permission. This covenant purports to survive the termination of the Agreement. [ 17 ]

Section 19 of the agreement includes an acknowledgment by Andres Incorporated that, in carrying out services for Wild Rose, it will acquire wide experience and knowledge with respect to Wild Rose’s business. It provides that during the term of the agreement, Andres Incorporated shall not use any acquired knowledge and experience to the detriment of Wild Rose and will not engage in any practice or business that competes with Wild Rose’s business, “anywhere Wild Rose does business.” [ 18 ]

Section 19 includes an acknowledgement by Andres Incorporated that, if on termination of the agreement, “it competes directly against the interests of Wild Rose, that Wild Rose will be irreparably harmed”, which harm cannot be compensated by damages. Andres Incorporated agrees in this section, both during the term of the Consulting Agreement and thereafter, to comply with the confidentiality and non-competition provisions set out in Sections 8.1 through 8.5 of the Shareholders’ Agreement. [ 19 ] Again, Mr. Andres personally guaranteed the obligations of Andres Incorporated under this agreement. [ 20 ] When Mr.

Andres first became involved with Ms. Long and Mr. Spinder in Wild Rose, he operated a cow-calf bison ranch in Alberta. He did not sell finished bison, but bred bison cows and sold the calves to others for finishing. Two years after joining Wild Rose, he sold this operation. [ 21 ] In 2005, however, Mr. Andres moved to a ranch in Saskatchewan. When Ms. Long learned that Mr. Andres had bison at his ranch and at feedlots in Saskatchewan and Kansas, she initially thought he was aggregating these bison on behalf of Wild Rose. In 2006, she learned that Mr. Andres had sold a load of bison to a competitor of Wild Rose.

The resulting dispute among the shareholders was mediated to Ms. Long’s satisfaction and she thought that Mr. Andres had agreed not to sell further animals without consulting Wild Rose. [ 22 ] Wild Rose submits that, over time, it became increasingly dependent on Andres Incorporated for the supply of bison, and by 2010, Andres Incorporated was providing approximately 50% of Wild Rose’s bison.

[23] Mr. Andres resigned as Chief Operating Officer in December, 2010. Wild Rose submits that, unbeknownst to it, Mr. Andresbegan to divert sales of bison from Wild Rose to its competitors beginning at the latest in August, 2010. Wild Rose asserts that Mr.Andres would tell Wild Rose that he had no bison or fewer bison available for supply, but instead would sell bison to its competitors.Commencing in August, 2010, the supply of bison for slaughter available to Wild Rose dwindled markedly. [24] Wild Rose adduced affidavit evidence to support these allegations. Wild Rose submits that, although Mr.

Andres initiallycontinued to supply bison to Wild Rose after he resigned as COO, the shipments began to dwindle. It submits that Mr. Andres has sinceDecember, 2010 bought bison from Wild Rose’s other providers for sale to Wild Rose’s customers. The supply of bison from otherproducers is currently very tight. Wild Rose submits that it is losing customers to producers that are being supplied by Mr. Andres andAndres Incorporated. Wild Rose submits that Andres Incorporated has raised its prices for bison offered to Wild Rose above currentmarket prices.

Wild Rose adduced evidence that it was advised by its two largest bison suppliers (apart from Andres Incorporated) thatMr. Andres had contacted them in May, 2011 to advise them of the shareholder dispute within Wild Rose. As a result, both producersdemanded pre-payment from Wild Rose before they would supply bison or meat, although they never had in the past. [25] In short, Wild Rose submits that Mr.

Andres and Andres Incorporated have obtained their herd of bison using Wild Rose’scontacts, supply network, information and good will, and that they are now using those advantages against Wild Rose by supplying WildRose’s competitors and choking off its supply of bison. Analysis 1. Overview [26] An interlocutory injunction is an extraordinary remedy. The onus of establishing that such a remedy is justified falls upon theapplicant, which must satisfy the tripartite test for interlocutory injunctions that was first formulated in modern form in AmericanCyanamid Co. v. Ethicon Ltd., [1975] A.C. 396 (H.

L) and adopted by the Supreme Court of Canada in R.J.R. MacDonald Inc. v. Canada(A.G.), (SCC), [1994] 1 S.C.R. 311. [27] This oft-cited test imposes three conditions before a court will grant an application for an interlocutory injunction: 1. There must be a serious issue to be tried; 2. It must be established that the applicant will suffer irreparable harm if the injunction is refused; and 3. The balance of convenience between the parties favours granting the injunction. 2.

Serious Issue to be Tried [28] It is generally accepted that a court should require the higher standard of a strong prima facie case before granting aninterlocutory injunction in restrictive covenant cases involving the possibility of restraint of trade: Globex Foreign ExchangeCorporation v. Kelcher, 2005 ABCA 419, 376 A.R. 133. [29] In order to determine whether a strong, prima facie case exists, I must consider whether the restrictive covenants at issue arelikely to be determined to be valid and reasonable.

Counsel for the defendants suggests that this is not an analysis that need be conductedat this stage of the proceedings, but this is predicated on the defendants’ submission that the thrust of Wild Rose’s claim is that Mr.Andres and Andres Incorporated have a contractual and/or fiduciary duty either to supply bison exclusively to Wild Rose or to withdrawfrom the industry. For this reason, the defendants characterize the application as an application for a mandatory injunction. That is not,however, how Wild Rose has argued its case.

Wild Rose relies instead on the alleged breach of various restrictive covenants contained

in the Shareholders’ Agreement and the Consulting Agreement and, in the alternative, on the alleged breach by Mr. Andres and/orAndres Incorporated of their fiduciary duties as agents or employees of Wild Rose. What are the restrictive covenants at issue, and how have they been breached? [30] Wild Rose complains of a number of breaches of the Consulting Agreement and the Shareholders’ Agreement, both beforeand after Mr. Andres’ resignation, but such alleged breaches fall under two broad categories as far as the application for an interlocutoryinjunction is concerned. Wild Rose submits that:

a) Mr. Andres and Andres Incorporated should be restrained from selling bison to competitors and customers of Wild Rose, and

b) Mr. Andres and Andres Incorporated should be restrained from contacting Wild Rose’s suppliers, customers or competitors for thepurpose of selling to or buying from those suppliers, customers or competitors any bison or bison products that are the same orsubstantially similar to Wild Rose’s products. Thus, Wild Rose seeks prohibitions both with respect to competition and solicitation. [31] Wild Rose relies primarily on

Section 8.2 and 8.3 of the Shareholders’ Agreement and

Section 19 of the ConsultingAgreement. [32] As noted by the Supreme Court in Elsley v. J. G. Collins, (SCC), [1978] 2 S.C.R. 916 at para.7, a caseinvolving restrictive covenants in a employment situation, I should assess the reasonableness of the restrictive covenants at issue againstthree criteria:

a) Does the employer [applicant] have a proprietary interest entitled to protection?

b) Are the temporal or spatial features of the clause too broad?

c) Is the covenant unenforceable as being against competition generally and not limited to proscribing solicitation of clients of theformer employer [applicant]? [33] The onus of establishing reasonableness is on the applicant for the injunction. The onus of proving the restrictive covenant iscontrary to the public interest lies with the respondent: Elsley at paras 19 and 26. [34] In Elsley, the Court noted that whether a restrictive covenant was reasonably required for the protection of the covenanteecould only be decided by considering the nature of the business and the nature and character of the employment.

Dickson, J. cautioned atpara. 14 that: It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in adisembodied manner, as if it were some strange scientific specimen under microscopic scrutiny.

The validity, or otherwise, of arestrictive covenant can be determined only upon an overall assessment of the clause, the agreement within which it is found and all ofthe surrounding circumstances. [35] Although the defendants in this case were not employees of Wild Rose, the principles set out in Elsley with respect to how toassess the reasonableness of restrictive covenants apply.

[ 36 ] With respect to whether it has a proprietary interest entitled to protection, Wild Rose points out that finding adequate sources of bison is very important to its business and that Mr. Andres was the one charged with that task. It notes that Mr. Andres was the face of Wild Rose with respect to suppliers, and it is also apparent that Andres Incorporated itself became a key supplier of bison to Wild Rose over time. The Shareholders’ Agreement that Mr. Andres signed on behalf of Andres Incorporated identifies supplier lists, the identity of Wild Rose’s clients and price lists as confidential information.

The agreement provides an acknowledgement that the restrictive covenants contained therein are necessary and fundamental to the protection of the business. The Consulting Agreement provides similar provisions and similar acknowledgements. [ 37 ] I am satisfied on the evidence before me that Wild Rose has a legitimate proprietary interest entitled to protection. [ 38 ] The next issue is whether the temporal or spatial features of the restrictive covenants are too broad. I have some concerns with respect to this question, as the restrictions appear very wide at first blush.

Both the temporal and spatial restrictions, however, must be considered in the context of the agreements in question and the circumstances of the parties. [ 39 ] The restriction on competition relied upon by Wild Rose under the Shareholders’ Agreement remains in effect as long as Andres Incorporated remains a shareholder of Wild Rose. That is not unreasonable, given that, as a shareholder, Andres Incorporated has a continuing financial interest in the business. Andres Incorporated points out that it is limited by the terms of the agreements in its ability to cease to be a shareholder.

This is true, and the provisions of the agreement in that regard appear to be onerous to the defendants, but there is no evidence that the defendants were coerced into entering into the agreement or that this was a case of unequal bargaining power at the time the Shareholders’ Agreement was executed.

As indicated in Elsley at para. 16 : [While there] is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants . . . the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power. . . .

The test of reasonableness can be applied, however, only in the peculiar circumstances of the particular case . . . [ 40 ] It is noteworthy that, if Andres Incorporated ceases to be a shareholder, the agreement provides a graduated approach to the temporal aspects of the restrictive covenant on competition, predicated on the length of time the shareholder was a shareholder, and a three-year prohibition on solicitation of customers. Andres Incorporated has been a shareholder, entitled to the benefits of what has by the evidence been a largely successful venture, for at least eight years.

In that context and given the constraints of this kind of business, a three-year prohibition on competition and solicitation of customers after it ceases to be a shareholder would be reasonable. [ 41 ] With respect to the spatial restrictions, while they are wide-ranging by virtue of Wild Rose’s customer list, they apply only to jurisdictions where Wild Rose carries on business.

Again, this is not an unreasonable restriction on an existing shareholder that freely negotiated and agreed to be bound by the Shareholders’ Agreement. [ 42 ] The Consulting Agreement is relevant with respect to its acknowledgement that Andres Incorporated, and through it, Mr.

Andres, will acquire wide experience and knowledge of the business, and also with respect to its provision that incorporates the restrictions in the Shareholders’ Agreement even after the Consulting Agreement has been terminated. [ 43 ] In the circumstances of this case, and on evidence before me, I do not find the temporal and spatial features of the restrictive covenants would fail on the basis of being overly broad. Are the covenants unenforceable as being against competition generally? [ 44 ] Important to this analysis is the nature of the relationship between the defendants and Wild Rose. [ 45 ] Mr.

Andres was more than an employee: he was one of the founding shareholders of the business. This was not a conventional employment relationship. The defendants freely entered into these contracts as founders of the business at the outset of the

venture, and their restrictions were not imposed upon Mr. Andres as a condition of employment. This was not a scenario of unequal bargaining power. Mr. Andres’ employment was not terminated; he resigned as the designated employee of an independent contractor. [ 46 ] It is also apparent from the uncontradicted allegations before me that Mr.

Andres has been able to capitalize on his relationship with various suppliers developed as the Chief Operating Officer of Wild Rose in a manner that has affected Wild Rose’s relationship with its customers, adding force to the argument that a non-competition covenant was required for Wild Rose’s protection, and that the restrictive covenants are reasonable and necessary. [ 47 ] Again, Elsley is helpful on this issue.

Even though Elsley involved an employment situation, which requires a more rigorous analysis of the restraint of trade concern, the Court found at para. 19 that: . . .in exceptional cases, of which I think this is one, the nature of employment may justify a covenant prohibiting an employee not only from soliciting customers, but also from establishing his own business or working for others so as to be likely to appropriate the employer’s trade connection through his acquaintance with the employer’s customers. This may indeed be the only effective covenant to protect the proprietary interest of the employer.

A simple non-solicitation clause would not suffice. [ 48 ] It is clear that the Court considered Mr. Elsley’s close personal acquaintance with, and knowledge of, the customers to be key. Dickson, J. noted that this close relationship was anticipated when the clause was drafted. He also remarked upon the number of clients who had shifted their business to Mr. Elsley. The evidence was unclear as to whether Mr. Elsley had solicited these clients, though there was evidence that he had advertised his new business, and the majority of the Court of Appeal found that he had actively solicited former clients.

The Supreme Court did not attempt to answer that question, commenting at para 23 that the point was that a non-solicitation covenant in the circumstances would have been meaningless. [ 49 ] The same is true here. In this limited, tight market for supply of bison meat, and given Mr. Andres’ opportunity to establish himself as a key supplier to Wild Rose’s customers and to develop relationships with its other suppliers, a non-solicitation covenant would be ineffective.

Subsequent events corroborate this concern. [ 50 ] The defendants submit that these restrictive covenants should fail by reason of ambiguity, given that the term “business” in

Section 8.2 of the Shareholders’ Agreement is not defined. [ 51 ] In Globex Foreign Exchange Corporation , the majority of the Court of Appeal found the word “dealings” in a restrictive covenant to be ambiguous and also too broad, in the sense of preventing a departing employee from soliciting customers with respect to any business of any client of the employer, rather than just the business of the employer. The restrictive covenants in this case do not suffer from these defects.

They restrict competition and solicitation with respect to Wild Rose’s “business” as carried on, and solicitation with respect to products and services that are the same or competitive with Wild Rose’s products and services.

While the term “business” is not defined with particularity, the defendants were both one of the founding shareholders of Wild Rose and the assigned employee of the consultant and cannot claim that they were not aware of the scope of the business. [ 52 ] I am satisfied on the evidence before me on this interlocutory application that Wild Rose has established a strong prima facie case that the defendants have breached their obligation not to compete with Wild Rose by using confidential information for their own purposes, by supplying competitors with bison, by purchasing bison from Wild Rose’s suppliers and diverting them to competitors and by interfering with Wild Rose’s suppliers and customers. [ 53 ] I am also satisfied that Wild Rose has established a prima facie case that the restrictive covenants in issue are reasonable and not too broad to be enforced.

On the evidence before me on this application, the defendants have not established that restrictive covenants are contrary to the public interest. 3. Irreparable Harm

[54] The Supreme Court in R.J.R. MacDonald at para. 60 noted that permanent market loss, irrevocable damage to a businessreputation or the real potential that an applicant will be put out of business if the injunction does not issue all constitute examples ofirreparable harm. So is the loss of actual customers: Sheehan & Rosie Ltd. v. Northwood, [2009] O.J. No. 716 (S.C.J.) at para. 37.

WildRose has adduced evidence of the loss of its largest customer and the likelihood of the loss of present and potential customers, which losswill be impossible to quantify. [55] At para. 43 of Sheehan, Quinn, J. set out a useful way to consider the issue of irreparable harm in restrictive covenant cases: Where the alleged harm involves damages from a departing employee in competition with his former employer, the courts haverecognized that the employer generally cannot be adequately compensated in damage because it is difficult to know or prove the impactof the conduct of the employee.

In such situations, the irreparable harm test may be rephrased by asking the questions: “Is it just to leavethe [employer] to its remedy of damages in the circumstances?” This rephrased test was first articulated by Lord Justice Sachs in EvansMarshall & Co. v. Bertola S.A., (1972) [1973] 1 W.L.R. 349 (Eng. C.A.) at 369. [56] I also note that the defendants acknowledged in the Shareholders’ Agreement that the restrictive covenants were necessaryand fundamental to the protection of the business and that damages were an inadequate remedy for a breach.

While this is not a completeanswer to an inquiry into the sufficing of evidence of irreparable harm, it is a factor, particularly since these acknowledgements were partof a contract negotiated by parties of equal bargaining strength. [57] In this case, the evidence of actual and potential irreparable harm is sufficient to establish that Wild Rose will sufferirreparable harm if the injunction is not granted. 4. Balance of Convenience [58] The question to be asked in considering the third branch of the R.J.R. MacDonald test was succinctly put by the SupremeCourt of Canada in Manitoba (Attorney General) v.

Metropolitan Stores Ltd., (SCC), [1987] 1 S.C.R. 110 at para. 35 asfollows: which party will suffer the greater if the injunction is granted or refused? [59] Wild Rose points out that the defendants derive income from a large farm in Saskatchewan that generates income from morethan just the sale of finished bison, and that Mr. Andres runs other businesses that are not dependent on the farm.

Wild Rose submits thatit will be put out of business if the injunction is not granted, and the evidence supports this submission. [60] The defendants submit that, in considering the balance of convenience, it is appropriate to consider the comparative strengthof the parties’ cases: Paul Sadlon Motors v. General Motors of Canada, 2011 ONSC 4432 at para. 74. They submit that Wild Rose’scase regarding a contractual right to an exclusive supply arrangement with the defendants is exceptionally weak.

While that may be so,that is not the case put forward in this application, but rather Wild Rose’s assertion of breaches of restrictive covenants. I have found thatthese submissions establish a strong prima facie case. [61] In Debra’s Hotels Inc. v.

Lee (1994), 159 a.R. 268 at para. 36, Hunt, J. in considering the balance of convenience quotedJustice Megarry in a notable English case as follows: Stripped of the persuasions of counsel for the defendant’s advocacy, the proposition is: “I am making handsome profits by doing what Icovenanted and undertook not do; therefore it would be wrong for the court to stop me.” I can conceive of few propositions calculated toappeal less to equity. The same can be said of this case. The balance of convenience in this case favours Wild Rose.

5. Breach of Fiduciary Obligations [ 62 ] Given the decision I have reached on the application for injunctive relief on the basis of breach of restrictive covenants, I do not need to consider the alternate argument of breach of fiduciary duty.

Conclusion [ 63 ] Wild Rose has established that it is entitled to an interim injunction as sought, restraining the defendants from directly or indirectly selling any bison, or alternatively from selling or tendering any bison, to any competitor or customer of Wild Rose, and from directly or indirectly contacting any suppliers, customers or competitors of Wild Rose for the purpose of selling to or buying from those suppliers, customers or competitors any bison, products or services which are the same as or substantially similar to the bison, products or services of Wild Rose. [ 64 ] As it undertook to do during the application, Wild Rose must provide its undertaking in damages to be filed in conjunction with the injunction order. [ 65 ] If the parties are unable to agree on costs, they may make submissions on that issue.

Dated at the City of Calgary, Alberta this 4th day of November, 2011. B.E. Romaine J.C.Q.B.A. Appearances: Scott H. D. Bower Bennett Jones LLP for the Plaintiff Laurie C. Livingstone Gowling Lafleur Henderson LLP for the Defendants