Court grants injunction against departed employees accused of using former employer’s trade secrets to compete.
Many employers’ businesses depend on keeping their proprietary technology, manufacturing processes, or other trade secrets confidential. Unfortunately, one of the greatest risks that such employers face is having their trade secrets stolen by their own employees who leave to join a competitor or start their own company.
One recent Alberta decision illustrates the importance of proactively implementing confidentiality agreements with employees who will be given access to the employer’s trade secrets to perform their jobs. In SHAC Solutions Inc. v. Guenther [SHAC], the Alberta Court of King’s Bench granted an injunction restraining the former employees of an employer from competing with it, pending trial of the employer’s claims against them for alleged misappropriation of its secret manufacturing process. Crucially, this was due in part to the employer proactively having its employees sign confidentiality agreements prohibiting the use or rather misuse of its confidential information.
Background
SHAC Solutions Inc. (“SHAC”) is a manufacturer of humic acid, a compound used in agriculture, resource extraction, and other environmental applications. SHAC’s founder developed a proprietary process for manufacturing humic acid and obtained a patent related to the process in 1992. However, the patent did not include an exact formula, or the specific procedures used in the manufacturing process.
In 2023, five of SHAC’s employees (the “Respondents”) left the company and started a competing humic acid manufacturing business called Envirotech Humics Inc. (“EHI”), which was able to jump-start production of humic acidic virtually immediately. SHAC quickly began losing customers to EHI. Consequently, SHAC alleged that the Respondents were using its secret manufacturing process to produce humic acid at EHI, and it commenced legal action against them for breach of their confidentiality obligations (among other causes of action). Notably, three of the Respondents had served as Directors of SHAC and had duties of confidentiality as well as fiduciary duties to SHAC, given their positions. The remaining two employees had signed confidentiality agreements prohibiting them from misusing SHAC’s confidential information. In response to the lawsuit, the Respondents asserted that SHAC’s process for manufacturing humic acid was in the public domain and therefore not confidential, largely because the 1992 patent had expired.
Subsequently, SHAC applied to the court for an injunction restraining the Respondents from being involved in the manufacture of humic acid, pending the trial of its claims.
The Decision
The Alberta Court of King’s Bench ultimately granted the injunction restraining the Respondents from manufacturing humic acid until the trial of SHAC’s claims.
The court first held that the legal test for obtaining an interim (i.e., pre-trial) injunction requires the applicant to establish: (i) that there is a serious issue to be tried; (ii) that it will suffer “irreparable harm” if the injunction is not granted; and (iii) that the “balance of convenience” favours the injunction being granted.
In this case, the court found that SHAC had established a strong prima facie case that its manufacturing process was confidential, that the departed employees all owed confidentiality obligations to SHAC, and they had breached those obligations by using SHAC’s manufacturing process at EHI. In particular, the court made preliminary findings that: (i) SHAC’s manufacturing process was confidential because it was not generally known to the public and the expired patent did not contain details of actual procedures used; (ii) the departed employees all had confidentiality obligations not to misuse SHAC’s confidential information (either because they were fiduciaries, or because the signed confidentiality agreements); and (iii) that the departed employees had all breached their confidentiality obligations at EHI.
The court further found that SHAC had proved that it would suffer irreparable harm if the injunction were not granted, despite it also ruling that the loss of customers can be adequately compensated with money and does not constitute irreparable harm. This is because the court held that a trade secret which has been divulged cannot be made secret again with money, such that SHAC would suffer irreparable harm if the injunction were not granted.
Finally, the court also found that the balance of convenience favoured the injunction being granted, after holding that that this component of the test requires analyzing which party would likely suffer more if it were granted or refused. Notably, both SHAC and the departed employees argued that they would be put out of business if the court did not rule in their favour. In response, the court succinctly stated that “if someone has to go out of business, it should be the business that should never have been created”.
In the result, the court granted the injunction restraining the departed employees from manufacturing humic acid until SHAC’s claims against them could be tried.
The Bottom Line
The SHAC decision represents an important reminder for employers operating businesses which depend on keeping trade secrets confidential that one of the greatest risks to their businesses is having their trade secrets stolen by their own employees. In particular, SHAC illustrates how a handful of rogue employees can very quickly establish a competing business by unlawfully misusing their former employer’s confidential information.
Fortunately, SHAC is also a positive decision for employers in that it demonstrates that the courts will grant pre-trial injunctions against former employees misusing their confidential information in appropriate cases, and that their trade secrets being divulged is sufficient for the irreparable harm requirement to be met.
Finally, SHAC also illustrates why it is so important for employers to proactively protect their confidential information, including by having all new employees agree to contractual confidentiality obligations. Indeed, part of the reason the SHAC was successful in obtaining an injunction was that it had all its non-fiduciary employees sign confidentiality agreements. Accordingly, employers should proactively require all employees who will be given access to confidential information to sign confidentiality agreements.
If you have require any assistance with implementing confidentiality agreements to protect your business, or if you need representation to address a potential breach of confidentiality by a current or former employee, please do not hesitate to contact us for expert legal advice.
