2005 BCSC 909 ACS Public Sector Solutions Inc. et al v. Courthouse Technologies Ltd. et al

Before: The Honourable Mr. Justice Williamson

Reasons for Judgment

Counsel for the Plaintiffs	S.K. Gudmundseth, Q.C. S. Miller
Counsel for the Defendants	C. Forguson
Date and Place of Hearing:	June 1, 2 and 3, 2005
	Vancouver, B.C.

INTRODUCTION

[1] The plaintiff, ACS Public Sector Solutions Inc. ("ACS"), is the Canadian subsidiary of the American corporation Affiliated Computer Services, Inc. ACS provides jury management services to courts. It is a large operation, supporting courts in a number of states of the United States.

[2] The defendant, Courthouse Technologies Ltd. ("CTL"), is a new company formed in January of this year. The three individual defendants Scott Kerr, Thomas Gravelle and Colin Millard were employees of ACS or its predecessor companies. The defendant Paul Arntsen was a consultant who worked on a contractual basis with ACS and its predecessors. Kerr left ACS's predecessor in l998. Millard and Gravelle left ACS in February of 2005. Arntsenís contract was not renewed in December of 2004.

[3] There are three applications before me. First, ACS seeks an interlocutory injunction to prevent the defendants from using or disclosing the plaintiffsí proprietary and confidential information which it says they hold and intend to use. Second, the defendants Paul Arntsen and Senaca Software Inc. (ìArntsenî), seek a declaration that a restrictive covenant which he executed when his contract was not renewed in 2004 is unenforceable. Finally, all of the defendants seek a ruling, pursuant to Rule 18A of the Rules of Court, dismissing the plaintiffsí claims.

BACKGROUND

[4] The Vancouver office of ACS, working with its head office in Lexington, Kentucky, is responsible for servicing the companyís jury management clients. Some 700 court clients in the United States use the plaintiffsí software. The company plans to extend into the Canadian market. While not yet servicing any courts in Canada, they are apparently involved in bidding in this country.

[5] ACS's software is based in part upon what they call ìsource codeî, which is written in computer programming language and is both proprietary and confidential. Employees who had access to the source code signed confidentiality agreements. The software source code concerned was created by ACSís predecessor company Omni-Tech Systems Ltd. (ìOmni-Techî), using a software development tool called "Power Builder". Omni-Tech amalgamated with ACS in April of 2004. The defendants do not dispute the contention that the source code is confidential and the property of the plaintiff.

THE DEFENDANTS

[6] Kerr is the President of CTL. He was employed as a sales representative for Omni-Tech prior to 1998.

[7] Arntsen worked on a contract basis as a senior software engineer with the plaintiffs. The plaintiffs claim he was their senior software engineer until they opted not to renew his contract in December of 2004. He had signed a Non-Competition and Confidentiality Agreement (the "Agreement"), with Omni-Tech in 2000. The non-competition clause stated that during the term of the Agreement, and for 12 months following its termination, he would not engage within North America in a broad range of activities related to the servicing of courts without the written consent of the company. The non-solicitation aspect of the Agreement requires that for that period of 12 months he not contact any person or company who is or was a customer of ACS or its affiliates at any time within two years prior to the date of the termination.

[8] The Agreement has a severability clause which provides that should part of it be found to have no effect, the remainder of the contract continues. In 2003, the Agreement was amended and all the unamended portions of the Agreement were said to remain in full force and effect.

[9] Gravelle and Millard were employed as software engineers by ACS until February of 2005. At that time, each, within a three-day period, resigned. Each gave two weeksí notice. Gravelle had been employed with the company since 1998. He programmed ìsource codeî for the jury management software. Millard, who had been employed by ACS since 2000, also programmed ìsource codeî. Both Gravelle and Millard signed a confidentiality agreement.

PLAINTIFFSí SUBMISSIONS

[10] The plaintiffs say that in late 2004, Kerr set out to establish a company to compete with ACS in the jury management business. They say he recruited ACS's senior employees and that he made false statements to at least one client of ACS that ACS would no longer be providing jury management services.

[11] The plaintiffs also say that they ìbelieveî that the new company, CTL, is using confidential information taken from the plaintiffs. In support of this, they point to CTLís website that reports it is developing jury management software that is ìcompatible with other commercially available jury management softwareî. They say CTL has introduced a hand-held product which is similar to one which they developed. They say that Millard forwarded information about Power Builder, the development program required to access ACSís jury software, to Kerr prior to Millardís departure from ACS. They also say that Millard was caught trying to remove computer discs from the plaintiffsí premises.

[12] Further, the plaintiffs submit that Arntsen violated the Agreement referred to above by utilizing confidential information which he obtained from ACS during the time that he was providing contractual services to them as a consultant.

[13] In support of this, they say that one of their employees, Sheila Gill, was approached by Millard who told her that Kerr had offered him a job. She deposed she asked Millard if Arntsen was involved in the new company. She deposed that Millard did not answer directly, but did say that he, that is Millard, could not do the programming alone. She later asked Kerr if Arntsen was involved. He replied he could handle Arntsen. From these exchanges, Ms. Gill and the plaintiffs inferred that Arntsen is involved in the new company.

[14] The plaintiffs also point to the fact that CTLís website says the company has over 40 years of combined experience and they say that if this is true it would have to involve more than Kerr, Millard and Gravelle, necessitating the involvement of Arntsen.

[15] The above allegations are denied by the defendants. Kerr has filed affidavit evidence saying that he has not taken any of the plaintiffsí ìsource codeî for its jury management software. He deposes that in any case he views that software as ìobsolete and worthlessî. He also deposes that when he incorporated CTL he did ask Arntsen to join him. However, he deposes that Arntsen told him he would not be involved until 12 months had expired from the December 2004 date of the termination of his contract because he did not want to be involved in a dispute with the plaintiffs about their restrictive covenant. Kerr deposes that as a result Arntsen ìhas not been involved in CT[L] in any wayî.

[16] Kerr also deposes that he approached Millard and Gravelle after he learned that Arntsenís contract had not been renewed. He says that he asked them to join his new company because he wanted to utilize their skills. His affidavit material discloses that he ìexpressly told Mr. Gravelle and Mr. Millard not to bring anything with them except their skills and experienceî.

[17] Both Millard and Gravelle deny they have removed or made use of any of the plaintiffsí confidential information. They have deposed, in affidavits consistent with that of Kerr, that Kerr told them they were not to bring anything from the plaintiffs and that all Kerr wanted was their ìskills and expertiseî.

[18] Kerr also denies that he has made false statements to clients of ACS. He concedes that he has solicited potential new clients including current customers of the plaintiffs. However, in contacting them he has, he deposes, used his own experience in the industry as well as publicly available resources in order to find how to contact them. He denies having made any damaging statements about ACS.

[19] At the heart of the plaintiffsí allegations is the claim that Millard was caught trying to remove discs from the plaintiffsí premises. According to the affidavit of Steven Andrews, the Manager of the Vancouver area office of ACS, during a conversation with another employee he learned that Millard was about to join a competing company. This incident occurred after Millard had given notice, but before his two weeksí notice period was concluded. Andrews confronted Millard, he deposes, and asked him to leave immediately. Andrews says that as Millard was packing up his belongings he noticed that ìhe had approximately 20 computer discs in his knapsackî. Andrews said he took the discs and informed Millard that he would not allow him to take any electronic media from the premises.

[20] Andrews also deposed that these discs were reviewed by one Byers, an expert in the American office of ACS. Byersí affidavit filed in this application says that he was provided with 25 computer discs and that some of the discs contained copies or portions of the jury management software code.

[21] Millard deposes that he agrees Andrews refused to let him take certain discs from the office on the day he left. However, he says there were neither 20 nor 25, but 16 CD discs which were in his knapsack, or which he was about to put in his knapsack. Millard deposes that he believed these discs contained personal information. He says he had no intention to remove any source code material and he does not believe that he did.

[22] His affidavit evidence is that there were a further nine discs, not in his knapsack, but in a drawer in his desk. He agrees that these discs contain source code information. However, he said that these discs were made some two years ago at the request of Andrews to be kept as backup at a time the office was ìmigratingî the information from one system to another. In support of this, he points to emails from January of 2004, which are in evidence, in which he reported to Byers that he has archived a great deal of such information on nine CD discs. Further, he swears he had no intention to take the discs which he left in the drawer.

[23] Without deciding on this issue, it appears to me that the evidence tends to show that the material reviewed by Byers after Millard had left was material that he put onto a disc long before he contemplated leaving ACS. What is not in dispute is the fact that Millard did not take that information with him. Andrews prevented him from taking any discs.

[24] Although it may not be necessary to show that Arntsen, Millard and Gravelle owed a fiduciary duty to ACS, I am also of the view that on the material before me that has not been established. I make no final determination on this issue because there may be further evidence at trial. I accept that such a fiduciary duty is that set out by the Manitoba Court of Appeal in W.J. Christie & Co. v. Greer (1981), 121 D.L.R. (3d) 472, (Man. C.A.) at p. 477, where it is stated:

...a director/officer/key management person who occupies a fiduciary position. Upon his resignation and departure, that person is entitled to accept business from former clients, but direct solicitation of that business is not permissible. Having accepted a position of trust the individual is not entitled to allow his own self-interest to collide and conflict with fiduciary responsibilities.

[25] Thus, one must consider whether these three men held key positions in management or as officers of the company. Arntsen was employed on a contractual basis. While the plaintiffs say he had access to confidential information, he deposes that since the termination of his contract at the end of 2004 he has not been involved with, employed by, or an investor in CTL. He says that neither he nor his company are involved at present in developing jury management software. He also deposes that the primary reason he is not working is because of the restrictive covenant, although he believes it to be unenforceable. He says he does not ìneed the hassle, aggravation or cost of being namedî in a lawsuit.

[26] Both Millard and Gravelle depose that neither of them have ever been an officer, director or shareholder of the plaintiffs. They each say they had no management functions, that no one reported to them, and that they exercised no discretion in matters affecting the plaintiffs. They had no signing authority and did not attend board meetings or management meetings.

[27] On this evidence, I conclude that it has not been shown at this time that these three defendants attracted responsibilities as fiduciaries.

THE TEST FOR AN INJUCTION

[28] In RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311, the Supreme Court of Canada set out a three-part test to be applied when considering interlocutory injunctions. As is well known, previously our Court of Appeal had considered that test but would have combined the second two aspects: See B.C. (A.G.) v. Wale (1986), 9 B.C.L.R. (2d) 333 (C.A.).

[29] While the fundamental question is whether the granting of an injunction is just and equitable in the circumstances, the three stages are as follows:

(1) has the applicant demonstrated a fair question to be tried;

(2) has the applicant demonstrated it will suffer irreparable harm if the injunction is not granted; and

(3) where does the balance of convenience lie?

[30] I ask whether there is a fair question to be tried. It is suggested that the three personal defendants had access to client files, confidential company information, and the source code for the jury software. The plaintiffs say they have taken this information and used it or intend to use it. The defendants deny this. I conclude there is a fair question to be tried.

[31] However, I also conclude that the plaintiffs have neither persuaded me that they will suffer irreparable harm if the injunction does not go nor that the balance of convenience favours the granting of an injunction.

[32] I note that the plaintiffs submit that proof of irreparable harm is not required where an injunction is sought to prevent the violation of a negative covenant. This rule, however, is not inflexible: See Sekhon v. Armstrong, 2003 BCCA 362 at para. 22. I will return to the restrictive covenant issue below.

BALANCE OF CONVENIENCE

[33] In C.B.C. v. C.K.P.G. Television (1992), 64 B.C.L.R. (2d) 96 (C.A.) at para. 23, the court set out the factors which should be considered in assessing the balance of convenience. They include:

...the adequacy of damages as a remedy for the applicant if the injunction is not granted, and for the respondent if an injunction is granted; the likelihood that if damages are finally awarded they will be paid; the preservation of contested property; other factors affecting whether harm from the granting or refusal of the injunction would be irreparable; which of the parties has acted to alter the balance of their relationship and so affect the status quo; the strength of the applicant's case; any factors affecting the public interest; and any other factors affecting the balance of justice and convenience.

[34] The plaintiffs say that wrongful solicitation of clients, loss of market share and diminution of goodwill can amount to irreparable harm. They also say that this harm will be impossible to calculate. They note it is difficult to assess the value of goodwill and that in the particular facts of this case it is difficult to determine which part of software which may be developed by the defendants is based upon the plaintiffsí source code material.

[35] I am not persuaded. First, there is no conclusive evidence at this time that the defendants intended to take or have used any source code material. Rather, there are suspicions and "belief". This brings to mind the words of Whitford J. in Reinforced Plastics v. Swansea Plastics, [1979] F.S.R. 182 (H.C.J. - Ch. Div.) at p. 182:

...unless the plaintiff can show that he has some basis for a reasonable belief in his assertion that the defendants are making use of his confidential information, then the action can only be characterised as speculative and fishing, and ought not, in my judgment, to be allowed to proceed.

[36] Second, the assessment of the value of goodwill, while difficult, is not something unknown to courts.

[37] Finally, the fact that it may be difficult to decide which portions of some future software developed by the defendants is dependant upon the plaintiffsí material is speculative. It is not determinative of damages. What is being discussed here are contracts to service courts. Those contracts have a value. If the plaintiffs demonstrate at trial that they have lost business or contracts as a result of wrongful activities of the defendants, damages will be a matter of evidence.

[38] In Faccenda Chicken Ltd. v. Fowler, [1985] 1 All E.R. 7245, aff'd. [1986] 1 All E.R. 617 (C.A.), the court divided information into three categories. The first was trivial information which would not be protected against use by a former employee. The third was specific trade secrets which would be so protected. The middle category was described, at p. 731 of the trial judgment, as follows:

Second, there is information which the servant must treat as confidential, either because he is expressly told it is confidential, or because from its character it obviously is so, but which once learned necessarily remains in the servant's head and becomes part of his own skill and knowledge applied in the course of his master's business. So long as the employment continues, he cannot otherwise use or disclose such information without infidelity and therefore breach of contract. But when he is no longer in the same service, the law allows him to use his full skill and knowledge for his own benefit in competition with his former master...

[39] On the evidence before me, I conclude that is the situation we have here. It has not been demonstrated that the defendants are doing anything other than using or planning to use their own skills and expertise as requested Kerr.

[40] In considering the C.B.C. factors set out in para. 33 above, I conclude that damages are an adequate remedy for the plaintiffs (a large corporation), but may not be for the defendants (a tiny company). I conclude on the evidence before me it is more probable than not that the confidential information concerned will be preserved. I find the plaintiff's case not particularly strong, and I have in mind the public interest in a competitive market.

[41] I repeat that I am not making any final determinations here. Those remain for trial. I conclude, however, that on the evidence before me, I am not persuaded that the defendants intended to take, have taken, or have used the plaintiffsí confidential information. It would not be appropriate to issue an injunction where a speculative belief by the applicant that the defendants may have or may use confidential information is countered by express testimony, supported by other evidence, that they neither have such information nor intend to have or use such information.

[42] In the circumstances, the balance of convenience favours the defendants. The application for the injunction is dismissed.

THE NEGATIVE COVENANT

[43] Given the above, I do not need to consider the effect of the negative covenant, executed by Arntsen, with respect to the injunction. However, Arntsen applies have the negative covenant set aside as unenforceable. In the alternative, they ask that portions of the Agreement be severed.

[44] The relevant portion of para. 8 of the Agreement reads as follows:

8.1.1 During the term of this Agreement and for 12 months following the termination of this Agreement, neither the Consultant nor Arntsen shall, without the written consent of the Company:

(a) own or have any interest directly in;

(b) act as an officer, director, agent, employee or consultant of; nor

any person, firm, association, syndicate, partnership, joint venture, collaboration, corporation or other entity that is engaged within North American in: (i) servicing courts of law, sheriffs, the judicial system, the judiciary, or any entity involved in case management, jury selection, jury management or jury administration, or (ii) a business that is substantially similar to or competes with the business engaged in by Omni-Tech Systems Ltd. as at the date hereof, whether or not Omni-Tech Systems Ltd. continues to exist after the date hereof.

8.1.2 Neither the Consultant nor Arntsen shall, for a period of 12 months from the date of termination of this Agreement:

(a) directly or indirectly, either personally, by agent or by letters, circulars or advertisements, contact for the purpose of solicitation or solicit any person, firm, association, syndicate, joint venture, collaboration, corporation, business entity or crown orporation who is or was a customer of the Company or its Affiliates on or at any time within the two years prior to the date of termination of the Consultantís employment with the Company or who was scheduled to become a customer of the Company or its Affiliates within twelve months prior to the date of such termination of employment.

[45] The defendants concede that it is appropriate that the Agreement restrict Arntsen or his company from being involved in jury management programs. However, they say that the other restrictions go too far and are severable because the agreement, in para. 14.1 states:

If any provision of this Agreement for any reason is declared invalid, such declaration shall not affect the validity of any remaining portion of the Agreement, which remaining portion shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated and it is hereby declared the intention of the parties that they would have executed the remaining portions of this Agreement without including therein any such part, parts or portion which may, for any reason be hereafter declared invalid.

[46] Restrictive covenants must be reasonable. I accept the law as stated by A.F. Wilson J. of this court in Unisource Canada Inc. v. Network Paper and Packaging Ltd. 2000 BCSC 396, at para. 26:

It is one thing to prohibit Davis from performing activities ìwhich compete with the business activities of Unisourceî (as the covenant does). However, it is quite another to prohibit him from ìany activities which are similar to the activities carried on by the Companyî, especially when the term ìactivitiesî is not defined. That is broader than is necessary to protect the legitimate proprietary interest of Unisource. As stated in Tank Lining Corp. v. Dunlop Industrial Ltd. [(1982), 140 D.L.R. (3d) 659 (Ont. C.A.) at p. 666] -

the test of reasonableness in the interest of the party upholding a restrictive covenant is that it is not more than adequate to protect that partyís interest.

[47] I also have in mind the words of Dickson J., as he then was, in Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916 at 923 where he said that:

A covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interest. As in many of the cases which come before the courts, competing demands must be weighed. There is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants.

[48] Here, I conclude that the restrictive covenant goes beyond what is reasonably necessary to protect the interests of the plaintiff. The business with which we are concerned here is the provision of computer services for jury management or administration. It is apparent in paragraph 8.1.1 quoted above that the covenant would restrict Arntsen from any involvement in servicing courts of law in ways unrelated to jury management or in any business that is substantially similar to the business engaged in by ACSís predecessor. Further, the covenant in paragraph 8.1.2(a) prevents Arntsen from soliciting clients of affiliates of ACSís predecessor, affiliates which on the evidence are involved in many other businesses.

[49] Taking into account that the parties contemplated in paragraph 14.1 that if any provision of the agreement is invalid the remainder of it remains in full force and effect, I would limit the restriction set out in para. 8.1.1. to any entities involved in jury selection, jury management or jury administration. Insofar as 8.1.2 is concerned, I would strike from subparagraph (a) the words ìor its affiliatesî in the two places in which it is found.

[50] The offending words as set out above will be severed from the agreement and the remainder of the agreement will remain in force.

DISMISSAL OF THE PLAINTIFFSí CLAIMS

[51] The defendants seek to have the plaintiffsí claims dismissed pursuant to Rule 18A. I have already concluded that there is a fair question to be tried. Further, I accept the submissions of Mr. Gudmundseth that to dismiss this claim at this stage of the proceedings when pre-trial procedures have not been completed would be premature.

[52] Costs will be in the cause.

ìL.P. Williamson, J.î
The Honourable Mr. Justice L.P. Williamson

Citation:	*ACS Public Sector Solutions Inc. et al v. Courthouse Technologies Ltd. et al,*
	2005 BCSC 909