Written by Lewis Waring, Paralegal, LL.B., Articled Clerk, Editor, First Reference Inc.
In a recent Ontario ruling, an employer was forced to pay an extremely high amount in costs after attempting to enforce its non-competition and non-solicitation clauses twice in the middle of the same legal proceedings. The employer had brought two separate motions that both sought to prevent its former employee from working for its competitor. However, the fact that the employee had actually ceased working for its competitor and that the non-competition and non-solicitation clauses in its contracts had actually expired made the employer’s request impossible. The impossibility of the employer achieving its goals did not prevent it from attempting to enforce its contract not once but twice. What resulted was a colossal waste of judicial resources and an exorbitant amount spent on legal costs by all parties involved. The amount of money spent on the employer’s choice was essentially doubled. given the fact that it had targeted not only its former employer but also its competitor. Given the employer’s unreasonable attempts to force the justice system to bend to its will on two separate occasions, it was forced to pay almost all of the legal costs of its former employee and its competitor.
The employer, in this case, alleged that one of its former employees went to work for its competitor, in violation of the non-competition and non-solicitation clauses of their contract. However, the employer had also targeted a second employee. Although it did not claim that the second employee had gone to work for a competitor, it nevertheless accused him of violating his contract with the employer regardless.
The employer alleged that the first employee had misappropriated confidential information for his own business interests and committed fraud in coordination with a competitor. As the employee’s contract had contained a six-month non-competition clause and a 12-month non-solicitation clause, the employer regarded this alleged conduct as a violation and sought to prevent the first employee from continuing by having the court grant an injunction.
However, the employer failed to demonstrate that it had lost a single sale or customer or any business due to the first employee’s conduct. It also failed to demonstrate any loss of revenue or harm to its reputation or market share. In other words, the employer’s claim was completely baseless.
While the employer alleged that the second employee had also stolen and misused confidential information, and breached his fiduciary duty, among other misconduct, it did not even bother to offer any reason for these accusations. While its allegations against the first employee were baseless, the employer had not even bothered to make allegations against the second employee in the first place.
As the employer’s request for an injunction against its two former employees fell dramatically short of showing any wrongful conduct, its request was denied. However, the employer did not change tact once it had been denied an injunction. Instead, it decided to try the same strategy again, launching another attempt at obtaining an injunction. Needless to say, this second attempt also failed.
As a result of these obstructive and outrageous tactics, the court decided to penalize the employer by forcing it to pay the employees’ legal costs. Specifically, the court awarded the first employee costs on a “substantial indemnity” basis, forcing the employer to pay $309,499.51, which was most, but not all, of his legal costs. The second employee, in contrast, was awarded costs on a “full indemnity” basis, with the employer being forced to pay $154,654.29, the entire amount of his legal costs.
Based on its conduct, described as “reprehensible, scandalous, or outrageous,” the employer was forced to pay costs far above the normal range. Normally, an unsuccessful party will be required to pay an amount of costs called “partial indemnity.” Partial indemnity generally requires an unsuccessful party to pay some but not all or even most of the successful party’s costs. However, when an unsuccessful party engages in conduct that is so outrageous that it is considered to be an “exceptional circumstance,” an elevated cost award may be justified. In most cases, a party who engages in such conduct will have taken a legal step to punish or intimidate another party, engaged in tactics to hinder competition or made unsubstantiated allegations of fraud.
An elevated cost award will not necessarily require an unsuccessful party to pay all of its adversary’s costs. In some cases, such a party will be required to pay costs on a “substantial indemnity” basis. Substantial indemnity means that a party is forced to pay a majority of their adversary’s costs. In the context of a motion, a court may award substantial indemnity when a motion is groundless or based on unfounded allegations of fraud, deceit or conspiracy.
While substantial indemnity is intended to be awarded rarely, there is an even more severe penalty that may be awarded when an unsuccessful party engages in conduct deemed to be “extraordinary and truly reprehensible.” In the face of such conduct, courts on occasion are permitted to award costs on a “full indemnity” basis. Full indemnity means that a party is forced to pay the entire amount of another’s legal costs. Such a rare award is intended to set impugned behaviour apart from the majority of cases. As a result, even behaviour deemed to be outrageous or reprehensible may fail to be extreme enough to justify full indemnity.
In this ruling, the employer had made extremely serious allegations against its former employees and sought extraordinarily broad relief. These tactics greatly increased the legal fees incurred by the two former employees. Given the fact that its allegations lacked any basis and it ultimately withdrew much of the relief it sought, the employer’s tactics were judged to be a means of punishing the employees instead of protecting a legitimate business interest.
However, while the employer’s tactics against its two former employees were similar, the costs awarded to each were distinct. The reason for this distinction was the fact that the second employee had been almost entirely absent from the employer’s allegations. While the employer made a number of allegations against the first employee, it barely made any mention of the second employee. Its decision to seek an injunction against the second employee without providing any real reason for doing so left him to pay exorbitant amounts of money without reason. The employer’s decision to force the second employee to engage in complex litigation without even bothering to make allegations against him made its tactics so extraordinary that they justified an award of full indemnity.
Much attention in employment law is paid to court awards of damages. This focus makes sense given that damages represent the value of the wrongdoing of an employer. However, any employer with litigation experience understands that the fees paid to legal counsel can be just as expensive as the damages themselves. The reality of legal fees is recognized by the justice system, which attempts to offset these costs by forcing the blameworthy party to help pay those of the other. Given the substantial funds parties invest in litigation, employers that are unsuccessful in court may find themselves ordered to pay costs that may equal or even exceed the amount they are forced to pay in damages. This ruling is especially salient in this regard. Although the two employees and their former employer were spending hundreds of thousands of dollars on legal fees, the specific relief sought, an injunction, was non-monetary.
Employers who end up in litigation by their own will or as a result of the claims of their employees should take heed of the hidden costs of court. While such hidden costs include the fees employers pay their own lawyers, these costs may also include the legal fees of their employees and any other party involved in a legal dispute. While it is rare that an employer would be forced to pay the full amount of an adversary’s legal fees, this ruling demonstrates that such penalties can indeed arise. Employers would do well to take the true expenses of court into account as they decide not only whether to engage in litigation but when they make strategic decisions such as whether to bring motions and how to design their case.
Source: Aware Ads Inc. v. Walker 2022 ONSC 6121