In my You Must Strike While the Iron is Hot post, I discussed how the courts take a flexible and imaginative approach to determining the legal remedy for the theft of trade secrets or confidential information. To recap, Canadian courts are typically reluctant to grant a new injunction order that prohibits activities associated with misappropriating information if the injunction is being sought for the first time at trial. If your goal is to stop the misappropriation or misuse of confidential material, you should therefore consider seeking a pre-trial injunction shortly after discovering the wrongdoing.
Here, I want to drill into the Equustek Solutions Inc. v Jack line of cases to shed light on remedial flexibility and the effect of non-compliance with the sort of pre-trial injunctions that I had recommended seeking. Namely, for the final order obtained at trial, I had mentioned that the courts often require a trade secret plaintiff to choose between permanent injunctive relief aimed at stopping the misappropriation and a monetary damages award for losses suffered. The GasTOPS Ltd. v. Forsyth framed this limit in terms of the value and utility of misappropriated information fading as the world changed. In Equustek the issue was initially framed as one of double recovery. More recently, Equustek confirmed that it is open to the Court to keep injunctive relief in place while also obtaining an enforceable judgment for damages.
In short, a trade secret plaintiff can have their cake and eat it too.
1. GasTOPS and the Problem with Post Facto Injunctions
To be clear, when a trade secret plaintiff first seeks the injunction remedy remains crucial. The GasTOPS case illustrates that even in cases of a brazen and carefully orchestrated misappropriation, if a pre-trial injunction is not put into place shortly out of the gate the courts will often refuse to grant one later.
(For an overview on the technical distinction between different types of injunctions and the phase of the litigation, see here.)
The Facts in GasTOPS
In GasTOPS, a group of managers left a software development and service company to found a new company under their control. This was carried out in a manner designed to usurp many of the customer relationships of the company these managers were leaving. This customer grab was enabled by, among other things, taking a range of confidential information, including information related to the software products and the customer’s operating requirements. The new company then aggressively marketed itself as a “spin off” that was best positioned to provide the next iteration of the product originally developed at GasTOPS.
Denial of a Permanent Injunction
The trial judge made it clear that this was a severely culpable act of misappropriation. Unfortunately, the conduct of the litigation process very much shaped the relief the court was prepared to grant at trial. The reality was that the trade secret plaintiff had not sought a pre-trial injunction after the orchestrated departure of its managers. Nor did the plaintiff seek a pre-trial injunction once it became apparent that the departing managers had founded a company that was actively poaching the plaintiff’s long-standing customer relationships by offering an equivalent product line. And by the time of the trial decision, almost fifteen years had passed.
In the result, the trial judge declined to grant the plaintiff’s request for a permanent injunction preventing the defendants from using the misappropriated confidential information in any way due to the length of time that had expired. Instead, the plaintiff was granted a money judgment calculated by way of stripping the misappropriating parties of the profits they had earned for a ten-year period.
The plaintiff appealed, seeking the permanent injunction remedy that would prevent the defendants from using the misappropriated confidential information in any way. In upholding the trial judge’s decision to reject this relief, the Ontario Court of Appeal observed that the significance of most forms of information’s contents tends to shift or evolve over time. As a result, information that is actively being used and updated “gradually loses its value and utility. At some point, it ceases to have the characteristics that require it be cloaked in confidence.” Despite the grave original sin involved in the misappropriation, enough time had passed that the information source in question had evolved to the point where it was difficult to view its use as an ongoing or continuing source of unfair competition.
A Permanent Competitor
For context, the defendant company was now a mature business that presumably had a range of innocent employees and customers relying on it. The courts were not, in this circumstance, willing to grant a court order that would likely have the effect of legally prohibiting continuing with what were now long-term commercial relationships. The world had moved on by the time a trial date had arrived.
Granting this ten-year stripping of profit was groundbreaking, and represented the court seeking to come down hard on the defendants. It is, however, often difficult to successfully enforce judgments of this size; you can’t take funds that the judgment debtors don’t have. More significantly, in addition to the loss of customer relationships, the plaintiff was left with a permanent competitive rival within a niche industry despite the flagrantly unlawful misappropriation. Even if the rival company was driven bankrupt by the judgment, the ownership of this competing operation may simply have changed hands (which, based on this news release and others, appears to have been what ultimately occurred).
2. Equustek and Pre-Trial Injunctions
The courts are, conversely, relatively willing to grant a pre-trial injunction aimed at cutting off misappropriating behaviour shortly after you first discovered it. At trial, a trade secret plaintiff is often put in the position of effectively asking a court to shut down a well-established competitor. Shortly after the misappropriation is stumbled upon, you are more plausibly asking the court to help you put the genie of a stolen secret back into the bottle.
Money Judgments and Non-Compliance with Pre-Trial Injunctions
Suppose that a plaintiff obtains an injunction to deliver up confidential materials and to prohibit commercial acts associated with the misappropriation, and the defendants simply breach this court order. If so, the trial decision in Equustek Solutions Inc. v Jack, 2020 BCSC 793 and 2021 BCSC 2126, suggests that even torturous efforts to enforce pre-trial injunctions may provide trade secret rights holders with a silver lining. Namely, this circumstance appears to open the door to obtaining both ongoing injunctive relief and a money judgment.
As an aside, as of this writing the trade secret plaintiff in Equustek is embarking on an appeal. For context, the trial result split between a core group of defendants who stopped participating in the litigation and four “participating defendants.” My impression is that the grounds of the appeal only relates to the trial judge’s rejection of claims against the participating defendants and the calculation of damages. If so, the result of the appeal should not affect my discussion below. Nonetheless, stay tuned.
The Facts of Equustek (Simplified)
Equustek has a complex factual and legal procedural background. For our purposes, the essence of the case is that the plaintiff developed a protocol converter, a type of infrastructure used in information technology networking. The defendant, Morgan Jack, left the plaintiff company. Mr. Jack obscured his subsequent activities vis-à-vis the plaintiff by acting in concert with other individuals. Some of these individuals were aware of the trade secret misappropriation and passing off activities that ensued, and some were not.
Initially, Mr. Jack drew on some pre-existing relationships to continue with a distribution arrangement with the plaintiff handling the protocol converter product. This evolved into Mr. Jack acting as the directing mind behind a myriad of “Datalink” entities under his control (collectively, the “Datalink Defendants”). The Datalink entities began to use websites to market protocol converters in a range of suspicious ways. This included simply passing off the plaintiff’s products as their own. Certain defendants also used misappropriated technical information and source code to develop and manufacture their own protocol converter.
Non-Compliance with Pre-Trial Injunctions
After the plaintiff detected this misappropriation and passing off activity, it launched a lawsuit in 2011 and immediately pursued a range of pre-trial applications. This included successfully obtaining an order requiring Datalink to return all the plaintiff’s documents, provide customer lists, and cease representing or marketing itself in certain ways (see Google Inc. v. Equustek Solutions Inc., 2017 SCC 34 for an overview).
The Datalink Defendants did not comply. Further, it became apparent that the Datalink Defendants were operating through shell corporations in different jurisdictions in a manner that seemed designed to make enforcing the injunction difficult. In response, in 2012 the court granted sweeping pre-trial injunctive relief against Datalink Defendants, including an asset freezing (Mareva) injunction and a prohibition from selling its inventory or using the plaintiff’s intellectual property, including its trade secrets and confidential information. The Datalinks Defendants abandoned participating in the litigation while continuing to flout the pre-trial injunction.
The Google Order Injunction
In response, the plaintiff spent several years successfully pursuing a novel injunction against a third party, Google, regarding the scope of de-indexed website material and search results. This Google order issue ultimately appeared before the Supreme Court of Canada.
As the trial judge noted, this Google order did gradually curtail, if not fully stop, the Datalink Defendants’ unlawful marketing and sale of the misappropriated protocol converter product. Nonetheless, there was evidence that the Datalink Defendants continued to sell devices made from the plaintiff’s stolen technology even after the Google order injunction was put into place.
Injunctive Relief and Money Judgment
Crucially, Equustek confirmed that, post-trial, a plaintiff can obtain an enforceable money judgment and injunctive relief designed to suppress unfair competition and misappropriating activity. Citing the trial reasons in GasTOPS, Equustek reaffirmed that the underlying issue remains whether monetary damages are, on their own, an adequate remedy when seeking to put the trade secret plaintiff in as good as a position as they were but for the misappropriation.
Conclusion: So Have Your Cake and Eat it Too
The remedial flexibility that accompanies trade secret and breach of confidence claims means that while there are tendencies, there are few hard and fast rules regarding what form of remedy is granted in a final order. My sense is that, as a baseline, most courts will tend towards the traditional view that a money award acts as the substitute for the injury. Yet in the teeth of persistent refusals to comply with a pre-trial injunction, it is open to the court to decide that the plaintiff continues to suffer some degree of irreparable harm that cannot be adequately quantified.
I do not want to make light of the difficulties and expense involved in enforcing a court order prohibiting or requiring certain behaviour. This is, in fact, an underlying reason why our legal system cleaves towards money judgments as the go-to substitute for a legal injury. Nonetheless, Equstuuk is significant in that in the face of demonstrable non-compliance with pre-trial injunctive orders, it may be effective to carry on to trial and seek both monetary and injunctive relief.