How can you stop a former employee from acting in a way that harms your company? Apart from threatening to sue the employee for damages, is there a way to have the Court tell the employee to stop doing something?
Unsurprisingly, the answer is “it depends”; however, the decision in Arc Compute v. Anton Allen, Michael Buchel et al. is an example of the type of situation where our courts will consider a proactive injunctions, rather than just awarding damages after the damage is done.
The Facts in Arc Compute v. Anton Allen, Michael Buchel et al.
Arc Compute (“Arc”), an artificial intelligence company, sought an injunction against two of its former employees to stop them from:
- retaining or using its confidential information,
- competing with it, or
- from interfering with its relationships with current or prospective customers.
Both defendants were longstanding employees of Arc, with employment agreements where they agreed:
- All intellectual property, ideas, research, inventions made, authored, invented, by them during their employ that relate to Arc’s business remained its property;
- Not to “solicit, interfere with or endeavour to entice away from Arc, either directly or indirectly, any of its in relation to any business that is the same as, substantially similar to or competitive with the Business or any part of its Business, or otherwise encourage or take any other action which could cause any such Client to reduce, cease or end its engagement with the Company” for 6 months after leaving Arc;
- Not to solicit customers or hire employees Arc for a period of 6 months after leaving for a company that is similar in business to Arc; and
- That they would acquire confidential information during their employment and that they would return this information to Arc at the end of their employment.
The Intellectual Property
The main piece of intellectual property at issue in this matter was the source code of one of Arc’s programs, Nexus, which one of the defendants, Buchel, was central in drafting. In late 2024 Arc encountered significant financial difficulties, leading it to dismiss most of its workers, including the second defendant, Allen, who was dismissed in December 2024.
Buchel reacted badly to the dismissals and was initially placed on leave and then dismissed for cause in January 2025 when his misconduct came to Arc’s attention.
Solicitation of Arc Clients
Arc determined that Allen and Buchel had colluded during their employment to move Arc’s customers to Deadbeef, a new company that they had set up in November 2024. Allen and Buchel’s actions during their employment included both contacting Arc’s clients to advise them of the pending move to Deadbeef and attempting to obtain their business.
In January, after both were dismissed, Allen contacted at least one of Arc’s clients to advise that Arc had dismissed most of its engineers, and that Nexus would now be available from Deadbeef.
Arc moved for an injunction to prevent Buchel from retaining the Nexus source code, for both Allen and Buchel to stop contacting Arc’s clients, and to restrain both from competing with Arc “for a temporal period as long as and the geographic area as wide as permitted by law”.
The Court Decision
The Court noted that neither defendant’s employment agreement included a non-compete clause, but that both were contractually prevented from soliciting Arc clients for six months. The Court also noted that both defendants were fiduciaries to Arc during their employment and were thus restrained from pursuing corporate opportunities available to Arc.
The Court issued an order for the defendants to:
- return all copies of Nexus to Arc,
- close Deadbeef, and
- restrain themselves from competing with Arc on a worldwide basis for a period of six months.
The Court relied on the fiduciary relationship to establish this final obligation in the absence of a non-competition provision in either defendant’s employment agreement.
Takeaways
Arc Compute is a good example not only of what remedies a court has available to dispense, but also what an employer must do prior to and during the employment relationship to set itself up to be able to enforce its rights after an employee’s departure.
An employee has a common law obligation to maintain confidentiality over an employer’s confidential and proprietary information, and a company may take steps to prevent the use or disclosure of this information without any contractual provision to this effect.
However, restraining use of an employer’s intellectual property, preventing an employee from interfering with relationships with customers or competing with it requires either that the employee being in a fiduciary role with the company or that a term of contract exists prohibiting this behaviour. Even still, a term of contract may not be enough. In Ontario, a non-competition clause is invalid at common law and statute unless it is for a c-suite executive. A non-solicitation clause is more likely to be enforceable but still must be deemed reasonable by the Court in order for it to be upheld.
As employment lawyers we frequently encounter clients who are upset that a former employee is poaching their clients or setting up a competing business. In many of these cases, there is nothing to prevent the employee from competing and soliciting clients. However, as is often the case, a well-drafted contract is the answer.
All of this can be addressed before it becomes a problem by having well drafted and properly implemented employment agreements in place with each employee. Where necessary these can include a term preventing the employee from soliciting clients or employees after they leave the company.
We work with employers to draft enforceable employment agreements and employees to evaluate whether an employer’s threatened litigation has any merit. We are here to assist you in navigating these complex legal issues, because as we always say: if you think you need an Employment Lawyer, you probably do!
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