MLT Aikins was just lately profitable in acquiring an interlocutory injunction within the Courtroom of King’s Bench of Alberta restraining an schooling software program firm’s former chief government officer and his new firm from launching an AI-enabled schooling software program software that was discovered to be immediately aggressive along with his former firm’s present product.
The choice underscores two frequent themes within the Courtroom’s consideration of such purposes, notably in an employment context:
- Courts will scrutinize a senior government’s conduct by the lens of fiduciary obligations, notably duties of candour, avoidance of conflicts of curiosity, devotion of time to the company and preservation of company alternatives
- Effectively‑drafted restrictive covenants negotiated inside a enterprise acquisition are a strong device for shielding a company on the interlocutory stage the place they clearly outline the scope of actions captured and to whom they apply
Background
In April 2020, ILP acquired the property of Intellimedia Inc., an Alberta-based schooling software program enterprise, pursuant to an asset buy settlement (APA) for about $5.1 million, plus assumption of outlined liabilities. Inside its product line, Intellimedia Inc. had developed a product known as File, which is an schooling analytics device working within the Okay–12 house. Additionally as a part of the transaction, Ahmad Jawad, an authentic co‑founding father of Intellimedia Inc., entered into an employment settlement to function ILP’s CEO.
The employment settlement included categorical acknowledgements and obligations per senior government fiduciary duties, together with commitments to behave in ILP’s finest pursuits, commit his time to ILP’s enterprise and keep confidentiality. The APA additionally included restrictive covenants, together with a non‑compete and a non‑solicitation clause, which the Courtroom discovered had been inextricably linked to the acquisition and meant to guard the goodwill bought by ILP.
ILP introduced the injunction software in relation to the defendants’ work on AI‑enabled merchandise focused to the Okay–12 schooling sector, together with an software (the DAI App) that DOCEOAI Analytics Inc. (an organization shaped by Mr. Jawad after the acquisition) had deliberate to launch in Could 2026.
The appropriate injunction threshold
Interlocutory injunctions are typically assessed below the acquainted three‑half take a look at:
- Critical subject to be tried
- Irreparable hurt
- Steadiness of comfort
ILP argued that the “severe subject” threshold ought to apply, largely as a result of restrictive covenants present throughout the context of a enterprise acquisition. The defendants argued for the upper “robust prima facie case” threshold as a result of sensible impact of the injunction being to successfully finish the motion. The Courtroom acknowledged that the decrease “severe subject” threshold would have ordinarily utilized, however in these circumstances, the upper threshold was extra applicable since an injunction in opposition to the defendants at this stage would successfully finish the motion from the defendants’ viewpoint.
Fiduciary duties and diversion of a corporate opportunity
Mr. Jawad acknowledged he was a fiduciary of ILP. The Courtroom discovered a powerful prima facie case that he breached contractual and customary regulation fiduciary duties by failing to advance the very best pursuits of ILP, failing to commit his time to ILP’s enterprise and affairs, breaching his responsibility of candour and full disclosure, breaching his responsibility of loyalty, breaching his responsibility to keep away from conflicts of curiosity and diverting a company alternative to develop an AI‑enhanced Okay–12 software program product to boost academic decision-making.
In reaching that conclusion, the Courtroom thought-about, amongst different issues, proof that steps had been taken throughout Mr. Jawad’s employment to pursue AI‑associated growth and advertising by DOCEOAI Analytics Inc., a separate entity, which included the acquiring of grants, use of contractors and different resource-related conduct, with out disclosure adequate to permit ILP to evaluate the character and implications of the exercise. The Courtroom additionally rejected the proposition that AI in schooling was merely an summary concept incapable of constituting a company alternative, as an alternative treating the chance as sufficiently related to ILP’s enterprise and Mr. Jawad’s position and data to interact fiduciary constraints.
Enforceability of the Restrictive Covenant
The Courtroom concluded there was a powerful prima facie case that the APA’s non‑compete clause was unambiguous, cheap and enforceable. Notably, the Courtroom interpreted the clause’s reference to the “creation” of competing software program as capturing growth exercise (not solely licensing or gross sales) and located a powerful prima facie case that the DAI App could be immediately aggressive with File as soon as launched. On the competitors evaluation, the Courtroom acknowledged variations between the 2 merchandise, notably within the DAI App’s use of an AI-driven chat-based interface. Nevertheless, the Courtroom emphasised that each merchandise sit between Okay–12 information and schooling determination‑makers and competitors was notably evident for potential clients evaluating choices to higher leverage their pupil information, the place the merchandise would finally be “preventing for a similar {dollars}.”
Irreparable harm recognized for an anticipated product
As a result of the DAI App had not but launched, being anticipated to launch in Could 2026, the defendants argued the applying was successfully quia timet (typically outlined as “feared future hurt”) and required proof of a excessive likelihood of imminent hurt, which is a better evidentiary threshold. The Courtroom discovered that ILP met the irreparable hurt requirement, emphasizing the area of interest nature of the Okay–12 market, the approaching deliberate launch of the DAI App and the problem of quantifying losses in goodwill, popularity and market alternative, and, notably, the lack to measure misplaced alternatives involving clients that ILP might by no means purchase.
Granting of the injunction
The Courtroom granted an injunction pending trial which:
- Restrained the defendants from partaking within the creation or licensing of AI‑enabled software program merchandise within the Okay–12 sector which can be immediately aggressive with ILP’s File software program within the areas the place ILP did File enterprise as of August 2024
- Particularly enforced the APA’s non‑compete clause
The Courtroom declined to grant the broader solicitation-related aid sought at this early stage and directed an additional course of if wanted to find out whether or not one other DOCEOAI Analytics Inc. product, an software known as Clario, fell throughout the scope of this injunction.
Key takeaways
The Courtroom stays keen to intervene in conditions the place it’s sufficiently clear that fiduciary obligations are owed and have been breached. In such circumstances, there could also be much less emphasis on demonstrable proof of irreparable hurt and the stability of comfort will are inclined to favour the applicant.
Synthetic intelligence enhancements, on their very own, usually are not adequate to render a brand new product non-competitive with an present product. As a substitute, the Courtroom will give attention to the positioning of that product throughout the market and buyer base that the prior product is working in to evaluate whether or not the merchandise are aggressive.
It isn’t needed {that a} company alternative be absolutely acted upon to be topic to fiduciary constraints. The place the company has indicated its intention to pursue sure enhancements to a product, even the place that enhancement has not but been pursued or researched, that could be adequate.
Solicitors ought to draft restrictive covenants with injunction readiness in thoughts. Particular and clear language defining the scope of actions restricted, together with the cohort to whom they apply, growth actions, geographical scope and length, are key to efficient enforcement.
Be aware: This text is of a common nature solely and isn’t exhaustive of all attainable authorized rights or cures. As well as, legal guidelines might change over time and must be interpreted solely within the context of explicit circumstances such that these supplies usually are not meant to be relied upon or taken as authorized recommendation or opinion. Readers ought to seek the advice of a authorized skilled for particular recommendation in any explicit state of affairs.