Thursday, May 10, 2012

Employees Quitting and Competing

Every so often, a case comes up involving an employee who departs from employment and immediately starts a new business, taking the old employers customers and sometimes even employees.

There is nothing inherently wrong with this, unless there is a contractual non-solicitation/non-competition clause (though these are often difficult to enforce) or common law fiduciary obligations.

Frequently, the employer will go to Court seeking an injunction preventing the employee from competing or soliciting customers.  A common feature of these cases, however, and one which makes the employee much less likely to succeed, is the misappropriation of proprietary information.  There's nothing wrong with an employee walking away, but when the employee walks away with the employer's files, that's a problem.  This is particularly problematic in the digital age, where copies of large numbers of files can be made with a few keystrokes.

In the recent case of Corona Packaging Inc. v. Singh, departing employees made exactly this mistake.  Two employees left Corona (Cascioli in June 2011 and Singh in March 2012).  Singh indicated that he was planning to return to India.  However, in April 2012 a representative of Corona saw Singh and Cascioli at a trade show representing a new competitor company (which had incorporated in July 2011), Aura Packaging.  This made Corona suspicious, so they called in forensic IT specialists.

It's pretty impressive what these forensic IT specialists can do.  If you do something on your computer - use a program, delete a program, access data, copy data, upload data to an external device, etc. - they can figure out with astonishing detail what you actually did.

In this case, they looked at Singh's old workstation and determined that, the day before he left, he connected an external device (likely a BlackBerry) and copied 8,465 files to it, including proprietary information of Corona.  The data included "all of its products technical specifications, the Corona budget setting forth confidential information including price lists, gross profit margins, machine cycle times, and input costs; the "Pre-Form" products' catalogue of Corona which is akin to the blue print for the final bottle products, with all the specifications created by Corona for such products; "Bottle Drawings" which include the final form bottle specifications; the Price List Notification which includes the proprietary formula utilized by Corona to determine its price list; product-related documents such as quality control testing, sample lists and packaging layouts; work place policies; confidential customer information including customer-owned mould specifications; and financial and administrative documents."

Sounds pretty much like Singh cleaned them out, no?

I retain a healthy dose of scepticism.  Before I go into the details of why, let me explain that this motion was brought on an urgent basis.  The defendants were given notice of the motion, and two of them had lawyers show up, but they were not given an opportunity to prepare responding materials.  So all of the evidence before the Court was the evidence led by Corona.  (Under these circumstances, if the injunction is granted, it can only be for ten days, subject to continuation following a hearing on appropriate notice.)

I'm no tech expert, but I know a thing or two about computers, and a lot about lawyers.  You can have thousands of files with no usable data, or a single file with a huge amount of material data.  The actual number of files transferred seems huge, but the number is essentially meaningless.  I couldn't begin to estimate how many files might be transferred in an ordinary automated synchronization process.  Still, a lawyer will throw in the total number of files because it sounds good.  (Law is still, in many ways, in the 'old school', where people think of a 'file' as being an assortment of data inside a physical folder.  A thousand files takes several filing cabinets, would include huge amounts of data, and represent years of work.  In the digital world, a simple program might have hundreds or even thousands of files associated with it, and barely made a dent in the storage space of a small USB key.)

Hansford, Corona's IT specialist, called Singh, and Singh "admitted that he had taken data files from Corona".  Singh asked if he could delete the data, and Hansford said that it was very difficult to permanently delete such data.

This is true.  Especially once data has begun to be disseminated into a new server, new databases, etc., it is immensely difficult to trace it through a system.  I was once involved in litigation similar to this where we had obtained an order that all the confidential data be destroyed, and years later, despite what the Court found to be good faith efforts to comply, we were still seeing reports generated by the defendant's system including excerpts from the confidential data in question.

Nonetheless with Singh's permission Hansford remotely logged into Aura's servers and deleted everything that he could find from Corona.

Not good enough, however:  The Court still gave Corona the injunction it was seeking.  There are three elements to awarding such an injunction:  There must be a 'serious issue to be tried', evidence that the plaintiff will suffer 'irreparable harm' - harm that can't be remedied just by an award of damages - in the absence of the injunction, and the balance of convenience must favour the injunction.

Serious issue to be tried:  "The evidence suggests that Messrs. Singh and Cascioli are in breach of their employment contractual obligations and common law duty of confidence to their former employer not to disclose or use trade secrets and confidential information.  Arguably, they are also in breach of a restrictive covenant in their contractual relationship with Corona to not compete with Corona for a three-year period following upon leaving their employment with Corona."

Irreparable harm:  The Court concluded that the misappropriation of the customer data would result in "permanent market loss" and "irrevocable damage to the business".

Balance of convenience:  Aura is a relative startup, by contrast to Corona's significant long-term investment in developing a business base.  So the harm to Aura by preventing competition is less than the harm to Corona of permitting competition.

The effect of the apparent deletion of the data isn't much discussed, but it doesn't appear to have helped Aura that they were halfway through a contract to produce a million bottles for Corona's biggest customer - the Court concluded that they could not have obtained this contract without the misappropriated data.

My Thoughts

This is a close case.  Having misappropriated data definitely hurts Aura, yet it has since been ostensibly deleted.  The thoroughness and effectiveness of the deletion is questionable, perhaps, but the efforts were undertaken by Corona's own IT specialist.  So I would question the appropriateness of granting an injunction based on the likely impact of continued use of misappropriated data.  That being said, where they have already gained market share through use of the data - i.e. a major contract from Corona's biggest customer - it may make some sense to require Aura to step away from that customer.  However, aside from this potential loss in market share (which may have at least been mitigated by the deletion of the confidential data), it appears that the only loss which may be suffered by Corona is the ostensible loss of this contract, and by no means would that harm be 'irreparable'.  The judge even queried Aura as to whether or not it would be prepared to complete the current contract but pay the profits into escrow pending determination of the issues in dispute.  Aura declined to consider such an agreement, and probably correctly so.  If disposition of the profits from that particular contract were the only unresolved issue on this motion, then granting an injunction would be wholly unnecessary and inappropriate - there are orders available for a defendant to preserve assets pending disposition of a claim, but they are available under only very specific circumstances.  In general, a plaintiff sues a defendant, and only gets to chase the defendant's assets after obtaining judgment.

I'm also concerned by the reference to the restrictive covenants.  On a motion of this nature, there is no reason why they could not be considered thoroughly, determining whether or not their terms ought to be upheld.  The effect they had on the ultimate decision is unclear; in my humble opinion they ought to have been discussed thoroughly or not at all.

Furthermore, this motion has all the earmarks of a motion without notice.  (In fact, the parties received notice, but not nearly sufficient notice to satisfy the rules for a motion made on notice, and thus I suspect that it should have borne essentially the same scrutiny as an ex parte motion.)  There is no discussion whatsoever of the 'urgent basis' on which the motion was made, and whether or not it was appropriate.

For a good discussion of the circumstances required for motions without notice, see Robert Half Canada Inc. v. Jeewan.  In that case, the Court notes that the first enquiry to be made is: "Why did you not give notice?"  If the answer doesn't reveal "extraordinary urgency", the motion must be refused.

There are two categories of "extraordinary urgency":

(1)  There are circumstances where there is reason to believe that, if given notice, the affected parties will act to frustrate the proceedings.  (For example, if I'm concerned that a person is going to move their assets to another jurisdiction to frustrate my interests, and I'm bringing a motion for the preservation of property, I might justifiably be worried that they're just going to make the transfer immediately upon receiving notice of the motion.)  Anton Piller orders - essentially private 'search warrants' - traditionally fall into this class.  True that an Anton Piller order was sought in this case, but it isn't much discussed, and given that Corona's IT people had already been given access to Aura's servers prior to the hearing, it doesn't seem like it would have been a compelling argument.  In any event, the fact that short notice was given completely would completely undermine the strength of such an argument.

(2)  In some cases the circumstances are of such exigency that any delay will defeat the plaintiff's claims.  "This is a distinctly rare circumstance."  This would clearly be the argued basis in this instance - the Courts will often insist on some form of notice, even if it is just a phone call to opposing counsel to notify them, and this would be why the plaintiff did put the defendants on notice of the motion.

Robert Half was also a non-competition case, and the Court noted that while loss of a competitive position in the marketplace may certainly ground an interlocutory injunction, it is another matter to justify an ex parte injunction.  In such a case, it must be established that "irreparable harm" would be established simply by virtue of the requirement to give appropriate notice.

The misappropriation of confidential information may have initially justified a motion without notice, but once Corona had an opportunity to destroy the confidential information on Aura's servers, it's unclear that there was continuing urgency to justify a motion without notice.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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