Last week, a decision was released in Measuremax v. Nelsons. There isn't too much factual detail, but it's an instance of an employer having obtained an injunction without notice. When such an injunction is obtained, it is only for a short period of time and needs to come before the Court for a full hearing as to whether or not to extend it.
Mr. Nelsons worked for Measuremax for several years as a technical information supplier to salespeople. Nelsons resigned on six weeks' notice, and was sent packing promptly. Measuremax then became concerned, and came to believe, that he had started conducting competing business while still working for Measuremax, including issuing a client a $15,000 invoice for work he had completed while employed by Measuremax. There were also allegations that Nelsons was using confidential information to compete.
On the basis of these allegations, Measuremax obtained an injunction. However, there were apparently innocent explanations for at least some of their evidence, and the motion judge here accepts that no such $15,000 invoice was issued and that Nelsons' work while employed at Measuremax was for Measuremax. Furthermore, the alleged proprietary information related to bids for contracts with government agencies, and accordingly is public record.
With no non-competition or non-solicitation clause, and no obvious basis for finding fiduciary duties, the employer failed to convince the Court to extend the injunction, failing the test on several fronts. No irreparable harm was established, and the balance of convenience favoured "the former employee who is entitled to earn a living". Furthermore, bringing the initial motion without notice couldn't be justified - under such circumstances, you need to show either that you have reason to believe that giving notice will interfere with the relief you're seeking (for example, if you're bringing a motion to seize and search a party's computer, and you expect the party to delete the incriminating data if they have notice), or that the matter is so urgent that the delay associated with proper notice will cause irreparable harm, and in that case it's still expected that the moving party will give informal 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.
A general resource for employees and management alike, covering issues old and new in the law of Ontario employment relationships.
Showing posts with label fiduciary duties. Show all posts
Showing posts with label fiduciary duties. Show all posts
Tuesday, August 14, 2012
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.
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.
Wednesday, March 21, 2012
Ontario Court of Appeal Rejects Restrictive Covenants
An interesting new case from the Ontario Court of Appeal was just released: Veolia ES Industrial Services Inc. v. Brule.
Brule founded Veolia, a company which engages in "inspecting, cleaning and rehabilitating sewers". In 1999, he sold it, and agreed as part of the sale to continue as Veolia's president for five years. This included a non-competition clause which carried for five years beyond the end of the contract. Four years in, they renegotiated the contract, and agreed to a new three year contract term starting January 1, 2004, with new restrictive covenants to become effective for two years starting January 1, 2007. (The new contract completely and expressly superceded the terms of the old contract.)
The contract also included early termination language, permitting Brule to quit on 180 days' notice. He did so, giving notice in July 2004, ending January 2005.
Brule went on to start a new company, Clean Water Works, originally intended to rehabilitate water mains (which did not compete with Veolia). However, in fall 2005, Clean Water Works needed more business, and so tendered for sewer work with the City of Ottawa. Clean Water Works won the tender process; Veolia was the next lowest bid.
Veolia brought an action seeking damages for breach of the non-comp clause and breach of fiduciary duties.
There was a problem with the language of the clause, however: The clause specified that it became effective January 1, 2007. The trial judge concluded that the intention of the parties was obviously to have a non-competition clause effective for two years following the end of employment, and interpreted the contract accordingly, finding that Brule breached it.
The Court of Appeal disagreed.
The specified 2007 date was not accidental - the evidence was clear that the intention was that, if the employment relationship extended beyond the anticipated three years, the non-comp would still not extend beyond December 31, 2008. Veolia's own representative acknowledged that Brule would not have signed the contract otherwise.
In other words, the trial judge's interpretation of the contract was one that the parties had quite expressly drafted to avoid, and was therefore an error. The Court of Appeal found that the language of the contract had to be left as it was, that the trial judge's "blue pencil" severance of the 2007 date was wrong, and that the language of the restrictive covenant was therefore unreasonable under the circumstances (and in any event wouldn't have barred Brule from competing in 2005).
As to the alleged breach of fiduciary duty, Brule had a common law duty not to compete unfairly. However, the only unfairness of the competition that Veolia could point to was that Brule had retained a binder of Veolia's public tenders...but the evidence was that this binder was not used in the Ottawa tender, and therefore could not have made the competition unfair. Besides, the tenders themselves were public record.
*****
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.
Brule founded Veolia, a company which engages in "inspecting, cleaning and rehabilitating sewers". In 1999, he sold it, and agreed as part of the sale to continue as Veolia's president for five years. This included a non-competition clause which carried for five years beyond the end of the contract. Four years in, they renegotiated the contract, and agreed to a new three year contract term starting January 1, 2004, with new restrictive covenants to become effective for two years starting January 1, 2007. (The new contract completely and expressly superceded the terms of the old contract.)
The contract also included early termination language, permitting Brule to quit on 180 days' notice. He did so, giving notice in July 2004, ending January 2005.
Brule went on to start a new company, Clean Water Works, originally intended to rehabilitate water mains (which did not compete with Veolia). However, in fall 2005, Clean Water Works needed more business, and so tendered for sewer work with the City of Ottawa. Clean Water Works won the tender process; Veolia was the next lowest bid.
Veolia brought an action seeking damages for breach of the non-comp clause and breach of fiduciary duties.
There was a problem with the language of the clause, however: The clause specified that it became effective January 1, 2007. The trial judge concluded that the intention of the parties was obviously to have a non-competition clause effective for two years following the end of employment, and interpreted the contract accordingly, finding that Brule breached it.
The Court of Appeal disagreed.
The specified 2007 date was not accidental - the evidence was clear that the intention was that, if the employment relationship extended beyond the anticipated three years, the non-comp would still not extend beyond December 31, 2008. Veolia's own representative acknowledged that Brule would not have signed the contract otherwise.
In other words, the trial judge's interpretation of the contract was one that the parties had quite expressly drafted to avoid, and was therefore an error. The Court of Appeal found that the language of the contract had to be left as it was, that the trial judge's "blue pencil" severance of the 2007 date was wrong, and that the language of the restrictive covenant was therefore unreasonable under the circumstances (and in any event wouldn't have barred Brule from competing in 2005).
As to the alleged breach of fiduciary duty, Brule had a common law duty not to compete unfairly. However, the only unfairness of the competition that Veolia could point to was that Brule had retained a binder of Veolia's public tenders...but the evidence was that this binder was not used in the Ottawa tender, and therefore could not have made the competition unfair. Besides, the tenders themselves were public record.
*****
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.
Tuesday, October 25, 2011
Dismissed CEO Wins Awkward Partial Summary Judgment Motion
There is a recent judgment in the Hinke v. Thermal Energy International Inc. case, by Justice Ray, on a motion for partial summary judgment.
Put briefly, Hinke founded TEI in 1991 and was its principal until he brought it public in 1994, and continued on as its President and CEO. In 2004, he recruited Timothy Angus into a senior position, and while conducting his due diligence prior to accepting the position, Angus discovered a letter from the TSX-V asking to review certain transactions, which had been received a few weeks earlier but not produced to the Board of Directors. Angus produced the letter to the Board, Hinke resigned as President in February 2005, and Angus became President and CEO.
Hinke's position with the company at this point seems unclear. His existing contract was set to expire on June 25, 2005, which would have triggered certain severance entitlements, etc. On June 5, 2005, Hinke and TEI agreed to enter a new employment agreement, and then they went about discussing some of its terms. It had not yet been finalized when Hinke's employment was terminated, allegedly for cause, on June 23, 2005.
Hinke then sued for wrongful dismissal, among other things, and TEI counterclaimed alleging oppression, breach of fiduciary duties, and negligence.
It should be a simple matter of two arguments about the same facts. If the facts underlying TEI's claim are warranted, then that probably constitutes just cause, right? Well, maybe not. Simply put, while there were disciplinary letters leading up to June, including some threatening termination, the Court concluded that entering a new agreement on June 5 was inconsistent with an intention to terminate Hinke's employment for cause. In effect, by entering into a new agreement, TEI undermined any case for just cause it was attempting to build.
The Court therefore held TEI to proving just cause based on conduct after June 5, which is a tall order considering how little time had passed since then.
This motion related only to the wrongful dismissal elements of the claim, and was successful. The remainder of the claim, however, along with the full counterclaim remain outstanding. (This judgment, however, has been stayed pending disposition of the other issues.)
My Thoughts
The dimensions of an eventual trial have been shifted. This is a brilliant tactical move, because it shifts the stakes significantly. The defence is no longer able to challenge the wrongful dismissal allegations, but its allegations of misconduct are limited to proving its own counterclaim now (and damages are often difficult to establish) and the consequences of failing could potentially have brutal consequences in terms of moral damages for breaching the duty of good faith and fair dealing. This could press a settlement of the other issues.
However, if they don't settle, then think about the trial that results. Among other things, Hinke is likely to make the same pitch that succeeded here - if his actions were really oppressive and breached his fiduciary duties, then the company would not have entered into the June 5 agreement. It may not be as strong a pitch, in context, but if it fails, and if the counterclaim does succeed, then we will be left with the Courts saying that the employer was entitled to hold him to account for all that misconduct, but they were not entitled to fire him on a for cause basis. There's an inconsistency there.
Here's where the inconsistency becomes worse: In employment law, there is a doctrine referred to as "after-acquired cause". (See the Lake Ontario Portland Cement case.) In a nutshell, when an employee is terminated on a for cause basis, and the employer later discovers the full breadth of the misconduct - or even entirely new areas of misconduct - the employer is entitled to rely on those in support of allegations of just cause. And condonation falls off the rails in these cases, too: An employer can't be said to have condoned what they didn't know about. So the possible trouble with the Court's finding that the employer was limited to relying on misconduct from June 5 to June 23 is this: The employer is also entitled to rely on any misconduct, regardless of when it occurred, that they discovered after June 5, and even after June 23. (Note: For all I know, it is entirely possible that the employer may have known the full particulars of the misconduct alleged prior to June 5, in which case this issue wouldn't arise. While it seems unlikely, that very possibility may justify the Court's decision if it wasn't disposed of in the employer's evidence: There's an obligation in summary judgment motions to "lead trump or risk losing". It may be a defect with the employer's case, or it may be a defect in how the employer led its case.)
One other interesting point: The Court notes that the employer's defence did not claim setoff - i.e. they're counterclaiming for damages, but they didn't lead those same allegations in the defence as a way of saying "Even if the plaintiff's claim is legitimate, we still don't owe him money because he owes us all this". It's understandable to do so in such a case, because of the natural inclination to think that the success of the claim and counterclaim, on the facts, would be mutually exclusive. However, such a pleading of setoff likely would have blocked a partial summary judgment motion with such a limited scope as this one.
*****
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.
Labels:
after-acquired cause,
condonation,
damages,
employment law,
fiduciary duties,
just cause,
settlement,
wrongful dismissal
Wednesday, October 5, 2011
Dance Instructor found not to be a "Key Employee"
I've occasionally discussed restrictive covenants before; what I haven't covered in much detail is the route that employers can occasionally go to prevent unfair competition by former employees who haven't signed restrictive covenants.
At common law, there is a concept of fiduciary duties, which is an obligation on one person to put another's interests ahead of his own. Professionals often owe their clients fiduciary obligations, and occasionally you get case law where a professional abused information received in confidence to their own advantage.
In the employment context, "key employees" may be considered to be fiduciaries of their employer, and are not permitted to use confidential information they acquired in their employment to unfairly compete with the former employer. A "key employee" is defined by the following non-exhaustive list:
At common law, there is a concept of fiduciary duties, which is an obligation on one person to put another's interests ahead of his own. Professionals often owe their clients fiduciary obligations, and occasionally you get case law where a professional abused information received in confidence to their own advantage.
In the employment context, "key employees" may be considered to be fiduciaries of their employer, and are not permitted to use confidential information they acquired in their employment to unfairly compete with the former employer. A "key employee" is defined by the following non-exhaustive list:
- An integral and indispensable component of the management team that is responsible for guiding the business affairs of the employer;
- Necessarily involved in the decision-making process; and
- Therefore, has broad access to confidential information that if disclosed would significantly impair the competitive advantages the former employer enjoyed.
Absent a restrictive covenant or fiduciary obligations, former employees are free to compete with former employers, including bringing to a new business the skills and knowledge acquired while serving the former employer. But restrictive covenants can limit that (if enforceable, which is not easy), and fiduciary obligations do as well in very similar ways.
In the recent case of Laplante v. Hennessy-Craibe, Laplante operated a dance studio in Cornwall and had employed Hennessy-Craibe as a dance instructor until she left to start her own studio. It appears that several students went with her. Laplante then sued and sought an interlocutory injunction preventing Hennessy-Craibe from soliciting current and former students.
This is surprisingly similar to Gatreau v. Arvelo (2004), also involving a defecting dance instructor, in this case from an employer in Brockville. I suppose Eastern Ontario must have a competitive industry for dance instruction. Similarly, in that case, the plaintiff alleged that the instructor was a fiduciary, but the judge rejected it.
In Laplante, even without referring to Gatreau, Justice Quigley came to the same conclusion: He did not see a serious issue to be tried, and felt that even if a trial judge ultimately found Hennessy-Craibe to be a fiduciary, Laplante could be compensated through an award of damages; therefore, he declined to award the injunction sought.
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There is also previous jurisprudence considering whether or not written restrictive covenants can be enforced against athletic instructors. Of course, every case is unique on its facts and the specific language of these clauses, but Courts have gone both ways when determining whether or not an athletic school is protecting 'legitimate proprietary interests' with restrictive covenants:
In Gold in the Net Hockey School Inc. v. Netpower Inc., a 2007 Alberta case, the Court found that a non-competition clause did not protect a hockey school's legitimate proprietary interests.
In Moffatt v. Sanchez, a 2004 Ontario decision involving a Tae Kwon Do academy, a non-competition clause was enforced against the former head instructor.
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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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