Thursday, March 20, 2014

Employer Ransacks Former-Employee's House Searching for Documents

In law, there's a powerful tool we call an "Anton Piller Order", or "APO" - the easiest way of understanding it is as a 'civil search warrant', an order enabling a party to search for and seize documents in the possession of another party.

The purpose is to prevent the destruction of incriminating materials.  It's absolutely not about procuring evidence to bolster one's case, and is reserved for cases where the court is satisfied that there's a real risk of the materials being destroyed if the other party has notice.

APOs have been referred to by the courts as "draconian", and as "a nuclear weapon".

And in the recent case of Irving Shipbuilding Inc. v. Schmidt, it was used by an employer against its former employee.

The facts are fairly simple, and relatively run-of-the-mill, even on the worst allegations made by the employer, ISI:  Basically, Schmidt had been a senior employee of ISI, and he departed to go work for another company (allegedly their competition), and allegedly downloaded some 7000 pages of confidential documents before leaving.

I've talked about such cases before.  They happen.  Taking confidential and proprietary information over to a competitor is a very bad idea.  Non-compete agreements are hard to enforce, and even fiduciary duties - where applicable - have their limitations, but misappropriation of confidential information to use with a competitor will always mean trouble for the employee.

And the usual course of action is this:  The employer commences an action against the employee, brings an ex parte motion (i.e. without the other party showing up) on an urgent basis, seeking an injunction for the return and destruction of all confidential information, and prohibiting the employee or competitor from using the information in any way.  In theory, the motion's supposed to come on again for full argument, on full notice, within ten days afterward, but in practice there are usually adjournments, as preparing for a full hearing can take longer than that.

But ISI took this to a whole other level, seeking an Anton Piller Order.

The Sequence of Events

Schmidt resigned on July 29, 2013, claiming that it was for health reasons.  In fact, he had already accepted a position with Chantier Davie Canada Inc. ("Davie"), of which he advised other ISI employees by email on August 16.  Davie had recruited a number of ISI employees previously, and Schmidt was recruited by another former-ISI employee at Davie.  The extent to which Davie and ISI are actually competitors, commercially speaking, is disputed, however:  Schmidt's position is that they address different market segments of the shipbuilding industry, with ISI dealing primarily with the Canadian Navy, whereas Davie builds for offshore and commercial clients, mostly supply vessels for offshore oil platforms and ferries for the Province of Quebec.

Still, after finding out that Schmidt had gone over to Davie, ISI started an investigation, and concluded that, shortly prior to his departure, Schmidt had downloaded 7000 pages of confidential and proprietary documents from offsite locations.

On August 20, 2013, ISI's counsel sought a hearing date from Justice Beaudoin on an urgent basis, for an APO to seize and secure ISI documents in Schmidt's possession (and, strangely, Schmidt's employment contract with Davie).  It was scheduled for August 23.  ISI provided Justice Beaudoin with motion materials, and further requested a closed hearing and a sealed court file because of concerns that the documents would be destroyed if they came to Schmidt's attention.

As I was reading the case, it seemed like a strange thing from the outset:  Electronic downloads leave the original documents intact.  There's no reason to think that Schmidt went in and deleted the documents from ISI's records, but rather it seems that they had copies.  And they seemed to have records establishing what he accessed and when.  So why are they so concerned about possible destruction?  In the usual injunction, destruction is sought by the moving party.  And asking for a closed hearing, with no notice to other parties, for an order allowing a party to search Schmidt's's a pretty dark scenario.

They convinced the judge that the APO was appropriate, alleging that ISI and Davie were competing for a particular contract, the "Terry Fox" bid, and that Davie having access to ISI's materials would be catastrophic.

It's not entirely clear how they convinced the judge that their interests couldn't be protected by a less intrusive order.  The 'risk of destruction' was warranted because of Schmidt's deception regarding his new job, and his offsite downloads at strange hours.

So, the first thing Mr. Schmidt heard of the case was on August 23, 2013, when a search party showed up at his door with the APO in hand.  They told him he could contact a lawyer (within an hour...of course, he doesn't have a lawyer lined up), and then they searched his house for relevant materials, searching his computers, seizing USB keys, etc.

The Reality of the Documents

Following the search, Deloitte was retained to audit the materials, and found that their suspicions and fears of improper use of confidential information were unfounded.

Schmidt had, over the course of his employment, accumulated some ISI documents in his possession.  That's normal.  But most had no proprietary information at all, and nothing that was commercially sensitive.  As well, without any real basis, the APO included Schmidt's employment contract with Davie.  (So now, apparently, ISI knows the details of what Davie is offering its employees to induce them to depart ISI.)

Only two USB keys with ISI information had been plugged into computers after Schmidt's resignation, limited to contact information, biographical information, and a Teaming Agreement with no particular commercial sensitivity.

An Improper Purpose?

Schmidt alleges that the reason that ISI proceeded for an APO was to 'make an example' of him, to show its employees what would happen if they went over to Davie.  Immediately after the APO was granted, despite the sealing of the record and the absolute secrecy it had demanded, ISI proceeded to distribute the APO to other former ISI employees.  Without actually making a factual finding of improper purpose, the judge noted that these actions "lend credence to Davie's and Schmidt's arguments that this APO was obtained to send a message to Davie and to intimidate departing ISI employees."

Final Disposition of the Motion

When the motion comes back on for a full hearing, the main question on a motion like this is whether the order should have been granted in the first place.  It's a hearing de novo, meaning that the court gets to look at all questions with fresh eyes, but the results of the search aren't really material to whether or not it was appropriate to permit the search in the first place.

Schmidt raised a lot of challenges to the APO.  He didn't succeed on all bases, but he was successful enough:  Notably, he persuaded the court that ISI had materially misrepresented the facts in respect of the Terry Fox bid.  ISI had stated as an unequivocal fact that they were competing for the bid.  In fact, they merely suspected that Davie was planning to make a bid for the contract, and never disclosed that it was merely a suspicion, nor the basis for that suspicion.  Furthermore, as it turns out, the Terry Fox bid was a million-dollar contract, which in context was pretty insignificant.

Furthermore, ISI breached the terms of the very order it had sought by serving others with the APO before it was confirmed.  On an ex parte motion, the moving party has an obligation of 'full and frank disclosure', and breaching that obligation is sufficient to set aside the order.

As well, ISI failed to establish 'serious damage' that would result from destruction of the evidence in question.  The serious damage can be procedural (i.e. If it's destroyed, we won't be able to prove our case) or financial (i.e. If it's destroyed, we're going to lose a huge amount of money).  The trouble for ISI is that they (a) had all the documents and (b) still knew exactly what documents were alleged to have been misappropriated.  They claimed that the APO prevented Schmidt from just handing off the documents to someone else, but there is other relief effective to address such concerns.

Next Steps

Now, having established that the APO shouldn't have been granted in the first place, Schmidt gets to chase ISI for two things:  Damages, and costs.

And, frankly, I think ISI has a pretty heavy exposure here.  The overbreadth of the APO to capture the the employment contract could be a problem for ISI, but the far bigger and more concerning aspect of this is the search:  It's a deep invasion of Schmidt's privacy, just showing up at his door with an order to search his house, which can call for fairly significant general damages on its face.  Intrusion upon seclusion, trespass, conversion...  Add to that the fact that ISI knew that Schmidt has personal health issues, and that as an employer ISI owed Schmidt a duty of good faith and fair dealing, and you could potentially be looking at aggravated and/or punitive damages as well.  And costs...well, I expect that they'll be fairly far into the five digit range as well.

Additional Comments

Anton Piller orders are pretty exceptional.  In employment relationships, I would think they'd be even moreso.  There were other avenues, which are adequate and frequently pursued in parallel situations, available to ISI, and that fact alone means that they should have gone down that road.

But I don't see why this was granted in the first place.  On an ex parte motion, there's a high burden on the moving party to make frank and full disclosures, but there's also an elevated burden on the court itself to satisfy itself that everything appears to be proper, and it's not clear to me how ISI could ever have convinced the judge that lesser injunctive relief - return/destroy all confidential information, make no use of any confidential information, etc. - would have been inadequate.  Heck, an injunction restraining Davie from bidding on the Terry Fox contract might even have been appropriate, based on the facts being alleged.  But an Anton Piller Order seems to be missing the mark entirely in terms of purpose.

As well, I'm growing increasingly concerned about framing in these 'download' cases, about lawyers and judges dealing with highly technical IT issues in the absence of a full record.  Plaintiff lawyers keep going on about high numbers - number of pages, number of documents, number of files - which were downloaded.

Here's the thing:  The instant you clicked on the link that brought you to this blog, you downloaded its contents.  Pages of content, probably multiple files.  That's how the internet works.  We think of downloading as 'copying', and technically it is, but it's not necessarily active or intentional copying.

So whenever an individual does work from home, the contents of the files being worked on end up downloaded and temporarily stored to the individual's hard drive.  In my current office, there's a law clerk who works from home once a week, accessing the server remotely.  If she were to depart employment, we could get IT people to come in, look at the history, and say truthfully that, in her last few weeks here, she "downloaded" hundreds of files, with thousands of pages, containing confidential and privileged client information, litigation strategies, billing practices, and other confidential and proprietary information.  This would all be strictly true, simply on the basis of her acting in the ordinary course of her duties, yet it could be cast or characterized in such a way that a listener would assume that she misappropriated the information for sinister purposes.

I've seen clearer cases, where the employee was accessing sensitive information he had no business accessing in the course of his duties, or where the employer's IT records can establish distribution of the information - i.e. download to a USB key, or emailing to somebody else outside the organization.

But in the absence of those indicia, we need to be careful about exactly what is being described, distinguishing, in a meaningful way, a download for the purpose of misappropriation, versus simply accessing it for use in performing one's job.


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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