A recent Ontario Court of Appeal decision affirmed that employees who play a vital role in a company owe a fiduciary duty to their employer even after termination.

In GasTOPS Ltd. v. Forsyth, the defendants resigned from GasTOPS, a developer of computer software for gas turbine engines, without providing a reasonable notice period and formed their own competing company called MxI. This left GasTOPs unable to fulfill its contractual obligations with several clients and unable to pursue business opportunities planned for with prospective clients.

At trial, the defendants were found to play a key role as senior designers of several products and in possession of vital information including a list of current and prospective clients and their needs. The Court held that an implied fiduciary relationship was owed to GasTOPS since the defendants were in a position to exercise power that could leave the company in a vulnerable position. This duty was held to be breached by the active solicitation of the plaintiff’s clients and through the misappropriation of confidential information for the benefit of MxI.

MxI were ordered to disgorge their first ten years of profits and the defendants were held jointly and severally liable for the same amount entitling GasTOPS to an award of over $20 million. The defendants’ appeal against the period of disgorgement was dismissed. The Court of Appeal upheld the remedy due to GasTOPS’ operating market which entailed a very small number of high paying customers.

This case stresses how employees are expected to serve their employers honestly and faithfully by acting in their best interests at all times. A fiduciary duty further elevates this expectation by requiring employees to avoid all conflicts of interest, to act only in the best interests of their beneficiary, and to not profit from their position. To establish a duty, the Court will look at how important an employee’s role is within a company. Factors including the employee’s duties, their contact with customers and suppliers, their influence over the company’s sales and pricing practices, and the degree of confidentiality over such information will be assessed in finding a fiduciary relationship.

What if an employee wants to compete with their employer?

A fiduciary is not barred from competing with its former employers. They must however disclose their intention to compete prior to issuing a notice of termination.

Without the consent or approval of their employer, fiduciaries are prohibited from engaging in any business opportunity and using any confidential information obtained during their employment for their own personal use.

What forms of solicitation are acceptable if an employee is competing with their former employer?

A fiduciary has a duty to not solicit any of their former employer’s clients or employees. In Resevoir Group Partnership v. 1304613 Ontario Ltd., the Court indicated that this duty is intended to preserve the goodwill and reputation of the employer. However, solicitation entails more than passively receiving a client. A fiduciary only breaches this duty if they have finalized a business arrangement with someone they have been directly enticing. Therefore, general advertising of services that attract a former employer’s client is an acceptable practice. This same principle however does not apply for employees. Regardless of whether they were actively solicited, a fiduciary will not be acting in the best interest of their former employer by hiring any of their current employees.

Key Take-Aways

  • After termination, employees may still owe a fiduciary duty to the Company they were employed with.
  • An employee may compete with their previous employer if they provide the employer with notice to compete, along with their notice to terminate.
  • Employers must ensure they include a strong non-solicitation and non-compete clause in their employment agreements to protect their business.

To view our employment agreement templates, click here!

This article was co-authored by: Gurinder Gill

 

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