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Does the improper disclosure of confidential information always result in damages?

MISUSE OF CONFIDENTIAL INFORMATION DID NOT RESULT IN DAMAGES

Edac Inc. v. Tullo 1999 CanLII 14868 (ON SC)

Before resigning from his senior management employment position with the plaintiff, an employee disclosed confidential information to a third party during a written job interview. The employee then took an employment position with a former supplier of the plaintiff, and began arranging sales to the plaintiff’s customers. The court held that the employee had both a common law and contractual obligation of confidentiality. However, the improper disclosure of confidential information caused no actual harm, and in the absence of a non-competition restriction, the employee made no improper use of the customer lists.

Drafters acting for a disclosing party need to ensure that specific types of information are defined as confidential (e.g. customer lists), regardless of whether they are marked or treated as confidential. If the confidentiality agreement is ambiguous, the confidentiality of the information may depend on a subsequent finding of fact about whether the information was treated as confidential in a such way that the information was clearly considered to be confidential. Confidentiality restrictions are not sufficient by themselves to prevent an employee from competing with a former employer.

Details of the case:

In Edac Inc. v. Tullo, 1999 CanLII 14868 (ON SC), the plaintiff alleged that the defendant improperly used confidential information in breach of his contractual and common law duties. The employment contract provided that: In the course of your employment, you will become aware of confidential information about the Company that is not available in the public domain. By accepting this offer of employment, you will be bound to keep this information confidential and you will not reveal this information to third parties without the consent of the Company, either during or after your employment with the Company. The employee resigned and began working for a supplier of the employer, selling products to the clients of the former employer. Before resigning, the employee disclosed confidential information to a third party, as part of an unsuccessful employment application. The court held that there had been no damage caused by this breach of confidentiality. As for the client lists, the employee began by selling products not sold by the former employer. It was the clients themselves who requested sales of the same products sold by the former employee. In the absence of a non-competition clause the court held that the employee did not breach the confidentiality clause in the circumstances. The client lists could be discovered by the employee’s new employer, and he had not made improper use of the information.

Much of the court’s attention was focused on whether specific information was in the public domain. The court found that the prices and names of customers were commonly used in the course of business. “It is not clear to me that a company can claim that information is confidential where it is known to one segment of the market and not to others. Once the information has gotten into the public domain in any respect, it seems to me by definition to no longer be capable of being labeled confidential.” The court similarly ruled that the even if the information was confidential, there is no evidence it was used by the defendant. On the common law test for breach of confidence there has to be a misuse of confidential information and there has to be corresponding detriment. The court did not find that there was any detriment from the information that the defendant used. Thus, there was no breach of confidentially according to the court. The plaintiff similarly failed on his other claim for breach of the contractual confidentiality obligation.

To read the full case on CanLII, click here.

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Consideration to enforce a non-compete provision

Discussion: In the sale of a business, the agreement of the vendor not to compete may be part of the consideration by agreeing to acquire the business. Consider 1400467 Alberta Ltd. v. Adderley (2012 ABQB 155) in which the vendor of the business sold had an interest in a direct competitor. The court considered (among other things):
the merits of a restrictive covenant in the context of an employment agreement where such a covenant was part of the consideration for the sale of the business; and
[on “consideration”] the reasonableness of the restriction, and whether it was patently against the public interest; in this case, this covenant assisted the purchaser of the business to ensure that the purchase price paid for the business “was not money thrown to the wind.”

Also on “consideration”:
The court did note that consideration for the restrictive covenant was in the amount of $10, which, because of the breadth of the covenant, immediately attracts concern about a potential imbalance in contracting positions, in the context of a strictly employment-related relationship (which it was not).

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Employers Beware: Does Your Employee Owe a Fiduciary Duty Post-Termination?

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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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Blog Bite: Can a Franchise Enforce a Restrictive Covenant Against Its Competitors?

In an interesting case for parties seeking to impose a geographic boundary on competitive operations, an Ontario Court has held that a franchisor was not entitled to enforce a restrictive covenant because it did not have a legitimate interest to protect within the geographic area prescribed in the covenant.

In MEDIchair LP v DME Medequin Inc. (2016), the Ontario Superior Court of Justice held that MEDIchair LP (“MEDIchair”), the franchisor, could not enforce a restrictive covenant against Medquin Inc. (“Medquin”), the franchisee. MEDIchair operated a franchise network that sold home medical equipment.

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DME had owned and operated a MEDIchair franchisee located in Peterborough, Ontario for approximately 20 years. MEDIchair’s franchise agreement with DME contained a restrictive covenant which prevented DME from engaging in “any business similar to the business carried on by MEDIchair or any of its authorized franchisees” for 18 months, within 30 miles of DME’s store or any other franchisee.

In 2008, 2169252 Ontario Inc.

(“216”) purchased the DME franchise and agreed to comply with the restrictive covenant.

In 2015, the original franchise agreement between MEDIchair and DME expired and DME began operating an identical business under a new name.

MEDIchair sought to enforce the restrictive covenant against DME. The court held that while the covenant was not ambiguous or unreasonably broad, it was not enforceable because MEDIchair did not have a legitimate or proprietary interest to protect within the territorial scope of the covenant since it did not plan to locate a new franchise in the area prescribed in the covenant.

Take-Away:

FOR A FRANCHISOR TO ENFORCE A RESTRICTIVE COVENANT, IT MUST HAVE A LEGITIMATE INTEREST TO PROTECT WITHIN THE TERRITORIAL SCOPE OF THE COVENANT.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Non-competition Clauses: Is 5 Years Too Long to Promise not to Compete?

 

Employment Contracts

Non-competition clauses are often found in employment and consulting contracts. Generally speaking, these clauses have to be as narrow as possible, covering only the geographic area, time period, and type of work needed to protect the legitimate interests of the employer. Courts will usually not enforce clauses that make it difficult for the employee to earn a living when they leave the job. Five years would likely be too long in most cases.

Sale of a Business

But non-competition clauses are also found in contracts for the sale of a business. Once you have sold your business, how long can you be required to wait before you can open another business to compete with the one you sold? This question was considered by the Supreme Court of Canada, in a situation where the former owner also became an employee of the new business owner. (Payette v. Guay Inc., 2013 SCC 45)

Guay was a crane rental company which purchased assets from another crane rental business owned by Payette. As part of the agreement the parties agreed that Payette would work for Guay for six months and was, thereafter, to be bound within the province of Quebec by a non-solicitation and non-competition clause for 5 years. Payette worked for the Guay for over four years until being fired and then began to work for a competitor. Shortly after, several of Guay’s most experienced employees followed and began working for the competitor as well.

The Court considered several factors, including the sale price of the business, the access to legal guidance and the parties’ expertise and experience. The Court found that the parties had negotiated on an equal footing as informed businesses and the sale was of substantial value. The Court held the 5 year restrictive clause was reasonable because of the specialized nature of the crane business, and that the large geographic location was reasonable because of the mobility of the crane rental business.

 

Conclusion

As the owner of a business, you are unlikely to be able to require your employees not to compete for 5 years after they leave the job, but if you sell your business and then work for that business, it is much more likely that 5 years would be an enforceable time period, depending on the nature of the business. This is because the courts recognize that when you sell your business, the purchaser is paying for the goodwill of that business, and for the right to carry on that business without competition from you.

Takeaways:

  • non-competition clauses in sale of business agreements are likely to be enforceable if the businesses negotiated on an equal footing
  • non-competition clauses in employment contracts must be limited to only what is needed to protect the legitimate business interests of the employer
  • the reasonableness of the time, geographic, and work restrictions on competition will depend on the circumstances of each contract

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Engaging in ‘Other Business’ without Violating a Non-Compete Clause

Links from this article:
Read the article here.

Are you a consultant with a full time client and a related sideline where you enjoy trying out new and innovative ideas? If so, a good pitch to your client on how your sideline could benefit them may alleviate concerns about competition, and enhance the client’s regard for your skills as a consultant. It may even result in the client agreeing to flexible schedules and some financial participation in your innovative projects.

Many companies don’t specifically reference ‘moonlighting’ but prohibit the use of company resources, technology and intellectual property for noncompany activities. If the consulting agreement contains a non-compete clause, it can still be possible to provide that the consultant “may be engaged in any other activity which does not place the consultant in a conflict of interest with the company.”

Read the article here.

Take away:

  • If the consulting agreement contains a non-compete clause, consider adding a clause which permits the consultant to engage in other business which is not in conflict of interest with the company.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

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