Key Employees Liable to Former Employer for Unfair Competition

1 octobre 2012

( Disponible en anglais seulement )

On March 1, 2012 the Ontario Court of Appeal (the “Court”) released its decision in GasTOPS Ltd. v. Forsyth, 2012 ONCA 134.  The Court upheld the findings of the trial judge that the personal defendants were liable to their former employer GasTOPS Ltd. (“GasTOPS”) for breach of fiduciary duty, breach of confidence and breach of their employment contracts.  The respondent company, MxI Technologies Ltd. (“MxI”), was found liable to GasTOPS for breach of confidence.

Facts

Until October 1996, the personal defendants were senior employees of GasTOPS. GasTOPS designed sophisticated software for a small number of military and civil aviation clients. The personal defendants were crucial to the direction and guidance of GasTOPS.  They designed its core technology products and possessed confidential information about the company’s corporate strategy.

Over three days starting on October 7, 1996, the personal defendants provided GasTOPS with two weeks notice of their resignations.  Within hours of giving notice, they met with GasTOPS employees and explained their intention to start a new company, MxI. MxI promptly hired a number of GasTOPS employees and went into direct competition with GasTOPS.  MxI effectively developed and sold a new version of existing GasTOPS technology.  The similarities between MxI’s technology and that of GasTOPS made MxI products attractive to GasTOPS’ current and prospective clients.  MxI quickly usurped a profitable contract with the U.S. Navy that GasTOPS had been targeting for a considerable period of time.  The contract with the U.S. Navy accounted for 80% of MxI’s total income over its first three years of operation.

Trial Decision

At trial, the judge found that the defendants “intended to destroy GasTOPS’ technology business”.  They used confidential business information acquired as employees of GasTOPS to develop MxI technology and market it to GasTOPS clients.   The judge held that the personal defendants, as key employees of GasTOPS, owed fiduciary duties to the company and that they had breached such duties.  The judge also held the personal defendants liable for breach of their employment contracts for failing to provide reasonable notice of resignation.  The judge stated that reasonable notice for employees in their positions would be in the range of 10-12 months.

The trial judge ordered MxI to pay to GasTOPS the profits it earned during its first 10 years of operation.  The defendants were made jointly and severally liable for approximately $20 million in damages, prejudgment interest and costs. They appealed the decision.  GasTOPS cross-appealed and argued that MxI should be required to disgorge its profits in perpetuity.

Court of Appeal Decision

The appellants did not contest the judge’s finding that their actions had caused damage to GasTOPS. Instead, they appealed the judge’s use of 10 years as the period for disgorgement of MxI’s profits.  The also challenged the inclusion of certain amounts in calculating the quantum of damages.  They argued that the judge was incorrect in finding that two of the men, Cass and Vandenberg, were fiduciaries. Finally, they challenged the imposition of joint and several liability for each of the appellants and the award of trial costs to GasTOPS on a full indemnity basis.

10 Year Accounting Period

The Court upheld the trial judge’s findings that 10 years was the period of time during which MxI earned profits in breach of confidence and during which GasTOPS suffered damages stemming from the appellants’ breach of their fiduciary duties. The Court noted that the trial judge reached the 10 year figure by considering the highly specialized nature of GasTOPS’ business, the time required to develop its catalogue of products and the useful life of the confidential information used by the defendants. In light of these factors, the Court affirmed the 10 year period of damages. The Court dismissed GasTOPS’ cross-appeal that MxI’s profits should be disgorged in perpetuity.  It noted that the judge had made a reasonable conclusion in determining that 10 years was the period of time during which the misappropriated information would have commercial utility.

The Amounts used in Calculating the Quantum

The appellants contested the use of certain amounts used by the judge to quantify the damages owed to GasTOPS.  Specifically, they argued that profits MxI derived from contracts with the Canadian Air Force (“CAF”) should be excluded because GasTOPS continued to have an ongoing business relationship with the CAF. They also argued that MxI’s profits from dealings with the U.S. Navy should not be included because the opportunity with the U.S. Navy was “not ripe” at the time they resigned.  The Court rejected these arguments. It held that the role of the trial judge was to calculate the profits the defendants made from their impropriety.  The Court stated this determination should not be influenced by profits GasTOPS was able to make in spite of the defendants’ actions.

Cass & Vandenberg as Fiduciaries

The Court held that the trial judge made no palpable and overriding error in finding that both Cass and Vandenberg were fiduciaries.  Both men were responsible for developing a significant commercial component of GasTOPS’ business.  The Court upheld the judge’s conclusion that Cass and Vandenberg were crucial to the direction and guidance of GasTOPS.

Joint and Several Liability of all Appellants

The Court held that the appellants had collectively engaged in a mutual enterprise that caused damage to GasTOPS. The imposition of joint and several liability for the collective action of the four men was within the trial judge’s discretion and the Court saw no reason to interfere with that decision.

Costs

The Court upheld the trial judge’s finding that the personal respondents had engaged in a “deliberate attempt to frustrate the plaintiff’s claim by fraud or deception”.  The appellants had delayed production of certain documents that were in direct opposition to their testimony at trial. Consequently, the award of costs on a full-indemnity basis was “clearly warranted”.

Conclusion

The appellants were not successful on any of their five grounds of appeal. The Court’s decision demonstrates that breaching a fiduciary duty owed to a former employer can result in severe judicial sanctions. Interestingly, while the respondents did not appeal the trial judge’s finding that they, as key employees, owed a 10-12 month notice period, the Court did cast doubt on the trial judge’s conclusion on this point. Consequently, the issue of whether key employees owe their former employers such lengthy notice periods remains unresolved.

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