Competition and the Departing Employee

While you can’t prevent former employees from competing against your company, you can take steps to ensure that they do so fairly.

One of the greatest day to day challenges in operating any successful business is dealing with the competition.  Imagine how much more difficult that task would become if your competitor were assisted by one (or more) of your former employees, who, after years of employment with your company, joins your rival, bringing with them a wealth of information about your business practices, pricing and customers.

It’s not uncommon for an employee to begin a job with little or no training and to acquire significant experience through years of work with the employer. 

In addition to this experience, an employee may acquire confidential information with respect to the company’s methods of doing business, its customers and trade secrets.

One of the biggest concerns for an employer is that a departing employee will disclose this confidential information to a competitor giving them an unfair advantage.  The employee may even use their intimate knowledge of the business as a bargaining chip to secure the new job.

Generally speaking, it is not possible for an employer to indefinitely prevent a departing employee from joining a competitor or setting up a competing business.  This would amount to a restraint of trade.  However, it is possible for an employer to take preventive measures to ensure that a former employee leaves on a fair basis.

Duty of a Departing Employee

Depending on the position held by the departing employee, he or she may owe the company certain duties, even after leaving employment.

The Courts have made a distinction between senior or key employees and non-management employees who are often referred to as “mere employees”.  Upon departure a continuing duty of good faith and fidelity will exist, but the extent of this duty will vary depending on the position that the employee held at the company.  Generally, persons in management positions will have a broader obligation than those lower in the company hierarchy.

Essentially, the continuing duty of the key employee includes the obligation to refrain from usurping corporate opportunities, soliciting their former employer’s customers, or using confidential information for their own or new employer’s benefit. However, all departing employees will owe some measure of duty to their former employer to respect trade secrets and to keep customer lists confidential.  Also, when a “mere” employee departs along with a key employee that person may also become impressed with the duty owed by the more senior employee.

What Information is Confidential?
 
It is not possible to devise an exhaustive list of what constitutes confidential information because this will vary from industry to industry.  Some businesses are more sensitive than others to the disclosure of certain information.  However, the Courts have identified some common issues that are invariably considered to be confidential. These include:

(i) Customers lists;
(ii) Pricing information;
(iii) Customer purchasing histories;
(iv) Trade secrets;
(v) Key contacts;
(vi) Ongoing projects; or
(vii) Upcoming projects.

Different Treatment

We can consider two recent Court decisions which highlight how similar actions can be treated differently depending on who the departing employee is. 
The British Columbia Court of Appeal in Barton Insurance Brokers Limited v. Irwin ((1989) 170 D.L.R. (4th) 69) found that a former office supervisor who left her job to join a competitor was entitled to solicit customers of her former employer.  The employee’s new employer asked her to compile a list of the former employer’s customers relying on her memory and by use of a telephone directory.  The departing employee did not take an actual customer list from her employer, but instead relied on her recollection of the customers.
 
One important consideration in this matter was the position held by the departing employee.  As the Court found that she was not a “key employee”, the employee was entitled to make a list of the customers from memory and solicit their business. 
It is important to note that in this case there was no employment contract between the employee and her former employer.
The result in Barton can be contrasted with the Ontario decision of Quantum Management Services Ltd. v. Hann, ((1999) 69 O.R. (2d) 26), where two senior employees had mentally carried away customer lists and solicited the former employer’s clients.  The Court found that the employees breached a fiduciary duty owed to their former employer not to take advantage of corporate opportunities of which they had learned as senior employees.  In Quantum the Court awarded damages to the former employer based on the lost business resulting from the solicitation.  This decision was upheld by the Ontario Court of Appeal.

The Employment Contract 

Perhaps the most effective method of discouraging an employee from misappropriating confidential information and in protecting the business in the event that confidential information is used, is to negotiate an employment contract at the time the employee is hired.  The employment contract will include amongst the other relevant provisions:

(i) a reasonable definition of what will be considered confidential information;
(ii) appropriate restrictions on the use of that information; and
(iii) reasonable restriction on the ability of the employee to compete upon departure. 

Employment contracts must be carefully drafted in order to ensure that they are not too far reaching and onerous, otherwise they may not be upheld by a Court. 

A poorly drafted employment contract is of little use to the employer.  If the Court finds that the covenants are too restrictive they will not be enforceable.  The Court will not make an unreasonable contract reasonable.  The employees in the Quantum decision, referred to earlier, had executed an employment contract containing a restrictive covenant that the Court refused to enforce as being unreasonable. It was only based on their fiduciary duty as senior employees that the Court found them liable.

It is important that the employee be given the opportunity to properly review and understand the contract and to obtain legal advice before signing it.  Some employers even consider contributing towards the employee’s legal costs in having the agreement reviewed.  It is important that the employment contract be instituted at the beginning of the term of employment and amended and updated as required when the employee is promoted, to reflect the changes associated with moving up the company hierarchy.

Enforcing the Employment Contract

If an employer discovers that a former employee is making use of confidential information, the employer can attempt to stop it by obtaining an injunction.  An injunction will prohibit an employee from engaging in the offensive conduct, for example, from soliciting the former employer’s customers.

In Ontario, temporary injunctions (lasting a maximum of 10 days) can be obtained from the Court without notice to the employee, so long as the employer can muster enough evidence to satisfy the test established by the Court.  In order to obtain a permanent injunction the employer would have to return to Court with notice to the employee, who would have an opportunity to defend against the injunction.

In more drastic situations, where the employee has actually taken confidential lists or other corporate property, the employer can attempt to obtain an Anton Piller order, which operates like a search warrant.  This order, also obtained without notice to the employee, entitles the employer to search for and seize such property.

In some cases, an employer may seek damages for an employee’s breach of his or her employment obligations, against both the former employee and the new employer.

Conclusion

The existence of a well-drafted employment contract makes the process of protecting the information that is important to a company considerably easier, as the employer is able to rely on clear non-competition and confidentiality clauses agreed to by the employee.

And while there is no guarantee that a departing employee will not try to use confidential information to his or her advantage either to compete directly with the former employer or to obtain a job with a competitor, a good employment contract will assist in the process of obtaining relief from the Courts if all else fails.

Michael Buccioni practices commercial litigation at Harris + Harris LLP and can be reached at 905-629-7800.

The foregoing information is provided for general informational purposes only and readers are encouraged to consult with their professional advisors as to their specific circumstances.