Court of Queen’s Bench of Alberta, 2011
The Plaintiff Richard Evans (“Evans”) was employed by the Defendant The Sports Corporation (“TSC”), a sports agency headed by Ritch Winter and Steve Kotlowitz, under a three year contract beginning April 18, 2003. Evans became the primary connection to the Eastern European “pipeline” (the “Pipeline”), where TSC had agreements with two agents from Slovakia (“Kadlecek”) and the Czech Republic (“Henys”) who would help find TSC clients. Evans became primarily responsible for servicing any clients obtained via the pipeline, and although he successfully serviced those clients referred by Kadlecek and Henys, he was relatively unsuccessful in recruiting new clients via other means.
Irrespective of any difficulty recruiting new clients, a renewal contract (the “Agreement”) between TSC and Evans was signed in Fall 2003 after the exchange of several drafts, given the need to draft a provision in contemplation of the 2004-2005 lock-out. This provision held that in the event of such a labour disruption, TSC, acting reasonably, would be permitted to reduce or suspend the payment of base salary to the COO (Kotlowitz), and that Evans’ salary would be reduced or suspended for the same duration by the same percentage. The Agreement also included provisions regarding non-disclosure, developments and unfair competition (“s. 7”), severability and an expression that the Agreement was the entire agreement.
At the end of June 2004, Evans was notified that the lockout provision would take effect and that his salary would be suspended as of June 30, 2004. Evans had not budgeted to go without salary for the months of July and August, and was given $12,000 (the “Loan”), the net amount he would have received in July and August. Repayment terms were never discussed and it was concluded this amount was indicated as a “loan” by Kotlowitz and Evans to appease Winter, who did not think TSC should give Evans anything, given that TSC had issued him a Record of Employment (“ROE”) at the end of June.
Evans submitted the ROE and began receiving Employment Insurance benefits in July 2004. He continued to receive TSC benefits and office parking from, and testified that it was “business as usual”, although Winter and Kotlowitz testified Evans had been encouraged to work elsewhere as there were no contracts to negotiate and limited servicing given that the clients were not playing in the NHL. There were joint efforts (“fishing”) between the three agents to find alternative work, with the profits to be split between them. Winter negotiated some work with Skate Canada, on which Evans did a considerable amount of the work. Winter was paid a larger portion as he had netted the fish. Kotlowitz testified he paid Evans his portion because he knew Evans needed the money. The Skate Canada payments ($18,379) and the Loan were the only salary received by Evans during the lockout.
The lockout ended July 13, 2005, and TSC resumed salaries for July and August on a rolled-back basis. The three other agents (including Kotlowitz and Winter) agreed to receive half salaries as of September 1, 2005, but Evans refused and was paid his full salary. This further weakened the relationship between Evans and Winter, and when the Agreement renewal deadline of February 17, 2006 neared, each of Evans and Winter wanted the other party to make the first offer. Evans gave notice of renewal, but refused to make an offer. TSC (at Winters’ request) held out for an offer from Evans and ultimately failed to give notice of renewal or issue an offer. At the time of Evans' notice of renewal he had already had a conversation with Kadlecek and the son of Henys in respect of what the two European agents might do if Evans left TSC.
On April 12, 2006, Evans announced he would be leaving when his contract expired some days later. TSC responded that Evans should leave immediately. Evans made immediate arrangements to have his cell phone forwarded to the new telephone line he had already set up in his home. Winter and Kotlowitz were concerned about the TSC clients Evans had been servicing and, later that day, issued a letter to Evans reminding him of his obligations under s. 7 of the Agreement.
Shortly after Evans left TSC, the company began to receiving termination notices from many of the clients who had been serviced by Evans. TSC believed Evans was breaching the restrictive covenant or non-solicitation provisions of the Agreement, but made minimal efforts to mitigate its damages, making only a few telephone calls and instead relying on the Agreement for the payment of any revenues generated by Evans from these clients for at least the two year duration of the restriction. Evans was entitled to compete with TSC immediately on his departure, provided the clients were those he had recruited himself, for which he had been paid a bonus.
The primary issues in this case were as follows:
- Was Evans entitled to be paid for the days between the time he was asked to leave the offices and the expiration of the Agreement (the “Stub Period”)?
- Was Evans entitled to receive his full salary for the lockout?
- Did Evans breach the Agreement by attempting to obtain the withdrawal from TSC of any employees of TSC within 24 months of the end of his employment with TSC?
- Did Evans owe fiduciary duties to TSC, and if so, did he breach those obligations?
- Did Evans breach the Agreement by directly or indirectly calling on, soliciting, diverting, taking away (or attempting to) any client of TSC within 24 months of the end of his employment with TSC?
Stub Period Payment
Justice Graesser held that when an employment agreement is for a fixed term, both parties are entitled to hold the other to the agreement. Evans was willing to work the Stub Period, therefore TSC had to continue to pay him and provide his benefits absent termination for cause.
Justice Graesser found that the Agreement was not ambiguous and there was no measurable inequality of bargaining power given the legal backgrounds of Evans, Kotlowitz and Winter, and the access of all parties to legal counsel. According to the Agreement, Evans was to be remunerated in a similar fashion to Kotlowitz in respect of salary reduction, suspension and repayment. Graesser J. held that while it was reasonable for TSC to protect its finances in June 2004 once the lockout was a certainty, under the Agreement TSC was not permitted to suspend salaries until September 16, 2004. Similarly, he held that it was not unreasonable to resume salaries on a rolled-back basis once the lockout was officially over on July 13, 2005, but that Evans was entitled to his full salary from July 14, 2005 onwards. At the date of trial Kotlowitz had not been compensated for lost earnings, and given that the Agreement tied Evans’ compensation to that of Kotlowitz, Evans was not entitled to anything for the balance of the lockout period.
Justice Graesser dismissed Evans’ argument that the lockout provision should be struck for failure to comply with the Alberta Employment Standards Code (the “Code”) and that he should be entitled to his full salary for the lockout period. Graesser J. held that a salary reduction or deferral agreement should be interpreted to give effect to its clear intent, subject to the understanding that parties cannot contract out of the minimums wage, benefits, and conditions provided for by the Code. As Evans continued to receive benefits and the total of the Skate Canada payments and alleged Loan were more than the minimum wage payable, the result of the Agreement did not contravene the legislation. Graesser J. acknowledged that in such a situation it was preferable to take a “wait and see” approach rather than declare the provision void based on what could have otherwise happened. Any conversations suggesting Evans seek work elsewhere during the lockout were deemed irrelevant, given the entire agreement provision in the Agreement.
Lastly, Justice Graesser held that Evans’ submission of an ROE and receipt of EI benefits was indicative of his resignation of employment, and that any other finding would be tantamount to the court to turn a blind eye to a possible fraud committed against the Government of Canada, and that Evans had been terminated and was therefore disentitled from claiming any further salary from TSC for the period of September 2004 to July 13, 2005. Evans did, however, have a contractual entitlement to any salary under the operation of the lockout provision, noting that these amounts may be subject to repayment of the EI benefits. In short, Justice Graesser held that while Evans was no longer an employee, he still possessed a contractual relationship with TSC.
Withdrawal of Employees
Justice Graesser rejected Evans’ argument that Kadlecek and Henys were not employees of TSC due to an absence of both employment agreements and registration of the two as employees with the NHL Players’ Association (“NHLPA”). He held that the two gentlemen were clearly key personnel in the association and were essential to the Pipeline that TSC had relied on throughout its operation, noting that draft agreements existed with each party. Graesser J. held that it would be impossible to imagine the parties not intending Kadlecek and Henys to be treated as employees when drafting the Agreement, and that any failure to notify the NHLPA was a matter between TSC and the NHL, not one that affected the nature of TSC’s relationships with Kadlecek and Henys.
Graesser J. held that Evans breached the Agreement by soliciting and entering into arrangements with Kadlecek, and by soliciting Henys (via the son of Henys) to provide services to his new sports agency.
Justice Graesser applied the test for a fiduciary relationship as set out at para.17 of Firemaster Oilfield v. Safety Boss, 2000 ABQB 929 and para. 108 of Altam Holdings Ltd. V. Lazette, 2009 ABQB 458:
- whether the fiduciary has scope for the exercise of some discretion or power;
- whether the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and
- whether the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
Justice Graesser held that hiring and firing powers are merely indicia of a fiduciary relationship, and that Evans nevertheless met all of the above-listed elements. Evans was able to exercise discretion in the acceptance of clients and servicing therefore, was able to unilaterally sign (or choose not to sign) new clients, negotiate contracts for said clients, and service said clients, noting that for many clients, Evans was the only senior TSC employee they had worked with or known.
Solicitation of TSC Clients
Justice Graesser noted that the jurisprudence shows that in respect of a client whose files they control, departing professionals such as lawyers have both a right and an obligation to notify said clients of the right to remain with the firm, transfer the file, or hire another lawyer. He further noted that these rights and duties have not been found to extend to a corporate setting. Graesser J. agreed with the right and obligation to advise of the departure, but stated that any direct or indirect solicitation beyond that should be governed by the fiduciary duties, by contracts, or by the rules of the relevant professional association. He further stated that “the courts should be slow to dilute legitimate non-solicitation obligations by treating everyone who has clients as if they were a lawyer or doctor where there is a strong public policy reason to put the client/patient’s rights ahead of the proprietary interests of the professional [para. 225].” Graesser J. distinguished the canvassed jurisprudence in that the cases had not dealt with express restrictive covenants or non-solicitation agreements, which will require each case to necessarily turn on the context surrounding the involved parties, the wording of the agreements, and the nature of employment.
Justice Graesser held that despite the wording of the provisions regarding “non-competition”, the ordinary wording of s. 7 did not prohibit Evans from accepting a TSC client as his own during the two year period following his departure unless he did something deliberate to encourage this transfer, and therefore the provisions were more properly described a non-solicitation agreement. He noted that “[f]or a non-solicitation covenant to be enforceable it must be found to be protect [sic.] valid propriety interests of the employer, reasonable between the parties, and reasonable in the public interest [para. 272].”
Justice Graesser found that apart from the withdrawal of employees Kadlecek and Henys and the possible involvement of those employees, there was no evidence before the court of any apparent action of Evans that caused any TSC client to sign with Evans. Nevertheless, and absent any specific request, Evans was aware of the results of the efforts of Kadlecek and Henys, who were pursuing clients on his behalf, and Graesser J. held that “[Evans’] turning a blind eye to their activities [did] not shield him from the consequences of their actions [para 295].” Graesser J. held that TSC had met its burden of proof, establishing a breach of the s. 7 obligations on a balance of probabilities.
Mitigation of Damages
Ultimately, Justice Graesser found that TSC had failed to mitigate its damages, and did not even make a major effort with respect to the four players generating the majority of the revenue lost to Evans, instead relying on the damages provision in the Agreement. TSC’s damages were accordingly reduced by 50% due to this failure to mitigate.