A recent decision of the Ontario Superior Court provides an excellent overview of the duties of senior employees upon resignation, including providing reasonable notice to their employers. Mr. Justice Granger concluded his 670 page decision by awarding almost $11.5 million in damages to the former employer in compensation for the wrongful acts of departing senior employees.
The employer and Plaintiff, GasTOPS Ltd., was a company involved in the high-tech field. The Defendants were four former employees of GasTOPS, plus the company they incorporated to compete with their former employer.
The action was brought when four senior employees resigned upon two weeks notice and subsequently set themselves up in direct competition with their former employer. The Plaintiff employer brought an action claiming, amongst other things, breach of fiduciary duties by the Defendants. Not only did the Defendants set up a business competing directly with their former employer, but they did so using confidential information and trade secrets to acquire customers who had done business with the employer. A further 15 employees of GasTOPS “defected” to the new company, MxI, during the next three months, most of them leaving within 18 days of the “ringleaders.” The effect on GasTOPS business was, understandably, catastrophic. The goodwill and ability to service their clients, built up since the company’s founding in 1979, disappeared in the space of a few weeks.
Justice Grainger determined that the personal Defendants were, firstly, key employees and secondly, owed a fiduciary duty. Because they were responsible for developing a significant commercial component of GasTOPS’ business and achieved that through the use of sensitive technological information that they helped develop and that was at the very core of GasTOPS corporate identity, they met the legal requirements of both key employees and fiduciaries. Also relevant was Justice Grainger’s finding that they were privy to, or had determined, the customers’ and potential customers’ requirements. They had been privy to GasTOPS’ sales strategies and to contractual relations between GasTOPS and its existing and potential customers, including contractual negotiations and in many instances were responsible for the negotiations of those contracts. In addition, they carried out these responsibilities with minimal or no supervision, giving them a high degree of responsibility and exposing GasTOPS to a unique vulnerability at their hands.
The Defendants claimed to have been solely technical employees, but the Judge relied on previous caselaw which determined that even highly skilled technical employees may be found to be fiduciary employees if they are crucial to the direction and guidance of the company. This decision confirms that all employees owe their employer a general duty of good faith and fidelity, even if they are not fiduciaries and that at all times during the employment relationship employees are subject to an implied term in their employment contract that they must protect the employer’s interests. Justice Grainger relied on leading cases from the Supreme Court of Canada such as Canadian Aero Service Ltd. v. O’Malley, Frame and Smith and others, to confirm that the defining characteristics of a fiduciary employee are:
- The fiduciary has scope for the exercise of some discretion or power;
- The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and,
- The beneficiary is particularly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
Emmployer Entitled to Reasonable Notice
The Court found in the case of all of the individual Defendants that the two weeks’ notice of resignation was woefully inadequate, keeping in mind that the purpose of this notice is to give the employer sufficient time to find and train a replacement. Because of the technical expertise of these Defendants, the Judge determined that ten months’ notice would have been appropriate under the circumstances. Although far more attention is paid to the amount of notice or pay in lieu of notice that an employer owes to an employee upon terminating the employment contract of an employee, this case confirms once again that there is a corresponding duty on the part of employees to provide the employer with proper notice of resignation. The Judge also confirmed that in assessing damages for breach of fiduciary duty, the court may consider the appropriate period of reasonable notice, taking particular note of the effect an early departure has on the employer’s ability to compete. The Defendants argued that GasTOPS had waived its entitlement to a longer notice period when it demanded that the employees leave the premises immediately upon rendering their resignations. Justice Grainger, however, found that the notice given by the employees was insufficient, and was, therefore, a breach of their obligations to give reasonable notice of termination of their employment. The employer attempted to persuade the Defendants to either withdraw their letters of resignation or to provide more reasonable notice. The employer was entitled to accept the breach of the employment contract and ask the employees to leave immediately, thus accepting the breach.
This decision also deals with and clarifies the law concerning non-compete and non-solicitation duties, misappropriation of trade secrets and usurping business opportunities – all issues of importance to employers and employees. From a strategic standpoint, the decision updates and clarifies the law relating to all of the major issues that arise when key employees leave to set up their own shop.