The Ontario Court of Appeal recently confirmed a damage award to a software company, GasTOPS Ltd., of just over $15,000,000 in damages and interest together with a staggering $4,250,000 in reimbursement for legal costs as the result of the conduct of its former employees. In one sense this case is reaffirming for employers but it also begs the question, “How do I make sure my business does not have to go through this?”
GasTOPS carries on a unique and highly specialized software business. Four key employees, who were responsible for the design of the core programs of GasTOPS and who were “crucial” to its direction and guidance, gave 2 weeks notice and left to establish a competitive business that they described as a “spin off” of GasTOPS. This competitive business proceeded to usurp much of GasTOPS existing and prospective customer base.
The 4 employees did not have written employment agreements that addressed non-competition, confidentiality or the use of intellectual property. However, the Court found that they were all fiduciaries of GasTOPS and were prohibited from using its confidential information and trade secrets to compete against GasTOPS. The Court also found that the 2 weeks’ notice that the employees provided was inadequate.
The trial Judge required the competing business and the 4 employees to compensate GasTOPS for 10 years of lost profits together with interest and a full reimbursement of legal fees. The action took 7 years to complete, involved 295 days of evidence and 70,000 pages of exhibits. The Trial Court award is 668 pages long.
While this decision reaffirms that employers will have some protection if fiduciary employees leave and make use of confidential information to compete against their previous employer, this provides little comfort given the process that GasTOPS had to endure to right this wrong. An obvious question is how this circumstance might have been prevented. If these 4 employees had been required to sign employment agreements that addressed the use of confidential information, the ability to compete against GasTOPS Ltd. after they left and the use of intellectual property, these employees may not have ventured off on their own to compete.
Despite the fact that many key employees owe duties not to engage in conduct such as that described in the GasTOPS decision, our Courts have to deal with cases of this nature each year. One of the key aspects of a well drafted employment contract that deals with post employment conduct by employees is its preventative nature. In our view, an employer would be prudent to take pro-active steps to protect its business through a well crafted employment agreement with key employees. A primary goal would be to raise awareness amongst employees of their obligations in order to prevent employees from going down the path that the former GasTOPS employees took. That ounce of protection would be worth more than a pound of cure.