A recent decision of the Alberta Court of Queen’s Bench involved an allegation of a breach of confidentiality arising out of a proposed purchase.

The Proposed Purchase

In this case, the defendant proposed to purchase the plaintiff’s business of providing services, including meter reading, to electrical distribution companies. The meter readings are used to bill consumers and are charged on a price per read basis. At the initial meeting of the parties relating to the proposed sale, it was agreed that they would execute confidentiality agreements to protect their respective confidential business information.

The plaintiff advised the defendant that its most important assets were long term contracts with electrical distribution companies which were typically renewed. The proposed purchase did not proceed.

The RFP

The defendant subsequently acquired another meter reading company located in Newmarket, Ontario. Approximately one year after the initial discussions, one of the plaintiff’s major customers sent out a request for proposal (“RFP”) to various companies, including the plaintiff and the defendant. The defendant’s Newmarket office was designated to deal with a response to the RFP. Ultimately the defendant, through its Newmarket office was successful in obtaining the contract.

The Ethical Wall

Shortly after receipt of the RFP, the defendant implemented an ethical wall. A memorandum was circulated to all relevant employees advising that the defendant intended to adopt procedures to ensure that no information that could be confidential to the plaintiff and obtained as a result of prior discussions, should be used in any way in connection with the defendant’s bid. Various procedures were set out in the memorandum and employees were directed to sign and date it. In addition, the senior management of the defendant, who had been involved with the proposed purchase, instructed their Newmarket office to submit the bid and did not have discussions with anyone on the bid team about its preparation.

The Proceedings

As a result of the defendant obtaining the bid, the plaintiff had to lay off 75 employees and pay out a number of severance packages. The plaintiff alleged that it lost more than $3.5 million and brought proceedings.

The plaintiff alleged breach of the confidentiality agreement as well as a common law claim for breach of confidence. In order to succeed on the former claim, the plaintiff had to establish that the agreement had been breached. With respect to the breach of confidence, a successful plaintiff must show three elements: that the information conveyed was confidential; that it was communicated in confidence; and that it was misused by the party to whom it was communicated.

The Burden of Proof

At trial, the plaintiff argued that once it was shown that confidential information was conveyed in confidence, the burden shifted to the defendant to establish that it did not misuse the information. The plaintiff also suggested that it could rely on circumstantial evidence from which the Court could draw the inference that a misuse occurred.

Unfortunately for plaintiff, all of the defendant’s witnesses denied having used the confidential information in any fashion. The information had been placed in a locked cabinet and was not disseminated to anyone. In addition, any of the defendant’s employees who originally were involved in any way with the confidential information were not involved in the bidding process. As a result, the action was dismissed.

The Judge said that the ethical wall was by no means a panacea but that it was wrong to hold that such measures are never effective or that they must be in place by a designated time in order to be effective. Each case had to be decided on its own facts.

Comment

The case illustrates that obligations of confidence need to be carefully considered. In some cases, the prompt implementation of an ethical wall can be effective.