“I’ll take fifty per cent efficiency to get one hundred per cent loyalty.”
– Samuel Goldwyn
WITHIN THE CONTEXT of a contract of employment, an employee inter alia owes his employer an implied duty of loyalty.
Such a duty, which is said to originate from a time when the employment relationship was perceived as one of master and servant, continues into our era where the employment relationship is arguably characterised as one between a mobiliser of capital and a provider of labour.
Therefore, an employer is entitled to an employee’s loyalty whether or not the contract of employment includes written clauses by which the employee promises not to facilitate activities that compete with the business of his employer; that poach the customers or employees of his employer; that use confidential information, gained during employment, to the detriment of his employer; and so on.
Against the preceding backdrop, the case of GasTOPS Ltd. v. Forsyth 2012 ONCA 134 is instructive for business owners, directors, senior managers and persons holding responsibility for the human resources portfolio; since it highlights the legal ramifications that may ensue for employees (particularly managerial) who breach the non-compete, non-solicitation, confidentiality and notice of resignation clauses in their contracts of employment.
The case also reveals that businesses, which subsequently benefit from the aforementioned fiduciary and contractual breaches, may be called upon to account for the associated financial gains.
GasTOPS was an industry leader in the design, development and application of computer software products, which facilitated the assessment of machinery conditions and maintenance requirements by the operators of jet engines.
Bradley Forsyth, Douglas Brouse, Jeffrey Cass and Robert Vandenberg were considered the designers of GasTOPS’ main programmes and a key part of the company’s senior management.
In May 1996, Brouse and Cass attended a seminar on starting a software company, unknown to GasTOPS. The two subsequently shared the material with Forsyth. On October 7, 1996, Forsyth and Brouse submitted separate, but identical, letters of resignation that gave two weeks’ notice to GasTOPS.
On October 10, 1996, Cass and Vandenberg also resigned by giving two weeks’ notice to GasTOPS. Quickly after their resignations Brouse, Forsyth and Cass informed GasTOPS employees of their plans to start up their own software development company focusing on aviation maintenance systems. By November 1996 a number of GasTOPS’ employees left to join the new company, MxI which had been incorporated by Forsyth, Brouse, Cass and Vandenberg on October 15, 1996.
They then courted most of GasTOPS’ existing and potential customers to offer “a virtually seamless transition to MxI and its products”. Resultantly, several existing clients of GasTOPS and prospects such as the United States Navy diverted their business to MxI. GasTOPS sought to enact damage control by negotiating an arrangement with MxI, however such negotiations eventually broke down.
GasTOPS sued Brouse, Forsyth, Cass and Vandenberg. The trial judge found: Brouse, Forsyth, Cass and Vandenberg had been “fiduciary” employees of GasTOPS; breached their fiduciary duty by leaving without giving leaving without giving reasonable notice knowing other employees would follow and knowing that it would leave GasTOPS unable to fulfil existing contracts or pursue the business opportunities it had been cultivating; soliciting GasTOPS’ customers and prospective customers; and using GasTOPS’ confidential information to compete unfairly with GasTOPS.
Brouse, Forsyth, Cass and Vandenberg had breached their duty of confidence by acquiring confidential commercial and technical information and misusing that information to the detriment of GasTOPS and the benefit of MxI. MxI had breached its duty of confidence by acquiring confidential commercial and technical information and misusing that information to the detriment of GasTOPS and the benefit of MxI.
Brouse, Forsyth, Cass and Vandenberg had breached their employment contracts by resigning without giving reasonable notice. MxI had to account to GasTOPS for the profits of $12 306 495 it had made through GasTOPS’ confidential information over its first ten years of operation and to disgorge the same; pay damages equivalent to profits of MxI over its first ten years of operation; pay pre-judgment interest of $3 039 944 and GasTOPS’ full legal costs of $4 252 920.24; and were jointly and severally liable to GasTOPS for the amounts ordered.
An appeal was lodged and GasTOPS lodged a cross-appeal against the trial judge’s rejection of its request for permanent injunctive relief. However, the Court of Appeal dismissed the appeal and cross-appeal by upholding the trial judge’s decisions.
The appellate decision created the precedent that where an employee is found to have breached his/her fiduciary duties not to unfairly compete with his former employer, not to solicit the employees of his former employer, not to breach confidential information possessed by his former employer and to give adequate notice of resignation, he/she will be liable to pay damages to his former employer.
Also, where a company is found to have been used as a mechanism to facilitate an employee’s breach of his/her fiduciary duty not to unfairly compete with his former employer, the company will be ordered to account for the resulting profits and to disgorge the same to the former employer.
Even though we live in an era where employees are unlikely to work for one employer throughout their working lives, where the entrepreneurial spirit abounds and where fidelity is arguably a decreasingly prevalent sentiment; employees should be aware that being disloyal to their employers could come at a cost.
Calvin Husbands is a labour management advisor.
