A recent decision from the Ontario Court of Appeal has affirmed that “key employees” owe fiduciary duties to their employer upon resignation. As this case reveals, a breach of these duties can have costly consequences.
In GasTOPS Ltd. v. Forsyth, a group of employees resigned from GasTOPS, a specialized technology company, and started a competing firm the following week. Despite express assurances to the contrary, these individuals misappropriated confidential information from GasTOPS and used this information to solicit both clients and employees from their previous employer. Indeed, within a month of their resignations, several GasTOPS employees had left to join the new venture.
After 295 days of hearing, the trial judge found that the defendants had been integral in managing projects and designing the company’s core technology products which formed the backbone of the company. The Court found that these individuals were part of senior management and were crucial to the direction and guidance of the company and as such owed fiduciary duties to GasTOPS. The Court further held that the two weeks of notice of resignation provided by each of the defendants was wholly inadequate, and that each of the defendants were fully aware that their departures would leave GasTOPS unable to fulfill its existing contracts, or continue to pursue the business opportunities it had been cultivating.
On the facts of the case, the Court awarded GasTOPS all of the profits earned by the new venture for the first 10 years of its existence. Accordingly, the defendants were held to be jointly and severably liable for over $12 million in damages. With costs and pre-judgment interest the total damage award was nearly $20 million. The defendants appealed the period of disgorgement as well as the finding that certain individuals owed fiduciary duties.
On appeal, the Court of Appeal held that the 10-year disgorgement period was reasonable, given the small and highly specialized market, the nature of the confidential and technical information that had been misappropriated and used, and the product that was created and marketed using this information. The Court of Appeal was also influenced by the fact that GasTOPS was an industry leader in a market that only contained a small number of very large customers. Accordingly, it was reasonable to conclude that it would take approximately 10 years for the damage caused to dissipate.
Although the damage award in this case was extremely large, the Court noted that the breach of fiduciary duties owed in this case were particularly egregious. Even so, this case should act as a warning both to departing employees who are looking to start a competing business, as well as to organizations which seek to rely on confidential information absconded from the previous employer of a new hire: the costs may inevitably far outweigh the perceived benefits.
If you have any questions about fiduciary duties or the use of confidential information by new or departing employees, or any other questions relating to workplace law, please do not hesitate to contact a Mathews Dinsdale lawyer.
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