2010 CACE Conference – No Non-Compete? No Problem? –
By Shereese Qually on 2015/06/10
NO NON-COMPETE? NO PROBLEM?
by Sharon Cartmill-Lane and Shereese Qually , Taylor McCaffrey LLP
Indeed it is a challenge, perhaps an art, to draft a restrictive covenant which provides a company with adequate protection while at the same time not unfairly restricting an individual’s right to earn a livelihood. Even a carefully worded agreement may not be upheld depending on the court reviewing it and the particular facts in question.
Notwithstanding the many risks around actually enforcing a restrictive covenant, most counsel agree that it is preferable to have one in place, particularly in a highly competitive industry. But what if there is no such agreement? In that situation, a former employee’s actions are limited by a number of duties and restrictions created by the common law.
This paper will review a former employer’s common law protection regarding departing employees generally but more particularly, departing fiduciaries. Who is a “fiduciary” is explored in relative detail (however the scope of that topic is significant and an entire paper could be devoted thereto). Lastly, the limits on a fiduciary’s post-employment solicitation are also discussed.
The Duty of Good Faith and Fidelity
All employees owe their employers a general duty of good faith and fidelity, even if they are not fiduciaries. This is an implied term in the employment contract. This duty prevents all employees from competing against their employer during the employment relationship. What they can (not) do after changes depending on the category of employee.
A “regular” employee after leaving his/her employer is entitled to compete against the employer and even solicit customers provided he/she does not do so “unfairly”. This has been held to mean using the former employer’s trade secrets or confidential information.
Proving illegal use of a trade secret or confidential information may be problematic since “what” is a trade secret or confidential information is a complicated question (confirming an obvious advantage of having a restrictive covenant whereby the parties agree in advance of conflict what is a “trade secret” or even what is “confidential”).
In Amber Size and Chemical Co. v. Menzel, the court specifically considered the germane factors in the employment context relating to actions involving trade secrets:
- Did the Plaintiffs in fact possess and exercise a secret process?
- Did the Defendant during the course of his employment know that such process was secret?
- Did the Defendant acquire knowledge during his employment of such secret or a material part thereof? and, if so,
- Has he since leaving the Plaintiffs employ made an improper use of the knowledge so acquired by him?
Equitable Breach of Confidence
In addition to the obligations relating to trade secrets there is an equitable obligation not to breach confidence during and after the employment relationship. The equitable action for breach of confidence against an existing or former employee does not require that the employee be a fiduciary, albeit several cases which purport to deal with fiduciary obligations are in substance breach of confidence decisions. It may permit redress against third parties to whom the information is disclosed.
The Supreme Court of Canada, in LAC Minerals Ltd. v. International Corona Resources Ltd., confirmed the constituent elements of the equitable action for breach of confidence found in the three-pronged test of Coco v. A.N. Clark (Engineers) Ltd.: the information conveyed must be confidential; it must be communicated in confidence; and it must be misused by the party to whom it was communicated.
It should be noted that unlike fiduciary duties which last for only a reasonable period of time, the duty of confidence remains until the information is no longer confidential.
Skill and Know-How
While a current employee cannot improperly disclose information or give any assistance to a competitor, even during off hours, a former employee is fully entitled to make use of the skill and knowledge acquired during his or her employment, provided that the employee does not disclose or use information imparted to him or her in confidence. The skills acquired by an employee in the service of an employer are the property of the employee, not the employer, even though the skills and knowledge may have been acquired because of the employment relationship.
New Employer and “Inevitable Disclosure”
Canadian courts have declined to apply the American theory of “inevitable disclosure”. Pursuant to the inevitable disclosure principle, a former employee can be prevented from working for a new employer if the employee, in order to perform his new employment adequately, will inevitably disclose or use confidential information acquired from previous employment. According to Ball, it has been thought that the adoption of the inevitable disclosure principle would engender too significant of a change to Canadian law.
Expansion of Duty – Quasi Fiduciary
The case of RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., must be noted as a recent high-water mark of the duty of good faith and fidelity. In this case virtually the entire Cranbrook RBC office, headed by the branch manager, left RBC and moved to Merrill Lynch. In organizing the mass exit, the branch manager (who was found not to be a fiduciary) breached his contractual duty of good faith as an implied term of his employment contract was the retention of RBC employees under his supervision. The damages for that breach were the amount of loss it caused RBC, amounting to approximately 1.5 million dollars. Some legal scholars suggest that this case has created a new category of duties which may be described as “quasi-fiduciary”. It should be noted that RBC specifically chose not to have investment advisors sign restrictive covenants because it was seen as an impediment to recruiting new advisors from competitors. In fact the evidence was the employer did not have restrictive covenants for its employees because it actually expected to raid investment advisors from competitors.
Breach of Fiduciary Duty
The post employment restrictions on a fiduciary differ from those of a “regular” or “mere” employee. The main difference (as discussed in greater detail below) being that a fiduciary may compete but cannot directly solicit a former employer’s customers for a reasonable period of time.
Reasonable Period of Time
How long a fiduciary’s duties last is unclear. Some cases suggest approximately one year after termination of employment, though other cases have found that the fiduciary duty should last the same length of time as the notice period for termination. In Anderson Smyth & Kelly Customs Brokers Ltd. v. World Wide Customs Brokers Ltd., the Alberta Court of Appeal ruled that a customs broker who was a key employee could not solicit his former clients immediately after leaving his employer to go to a competing customers broker firm, stating that:
[T]he duty of a departing fiduciary employee subsists for so long after his termination as is reasonable in the circumstances to enable the former employer to himself contact his clients and attempt to retain their loyalty. The length of that period will obviously be affected by the nature of the position held by the departing employee. Generally, the higher the level of trust and confidence reposed in the employee, with a corresponding vulnerability of the employer, the longer the period will be. Following the expiry of that period the departing employee is in the same position as any other former employee turned competitor – free to contact the clients of his former employer for the purpose of inducing them to follow him.
The evidence at trial portrayed the customs brokerage business as one in which personal contact between individual brokers and clients is important…I believe that it would have been reasonable for the Appellant to expect [the broker] to have refrained from soliciting its clients for a period of one year after his departure. During this time, the Appellant would have had the opportunity to solidify and secure its relationship with its clients and to compensate for any destabilizing effect [the broker’s] departure may have had. After this one-year period, however, [the broker], like any other customs broker in the marketplace, would be entitled to approach the Appellant’s clients to solicit their business.
Duty not to solicit
A post employment general solicitation by a fiduciary to the public is permissible. More specifically, a fiduciary may do business with the former employer’s customers if they come to him or her through a general solicitation. A general advertisement to the public is not considered an improper attempt to solicit a former employer’s customers. For example, a fiduciary has the right to advertise his or her move to a new firm, and it has been held that a fiduciary has a right, if not a moral obligation, to advise those dealt with on behalf of an employer that he or she is no longer representing the employer. This is particularly true of “professional” employees as discussed below. .
As is the case during the employment relationship, it is irrelevant that the employer will not suffer damages from breach of a post-employment fiduciary obligation. A breach of a fiduciary obligation after termination of the employment relationship will be actionable even if the employer has not suffered damages. The employer’s obtaining or maintaining of the business opportunity in question is not a pre-condition for relief.
On the other hand, establishing the grounds for an injunction is challenging as a plaintiff must prove the harm that will ensue if not granted will be irreparable and monetary damages would not suffice. As discussed below, an equally concerning hurdle a plaintiff may face is convincing a court that the former employee was in fact a fiduciary (an element not required if an enforceable covenant has been executed).
Who is a Fiduciary?
Introduction and Canaero Principles
The task of identifying which employees will be designated as having fiduciary duties is increasingly difficult given the inconsistent tests and factors applied by courts across Canada. The concept of a fiduciary itself is difficult to pinpoint being described by La Forest J. as “…one of the most ill-defined, if not altogether misleading terms in our law.” This confusion and lack of precision in definition has carried over into the employment law context.
The foundational case in identifying who is a fiduciary in the employment context is Canadian Aero Service Ltd. v. O’Malley (“Canaero“). Canaero was a major shift in Canadian law, confirming that there are certain groups of employees who, due to their status and position within the company, will have more exacting obligations to their former employers following termination of their employment.
The law has since developed a test for the imposition of fiduciary duties into an employment relationship based primarily upon the employee’s degree of responsibility in the enterprise. A “mere” employee will rarely be subject to a fiduciary duty, but an upper-level executive will rarely escape it.
In Canaero, the president and vice-president of Canaero were extensively involved in the pursuit of a contract for topographical mapping and aerial photographing of Guyana on behalf of their employer. These two employees resigned from Canaero, formed their own company, and successfully bid on the mapping project. The Supreme Court of Canada overruled the Ontario Court of Appeal finding that the two executives were fiduciaries who had failed in their obligations to Canaero.
The test applied in this case has been identified as the “top management” test: the defendants’ remuneration and responsibilities, “verified their status as senior officers of Canaero.” The employees’ position and job responsibilities rendered them fiduciaries. The court indicated that the great degree of discretion held by these employees was a key element in identifying their fiduciary status, commenting on the fact that these employees had a wide-breadth of control with respect to corporate operations and had little scrutiny/direction from shareholders or superiors in carrying out their duties.
This test was easily applied on the facts of Canaero as the defendants in question held the positions of president and vice-president and as such there was no doubt that their status was that of “top management”. However, subsequent cases have broadened the class of employees who have fiduciary duties thereby creating uncertainty with respect to who properly falls into the category of “fiduciaries”. Other cases have narrowly applied the test citing the concern of unduly restricting an employee’s ability to obtain further employment and reserving the imposition of fiduciary duties to situations in which the equitable protection is clearly required. These inconsistencies are found even within jurisdictions creating contradictory lines of authority within the various provincial boundaries. As a result there is now a lack of clarity as to what the proper “test” is for a fiduciary and to whom it will apply.
Uncertainty in the SCC
The most oft quoted test for fiduciaries is derived from the minority decision of Wilson J. in Frame v. Smith, which was subsequently adopted in the better known, Lac Minerals Ltd. v. International Corona Resources Ltd.:
- 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 interest; and
- the beneficiary is particularly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
One of the primary areas of contention in the Supreme Court jurisprudence is the extent to which vulnerability is a governing factor (as discussed below this has been particularly relevant in cases involving departing sales people working for competitors). Recently, LaForest J. in Hodgkinson v. Simms, emphasized that while vulnerability is an important indicator of a fiduciary relationship, it is not a hallmark. LaForest J. held in this case that the above-noted factors are important but must evidence a finding that one of the parties could reasonably have expected that the other party would act in the former’s best interests with respect to the subject matter at issue. Discretion, influence, vulnerability and trust are non-exhaustive examples of evidential factors to consider in making this determination.
Overview of Case Law
Over the course of the last 10 years and certainly the last 5 years, most jurisdictions have narrowed their approach to defining who is a fiduciary and have returned to the “top management” test and principles espoused in Canaero. Like the approach to enforcing restrictive covenants (and for the same policy reasons), most jurisdictions have gravitated to an interpretation of fiduciary duty that will limit the employees to whom these restrictions apply. The most recent decisions clearly indicate a trend toward returning to the more restrictive Canaero principles, basing a finding of fiduciary on the duties, authority, discretion and general ability of the employee to influence, direct and control the business’s higher level financial, strategic and operational plan.
Expansion of the Canaero Test
One of the first ways in which the Canaero “top management” test was expanded was by emphasizing the consideration of “vulnerability” – i.e. how vulnerable the former employer was to the employee’s competition or solicitation. This expansion in the test has its foundation in the decision of Edgar T. Alberts Ltd. v. Mountjoy, where the general manager of an insurance business was found to be a fiduciary as he was the directing force of the company, operationally reporting to no one, thereby exercising a broad degree of discretion. The court was strongly influenced by the vulnerability of the employer to competition by this employee, recognizing that the plaintiff’s most substantial business asset was its trade attachment with its clients.
Sales People as Fiduciaries
A line of authority developed from Mountjoy basing fiduciary duties almost entirely on the consideration of vulnerability, regardless of the fact that many of the employees held only sales type positions with a complete lack of managerial authority.
For example, in White Oaks Welding Supplies v. Tapp, a sales manager of a welding company with intimate knowledge of the plaintiff’s business and customers was a fiduciary because he had an encyclopedic knowledge of the plaintiff’s customers, unrestricted access to all customers lists and information, and personal contact with and responsibility for a large portion of the plaintiff’s customers. Due to the resulting vulnerable position of the employer, the employee was a fiduciary.
Similarly, in Merlo v. Demarco Agencies Ltd., a salesperson responsible for approximately one-half of the plaintiff’s territory was found to be a fiduciary despite the fact that he held no managerial duties whatsoever. This decision was again based on the vulnerable position of the employer to competition. This was also the finding in EJ Personnel Services Inc. v. Quality Personnel Inc., where an employee working in a sales capacity, had knowledge of potential customers and detailed contract information was found to be a fiduciary based on the vulnerability of the plaintiff’s business to loss of clients through solicitation by this employee.
These decisions have been highly criticized due to the fact that basing a finding of fiduciary duty on the volume of sales/customer contacts alone could render all salespeople fiduciaries regardless as to whether they have any “top management” qualities or managerial duties at all. This is argued to be an unwarranted and unprincipled expansion of Canaero, emphasizing vulnerability without regard to the employee’s position and ability to influence direction of the company.
(ii) Key Employee/Personnel
A second major development in the test for fiduciaries is expanding the group of employees who qualify as fiduciary to “key employees/personnel”. Although function remains the salient consideration, “key” is interchanged with “essential”, a description available at any level of employment. However “top management” can only relate to a narrower group of individuals.
This expansion is often cited to be based on the Manitoba Court of Queen’s Bench decision of Hudson’s Bay Co. v. McClocklin where the manager of the hearing aid department of its downtown store in Winnipeg was held to be a fiduciary. His duties included ordering supplies, servicing customers and soliciting business within the department in which he worked with one other employee sharing these duties. There was no doubt that he was not top management of the Bay, however he was considered “supreme” in his department and key to its functioning and accordingly a fiduciary.
This decision and others following it have been viewed as an unreasonable expansion of Canaero. This employee had no ability to direct or influence operations and accordingly did not fall under the factors espoused in Canaero. There is an inherent danger in dissecting key employees by departments as the requirement that the employees have some ability direct or control the business quickly becomes meaningless.
A similar decision is set out in Wilcox v. G.W.G. Ltd., where 2 defendants were held to be fiduciaries. The first, Wilcox, was the director of operations, exercising a great deal of control over the company resulting in a logical finding of a fiduciary relationship. However, the court also held that a second employee, Marshall, was a fiduciary due to the fact that he was a key employee holding a position of trust and confidence and therefore a fiduciary notwithstanding that his job was more technical and less administrative.
These types of decisions have been viewed by many courts as too broad. It can be said of most employees in supervisory capacities that they hold positions of trust and confidence even though they are not able to direct the mind of the company or exercise control over operations. As such, a key element of Canaero is missing.
Interestingly, the Manitoba Court continues to develop its case law in a manner which requires something far short of “top management” in identifying a fiduciary. In the more recent decision of M.E.P. Environmental Products Ltd. v. Hi Performance Coatings Co. the court created list of indicia from which it can identify who is a “key employee” warranting fiduciary duties:
- What were the employee’s job duties with the former employer?
- What was the extent or frequency of the contact between the employee and the former employer’s customers and (or) suppliers?
- Was the employee the primary contact with the customers and (or) suppliers?
- To what extent was the employee responsible for sales or revenue?
- To what extent did the employee have access to and make use of, or otherwise have knowledge of, the former employer’s customers, their accounts, the former employer’s pricing practices, and the pricing of products and services?
This test does not require the high level, strategic influence and control first required by Canaero. It appears that in Manitoba, the “Key Employee” test remains alive and well with a specific focus on vulnerability to customer relations. It is submitted, as more thoroughly set out below, that this line of authority is inconsistent with the more restrictive principles set out by most other jurisdictions in the last 5 years and is likely to be subject to more restrictive appellate review in the future.
(iii) Key Management and Senior Management
Similarly, numerous courts have broadened the scope of employees to whom fiduciary duties apply to include “key management” and “senior management”. These cases remain current and relevant focusing on the duties and ability of the employees to influence the strategic and operational functioning of the employer, even if the employee is not the top manager of the business.
For example, in the decision of W.J. Christie & Co. v. Greer, the Manitoba Court of Appeal found that the employee who was the property manager and of the insurance department at the time of his termination held fiduciary duties to the company. He was not top management but was part of the key and senior management team.
As is noted below in the most current decisions, many employees deemed to be fiduciaries may not be “top management” but would fall under this lesser standard of “key management” or “senior management” based on their duties and responsibilities in the corporation.
(iv) Reasonable Expectations Text
A further recent expansion to the test, based on the Hodgkinson v. Simms decision, is to define as a “fiduciary” those employees whom it was within the reasonable expectations of the parties would hold fiduciary duties. For example, in Alder Firestopping Ltd. v. Rea, a general manager was found on the facts to have relinquished his own self interest and have agreed to act on behalf of the employer from the time he was employed. He was the general manager, part of a small group that met to discuss ongoing operations, and key to building the business in Calgary.
It is unclear how significant a role this factor will play in the development of fiduciary case law in the employment context in the future.
Current State of the Law
As previously stated, courts in most jurisdictions have recently and increasingly applied a more principled and restrictive approach to identifying fiduciaries in the employment context. Most cases apply the above-noted Supreme Court of Canada factors and have reserved the status of fiduciary for only those employees who exercise real discretionary, managerial power and authority over the company’s financial and strategic well-being. The following is a summary of relevant cases:
(i) New Brunswick
The Court of Appeal of New Brunswick has provided in Imperial Sheet Metal Ltd. v. Landry, one of the more decisive statements on the narrowing of fiduciary duties, confirming that the authorities following Canaero have expanded the reach of fiduciary duties far too broadly. It was held that a broad application of these principles has proven to be problematic in that an employee of little significance can be found to be a fiduciary easily if he/she works in a small business or a department and is therefore integral to the business or may render the employer vulnerable should he/she depart. The Court stated that an employee should normally be considered a fiduciary when he/she is: (1) an integral and indispensable component of the management team that is responsible for guiding the business affairs of the employer; (2) necessarily involved in the decision-making process; and (3) therefore, has broad access to confidential information that if disclosed would significantly impair the competitive advantages that the former employer enjoyed. These employees fall within the categories: top management, senior management or key management.
(ii) British Columbia
Similarly, the British Columbia courts have for sometime found that the more expansive authorities were not binding on its courts. In 57134 Manitoba Ltd. v. Palmer, where a finding by the trial judge found that a sales co‑ordinator, the senior employee at the plaintiff’s Vancouver operations was a fiduciary, was overturned by the Court of Appeal. The Court of Appeal focused on the fact that the employee began as a general salesman and still spent more than ½ his time performing these types of duties while taking on a degree of managerial functions. The Court specifically stated that cases taking a broader approach to the imposition of fiduciary status were not binding in British Columbia.
This sentiment is continued in the more recent decision of RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. As stated previously, the branch manager was held not to be a fiduciary of his employer. This was despite being responsible for the day to day operations of the branch; hiring and coaching investment advisors, supervision, employee discipline, ensuring regulatory compliance, branch budgeting and local advertising. The branch manager was not a fiduciary as he had little direct involvement in formulation of company policy, was not in a position to effect the economic interests of the employer at the branch level, and neither he nor his employer intended that the relationship would have a fiduciary character.
Similarly in Valley First Financial Services Ltd. v. Trach, a salesman/producer for an insurance company, while exercising a broad scope of discretion regarding insurance contracts with his clients, had no power to direct the affairs of the company generally, and therefore was not a fiduciary.
And more recently in Shafron v. KRG Insurance Brokers (Western) Inc. where the Court of Appeal affirmed the decision that Shafron was not a fiduciary in the insurance brokerage as he did not exercise sufficient authority and could not bind the employer contractually.
The Ontario court also seems to be narrowing the scope of findings of fiduciary: In Allstate Insurance Company of Canada v. Larocque, an employee who worked for Allstate for 20 years commenced a new insurance business in the same office and was able to retain most of his customers as a result. It was argued he was a fiduciary because he had extensive knowledge of their customers in this market, confidential information and relationships with its customers providing him an unfair advantage. This was essentially a vulnerability argument. The employee argued he was not a fiduciary because he had a supervising manager, no management responsibilities, he was not involved in pricing, and had no input into strategic planning. In finding that he was not a fiduciary, the court followed the rationale of Imperial Sheet Metal specifically rejecting the broad vulnerability test and applying the more narrow approach to identifying fiduciaries based on the Canaero decision. This employee lacked the position, influence and role to justify a finding of fiduciary duty.
Similarly, in Crystal Tile & Marbel Ltd. v. Dixie Marble & Granite Inc., the employer argued the employee at issue was a fiduciary due to the fact that it was vulnerable to his solicitation of its customers. The court found that the employee had little discretion or power, and was a mere salesman, and therefore not a fiduciary. This again is a clear indication from the Ontario Court of Appeal that vulnerability alone will not suffice to found a fiduciary duty.
In IT/Net Inc. v. Doucette, the employee left IT/Net to work for a competitor taking with him one of its largest clients with whom he worked at IT/Net. The employer argued he was a fiduciary due to his close knowledge and relationship to this client. The court held that he was not a fiduciary, just a salesman in charge of a very large account. He had no authority with respect to the management or direction of the company itself, and was therefore not a fiduciary.
A similar finding was made in the decision of BMO Nesbitt Burns Inc. v. Ord, where a group of employees left Nesbitt and were able to solicit a number of clients to move with them. The most senior employee at issue was found not to be a fiduciary as the employee was only one of 36 investment advisors at the branch in downtown Toronto. While the employee was given a Senior Vice-President title, it was found that this was given to all investment advisors attaining certain commission levels. While the employee may have been a key advisor, he was not involved in management decisions concerning overall operations and therefore was not top management.
In the Saskatchewan decision of Paso Services Ltd. v. Ratz, a commissioned salesperson for Paso, who merely sold promotional products detailed in catalogues which were available to competitors, operating within a specific sales area and exercising no control over procurement, pricing policy or management, was found not to be a fiduciary.
More recently in Culligan Canada Ltd. v. Fettes, a group of employees who worked as controllers, directors and managers under the direction of the former CEO left the employer and set up a competing business. Reviewing all of these employees’ duties and the information to which they had access and control, it was determined that there was a strong prima facie case that they were all, cumulatively fiduciaries for the purpose of an interlocutory injunction.
(v) Nova Scotia
In the recent Nova Scotia decision of Hill v. Bridgemohan, the plaintiff was the sole shareholder and director of a corporation which ran a restaurant called the Apple Barrel. This business closed due to landlord distraining for rental arrears and bankruptcy followed. The general manager then reopened the restaurant and was found not to be a fiduciary even though he was the former general manager. He had limited administrative duties only and lacked the requisite degree of trust, confidence and autonomy that normally attend in fiduciary relationships.
(vi) Newfoundland and P.E.I.
In Gateway Inn (1993) Ltd. v. Lomand, the former manager of the St. Christopher’s Hotel quit her job and purchased a second hotel to which her former employer had been considering expansion. She was found not to be fiduciary of the hotel as she did not have the discretion nor the power to bind her former employer in regard to an acquisition of such a business. She could not exercise the discretion or power required to affect her former employer’s legal or practical interests of the company despite the fact that she was the general manager. Clearly the substance (not the title) of the position was key.
The Alberta court too has refined its approach to fiduciaries such as in the decision of Flag Works Inc. v. Sign Craft Digital (1978) Inc. In this case the two defendants were the production and sales managers of the Flag and Banner division of the company. In terms of the managerial structure, the business was predominantly run by the owner and the General Manager. Upon the departure of the production and sales managers from the company, Flag Works attempted to establish that each were so integral to the company that they owed fiduciaries duties.
It was found that the Sales manager was primarily responsible to ensure that the other 2 sales people made their cold calls. Her functions regarding sales reports were mechanical rather than managerial; she had no independent unilateral discretion which would affect the employer’s legal or economic status. Similarly, while the Production manager was found to be a key employee in that she was a valuable employee, she did not exercise any managerial authority that brought her to the level of a fiduciary. She was responsible for quality control; setting prices within a profit margin set by the owner; deciding what material to use; contracting with suppliers and overseeing various employees. Despite the owner’s description of her as “more valuable than I was”, it was held that more is required than an employee who is important to the smooth and profitable functioning of the enterprise in order to affix fiduciary duties. Any vulnerability which existed was attributable to her diligence and good work, not her discretion to affect Flagwork’s relevant financial and legal interests.
In Jones v. Klassen, the employee was held to be a fiduciary because he was the “face” of Edward Jones in the territory in which he worked – the St. Albert office. This branch of Edward Jones was entirely dependent on Mr. Klassen’s activities and interaction with the clients of that office. Although he was one of 10,000 investment associates with Edward Jones, he was “the company” in St. Albert.
Also, in Alberta Care-a-Child Ltd. v. Payne, the employer, an agency providing placement for foster care, claimed that a group of former service providers who left to set up their own operations were fiduciaries. It was held that the defendant employees performed vital functions for the employer included program management, direction and supervision of staff, strategic planning and had significant influence on hiring and evaluating personnel. They worked in trusted positions and exercised considerable authority and were therefore found to be fiduciaries.
The restrictions set out above have been qualified to some extent where the employee may be considered a “a professional” because of overriding duties to clients or patients. Some cases have held that a professional who leaves a firm and contacts former clients or patients to advise them of the departure and their right to deal with him or her in the future has been held not to be liable on this basis alone for usurping a business advantage. Professionals such as doctors, dentists and lawyers have been held not to have the same proprietary right to their patients or clients as a corporation does to its customers. Since these types of professionals provide a personal service and establish personal relationships with their clients, regardless of where or how the client or patient arrived at the firm or practice, it is thought that they should not be “handcuffed” to the business. Although fiduciary obligations may be modified for a professional employee, there is authority that the employee still must give full disclosure to the firm, by providing copies of client authorizations, arranging security for outstanding fees and waiting to remove clients files until reasonable attempts have been made to fulfill these requirements. Recent Canadian cases suggest that when a professional employee with fiduciary obligations, such as an associate dentist or lawyer, has direct contact with a patient or client, the employer may not necessarily have a proprietary interest in the patient or client. For example, in Lyons v. Multari., a dentist was to have a proprietary interest in goodwill and his patients since at least some were referred to him directly by other dentists. However, this case did not consider the fiduciary issue. As Ball states, this interesting point is not yet settled in Canada and will have to be resolved by the appellate courts.
What Amounts to Solicitation?
Since the key difference between a mere employee and fiduciary is that the latter may not directly solicit clients/customers, it is important to identify what is “solicitation”. Not many cases have specifically considered where the fine line is between general competition and impermissible solicitation. There is no bright line test but rather a spectrum of activity with increasing risk associated therewith. The following outlines the range and increasing potential for liability associated therewith:
(i) General Advertisements
As stated previously, it is generally recognized the obligation to not solicit clients does not go so far as to prevent a person from undertaking general advertising in the media (such as newspapers etc.) regarding an employee’s move or new position. An untargeted general advertisement does not breach the duty to refrain from soliciting former clients.
(ii) Letters to Former Clients
The case law is unclear as to whether a general letter to former clients indicating that the employee is leaving and will be moving to a new employer amounts to solicitation. There is authority from some jurisdictions that indicates that such a letter amounts to solicitation and would violate a non-solicitation obligation. However, there are a number of decisions where it was permissible to send a simple notification to former employees. These cases do not appear on their face to have any distinguishing facts permitting a clear line to be drawn as to what type of language or circumstances is “too far” in terms of a written communication to clients.
The following are cases where impermissible solicitation was found in the context of a written communication:
Primarily in KJA Consultants Inc. v. Soberman, the defendant worked for the plaintiff’s engineering consulting business as the general manager preceding his resignation therefrom. He immediately set up a competing business and sent a standard form letter to 70-80 potential clients, most of whom were clients of the plaintiff, enclosing a brochure and business card, advising them of his new business. The letters ended with “If we can be of any assistance, please do not hesitate to call”. The Court held that this was not a “general mailing” campaign just because the letters were sent to those other than the plaintiff’s clients. The majority were to the plaintiff’s clients and were designed to solicit business and therefore this was a breach of the defendant’s fiduciary duties.
In the context of an interlocutory injunction, the case of Steinbach Credit Union Ltd. v. Hardman, addressed an employee subject to a 2 year non-solicitation agreement. When leaving SCU for Scotia Capital Inc., Hardman sent out a letter to his clients advising them that he was leaving and accepted a new position at Scotia. He also stated the business of his new employer as a prominent full-services investment firm. He thanked the clients for their business – it was noted that it was not clear if this was past or future business. The court held that this letter, as well as Hardman’s then telephoning his clients from SCU, were clearly acts of solicitation and in breach of the agreement. The court did not state that together these actions were acts of solicitation, but rather that they each individually were acts of solicitation.
Similarly, in Sanford Evans List Brokerage v. Trauzzi, the plaintiff was in the direct mail industry. Each of the companies in this industry had a list brokerage division. The defendant, Trauzzi, was a vice- president of the list brokerage division, and the other two defendants were employees under Trauzzi. Shortly after leaving, the defendants’ new employer sent a letter to the entire trade announcing the change. This announcement was mailed to the industry using the Canadian Direct Marketing Association directory (CDMA). The list of recipients included all of Sanford Evans’ clients and other list suppliers and list users. In addition to the letter, the defendants began calling list users and suppliers from the directory. The announcement read as follows:
I can’t begin to tell you how pleased I am to have this opportunity to announce Linda Trauzzi’s appointments as President of Watts List Brokerage Limited effective today’s date.
With 25 years of hands-on experience in the mailing list business, Linda brings a wealth of knowledge to her new position. Linda and her staff will continue to provide the level of professional service that the industry has come to expect.
In order to provide this service, Linda will continue to need your assistance and co-operation by providing updates and new list information.
As part of the Watts Group of Companies, she will be in the ideal position to draw on other direct marketing resources while maintaining her independence as a List Broker ….
I am sure that you and all of Linda’s friends will join me congratulating her on this exciting new venture. Please give Linda a call at (416) 503-4000.
The court held that these actions amounted to solicitation. With reference to the letter, the court reviewed specific wording/portions thereof, including, in particular, the words “continue to provide” and held that:
A careful perusal of the letter leads to the inescapable conclusion that it was, in reality, not only an announcement but also a solicitation for “continued business” – the same business that had been conducted formerly with Sanford Evans. Indeed, one witness recalled that the business cards for all three defendants were included in the announcement letter sent on Watts’ letterhead or stationery.
Further in MD Management Ltd. v. Dhut, the employee left employment with MD Management and joined ScotiaMcLeod. When starting his new job, Dhut sent letters to his former clients, followed up by telephone calls in which he specifically informed them that he could not solicit their business and they would have to decide whether they wanted to switch banks. The letter contained information regarding the fact that he had joined ScotiaMcLeod, the services they offer along with his contact information and ended with the statement, “I look forward to discussing how this new practice will enhance my ability to help you achieve your financial goals.” The court held that these were all acts of solicitation. The letters did not merely advise former clients that Mr. Dhut had left the employer and provide details as to where he could be contacted, but were “targeted communications clearly designed to encourage clients to follow Mr. Dhut to ScotiaMcLeod [the defendant’s new employer]”.
In Penncrop Life Insurance Co. v. Edison, the defendant was an independent contractor retained by the plaintiff to sell insurance. He was subject to an enforceable non-inducement agreement. Upon departure he sent a letter to a list of clients stating, among other things, that he had left the defendant for a new company, Desjardins Financial where he would be working as an independent broker. He further stated:
I have taken this step as Desjardins allows me much greater access to a variety of services. This allows me to provide to you my clients the highest level of service and satisfaction. With PennCorp I only had access to their products.….
As a valued client, my focus has always been on building a long term relationship with you, while operating with integrity and sincerity. I will be contacting you soon to discuss these exciting opportunities.
The court held that the communications made by the defendant in this case were clearly meant to induce the clients from their contractual relationships with the plaintiff and therefore breached the agreement.
It is important to note that the case law has identified what appears, on its face, to be innocent language, to amount to solicitation simply in the manner of phrasing. The following are examples of phrases that were fundamental to the court’s finding of solicitation in a written communication:
- “If we can be of any assistance, please do not hesitate to call”;
- Providing any description of the new employer’s services or products;
- Any reference to “continuing” to provide assistance or to “continue” to serve the client, or a reference to a continued relationship with the clients.
- “I look forward to discussing how this new practice will enhance my ability to help you achieve your financial goals.”
Such statements could provide an argument that the correspondence at issue amounts to solicitation.
(iii) General Industry-Wide Announcement
The courts have not commented specifically on general industry-wide announcements. This type of announcement would like fall in a category similar to a general advertisement. This mailing list would include both clients that he has worked with in the past as well as potential new clients. In so doing, it should be considered the source from which the list of addresses/contacts is derived. It is clear that simply adding a few more potential clients and otherwise simply targeting former clients will not suffice.
(iv) Telephone Calls
It is clear that an employee may not call clients and advise that he/she is leaving and where he/she is going. This level of communication is always interesting not only because it starts a conversation in terms of why and where the employee is going but further, there is no formal record of the interaction and leaves the employee vulnerable to the client’s recollection as to what was/was not said in the course of this conversation.
It is not clear on the face of these decisions what the distinguishing features are and where the line can be drawn. Given the lack of consideration in the case law of this issue, this is an area, particularly with exacerbating facts such as telephone calls or retaining employer information, in which an employer may wish to pursue regarding a departing employee.
Pinpointing a clear test for “fiduciary” is a challenging task given the numerous contradictory and ever changing authorities. As recently stated by the Manitoba Court of Appeal in Manitoba Métis Federation Inc. v Canada (Attorney General) et al.:
The law pertaining to fiduciary duties has caused some frustration to those who seek to understand it. As expressed by Professor Leonard I. Rotman in Fiduciary Law (Toronto: Thomson Canada Limited, 2005) at 1-2:
The fiduciary concept is wonderfully enigmatic. A variety of terms have been used to describe this peculiar creature of English Equity: “aberrant,” “amorphous,” “elusive,” “ill-defined,” “indefinite,” “vague,” “peripatetic,” and “trust-like” are but a few. The fiduciary concept has also been characterized as “a concept in search of a principle” and “equity’s blunt tool.” The consequences of its application have been referred to as “draconian.” Still more adjectives could easily be added to the mix: intriguing, confusing, complex, abstract, flexible, wide-ranging and vexing.
There is no doubt in reviewing the case law that there remain anomalies and exceptions to this principled approached. However, the unsettled case law may prove to be a useful tool for negotiation purposes when contemplating the risks of failed litigation. Certainly a shrewd defendant will challenge a plaintiff’s confidence about proving that a former employee was a fiduciary (as opposed to a “mere” employee). This would be fair comment because identifying a departing employee as a fiduciary and limiting her/his conduct because of that assignment is far from a “sure thing”. Clients should be advised they may be left at risk if intending to rely on the post employment obligations arising from that status rather than creating a contractual agreement at the forefront.
On the hand, all hope is not lost when no restrictive covenant exists. In fact, an employee’s fiduciary responsibility may subsist despite a Court’s ruling that a restrictive covenant is void for public policy reasons. Thus, in Wilson Learning Corp. v. Hurley, the Ontario High Court ruled that despite the invalidity of a restrictive covenant, an injunction would be granted on the basis of a breach of confidence owned by the former vice president and agent of the employer as a result of his fiduciary status. The Judge granted an injunction enjoining the former employee from soliciting the employer’s customers for a one-year period. Therefore it is prudent to seek relief for breach of fiduciary duties as well when litigating a breach of a restrictive covenant.
 In Canadian Aero Service Ltd. v. O’Malley,(1973), 40 DLR (3d) 371 (S.C.C.) at p. 381: Laskin J. (as he was then) stated that the duties of “mere” employees, “unless enlarged by contract, consisted only of respect for trade secrets and for confidentiality of customer lists”.
 In R.L. Crain Ltd. v. Ashton,  2 DLR 481 (Ont. H.C.J.), at pp. 485-6, aff’d  1 DLR 601 (Ont. C.A.): a Canadian court approved the following definitions of a “trade secret”: A trade secret is a plan or process, tool, mechanism, or compound known only to its owner and those of his employees to whom it is necessary to confide it . . .[A] secret formula or process not patented, but known only to certain individuals using it in compounding some article of trade having a commercial value, and does not denote the mere privacy with which an ordinary commercial business is carried on.
 (1913), 30 R.P.C. 433, at p. 441.
 Ball, Stacey. Canadian Employment Law (Canadian Law Book, Looseleaf Vol. 1), page 18-2, para 18.10
  2 S.C.R. 574
  R.P.C. 41 (Ch. D.)
 Supra, footnote 5, at p. 20
 Supra, footnote 5, at p. 20
 Ball, supra at p. 15-11 at para 15.20.3(a)
  B.C.J. No. 2700 (QL) (S.C.) supp. reasons as to damages 55 C.C.E.L. (3d) 208 (B.C.S.C.) appeal allowed in part 275 D.L.R. (4th) 385 (B.C.C.A.), appeal allowed in part 298 D.L.R. (4th) 1 (S.C.C.)
 Ball supra, at p. 15-3, para 15:10
 It should be noted that there are a number of recent Ontario cases we would describe as anomalies yet nevertheless have held that fiduciaries may not in fact compete. See:Audience Communications Inc. v. Sguassero  OJ No. 1539; Bonazza v. Forensic Investigations Canada Inc  O.J. No. 2626
 W.J. Christie & Co. v. Greer, (1981), 121 D.L.R. (3d) 472 (Man. C.A.) at pp. 476-7, disapproving the approach in Waite’s Auto Transfer Ltd. v. Waite,  3 W.W.R. 649 (Man. K.B.). See also Edgar T. Alberts Ltd. v. Mountjoy, (1977), 79 D.L.R. (3d) 108 (Ont. H.C.J.); White Oaks Welding Supplies v. Tapp (1983), 149 D.L.R. (3d) 159, 42 O.R. (2d) 445 (H.C.J.); Hudson’s Bay Co. v. McClocklin,  5 W.W.R. 29, 42 Man. R. (2d) 283, 11 C.P.R. (3d) 523, 39 A.C.W.S. (2d) 477 (Q.B.); E.J. Personnel Services Inc. v. Quality Personnel Inc. (1985), 6 C.P.R. (3d) 173 (Ont. H.C.J.).
 see e.g. W.J. Christie & Co. v. Greer et al. supra
 KJA Consultants Inc. v. Soberman (2002), 17 C.C.E.L. (3d) 261
 , 39 Alta. L.R. (3d) 411, 20 C.C.E.L. (2d) 1,  7 W.W.R. 736, 96 C.L.L.C. 210-045, 184 A.R. 81, 122 W.A.C. 81, 68 C.P.R (3d) 45 (Alta. C.A.)
 Ball supra, at 13-27, para 13.40.2; see footnote 184
 International Corona Resources Ltd. v. LAC Minerals Ltd., (1989), 61 D.L.R. (4th) 14 (S.C.C.) at p. 26
 (1973),  S.C.R. 592
 Ellis, Mark V., Fiduciary Duties in Canada, (De Boo, 1988-(Loose-leaf)): p 16-2.2 p. 16-2.2; Ball supra at 13:30.1
 Sproat, J., Wrongful Dismissal Handbook, (Carswell, 2009, 5th edition), p. 9.2(a)
  2 S.C.R. 99
  2 S.C.R. 574
 These factors have influenced the case law in the employment context with various courts emphasizing the above-noted factors with varying degree of importance.
 1994 CanLII 70 (S.C.C.)
 supra, footnote 13
 (1983), 42 O.R. (2d) 445 (H.C.)
 (1984), 48 Nfld. & P.E.I.R. 227 (Nfld. Dist. Ct.), vard 22 C.P.R. (3d) 74 (Nfld. C.A.)
 (1985), 6 C.P.R. (3d) 173 (Ont. H.C.J.)
 D’Andrea, J., Employee Obligations in Canada (Canada Law Book 2003-(Loose-leaf): 1-20, 1-24; Ellis 16-12.3 – 16-13
 Ellis – 16-9
  5 W.W.R. 29 (Man. Q.B.): Note that this case is highly criticized by the New Brunswick Court of Appeal in Imperial Sheet Metal, supra
 D’Andrea, p. 1-26; Ellis, 16-12(1), note that this case is highly criticized by the New Brunswick Court of Appeal in Imperial Sheet Metal, supra in which the Court of Appeal held that many decisions, including McClocklin had resulted in an unwarranted broadening to the group of employees who have fiduciary duties.
 (1984), 4 C.C.E.L. 125 (Alta. Q.B.) revd 40 Alta. L.R. (2d) 300 (C.A.)
 D’Andrea, p.1-18, Ellis, 6-10 – 6-12
 2006 MBQB 119
 para 18; note that the decision of Western Tank & Lining Ltd. v. Skrobutan et al., 2006 MBQB 205 similarly focused on the fact that the employee was put in a position of trust and had taken unfair advantage of the employer’s vulnerability. Despite finding that two of the defendants were “the whole show” in Manitoba, there was an undue focus on the vulnerability of the employer to the employees’ competition and solicitation.
 (1981), 9 Man. R. (2d) 260 (C.A.)
  3 S.C.R. 377
 Ellis, 16-16(4)
 2008 ABQB 95
 See also Atlantic Business Interiors Ltd. v. Hipson, 2006 NSCA 16 and Audience Communication Inc. v. Sguassero (2008) 40 E.T.R. (3d) 62 (Ont. S.C.J.) additional reasons (2008) 41 E.T.R. (ed) 291
 2007 NBCA 51
 (1985), 88 C.C.E.L. 282 (B.C.S.C.) supp. reasons 67 B.C.L.R. 100 (S.C.), affd 44 B.L.R. 94 (B.C.C.A.)
 note found breach of general duty of good faith and fidelity
 supra, footnote 10
 reasoning followed in a similar decision of Stenner v. ScotiaMcLeod, 2007 BCSC 1377
 2004 BCCA 312
  B.C.J. No. 261 (QL) C.A.), supp reasons 69 B.C.L.R. (4th) 201 (C.A.), revd 301 D.L.R. (4th) 522 (S.C.C.)
 (2008), 64 C.C.E.L. (3d) 119 (ON S.C.)
 2007 ONCA 566
 2007 ONCA 52
  O.J. No. 2620 (ON S.C.)
 2008 SKQB 356
  S.J. No. 511 (QB) appeal allowed in part on other grounds  S.J. No. 780 (C.A.),
 2008 NSSC 219
 2003 NLSCTD 80 (N.L.T.D.)
 2007 ABQB 434
 2006 ABQB 41
 2005 ABQB 561
 (2000), 3 C.C.E.L. (3d) 34, 99 A.C.W.S. (3d) 771 (Ont. C.A.), leave to appeal to S.C.C. refused 150 O.A.C
 Ball, supra at para 7.20.3
 Dr. Alain Nourkeyhani Dentistry Professional Corp. v. Pakroo,  O.J. No. 2249 (S.C.J.) at para 18; 947535 Ontario Ltd. (c.o.b.) H&R Block v. Jex,  O.J. No. 3290 (S.C.); Dr. P. Andreou Inc. v. McCaig, 2007 BCCA 159 (CanLII)
 Steinbach Credit Union Ltd. v. Hardman,  M.J. No. 237 (Q.B.); Penncrop Life Insurance Co. v. Edison,  O.J. No. 3763 (S.C.J.)
 Investors Group Financial Services v. Smith,  N.S.J. No. 466 (S.C.); Brouwer Claims Canada Co. v. Doge¸ B.C.J. No. 1524 (S.C.); Road Trailer Rentals Inc. v. Robinson, 2008 CanLII 5645 (ON S.C.)
  O.J. no. 3175 (S.C.J.)
  M.J. No. 237 (Q.B.), varied on other grounds  MBCA 25
  O.J. No. 1394 (S.C.J.)
 Ibid at para. 57
  B.C.J. No. 764 (S.C.)
  O.J. No. 3763 (S.C.J.)
 KJA Consultants Inc. v. Soberman,  O.J. no. 3175 (S.C.J.)
 Steinbach Credit Union Ltd. v. Hardman,  M.J. No. 237 (Q.B.); Sanford Evans List Brokerage v. Trauzzi,  O.J. No. 1394 (S.C.J.)
 Sanford Evans, supra; Penncrop Life Insurance Co. v. Edison, supra
 MD Management Ltd. v. Dhut,  B.C.J. No. 764 (S.C.)
 KJA Consultants Inc. v. Soberman, supra
 2010 MBCA 71
 para. 462
 De Rose & Associates v. Bruganano, supra; Torcana Valve Services Inc. v. Anderson, 2007 ABQB 356, Beyer-Brown& Associates Ltd. v. S & R Interiors Ltd., 2007 B.C.S.C. 327; Atlantic Business Interiors v. Hipson, 2005 NSCA 16; Gertz v. Meda Ltd.,  O.J. No. 24 (Ont. S.C.J.)
 (1990), 30 C.P.R. (3d) 172
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