Legal Blog

Non-Competition

Departing employees often consult lawyers when the employees are moving to another employer and want to be able to compete. The case of IT/Net Inc. v. Doucette [2005] O.J. 1814 (S.C.J.) gives a good summary of the various levels of fairness that bind the departing employee.

Levels

Any employee owes a common law duty not to use confidential information acquired from an employer to compete against the employer for the benefit of the employee or the new employer. This is the base level of fairness.

A fiduciary, who carries the duty of utmost good faith, may not solicit business from the past employer’s clientele. The fiduciary duty rarely attaches to a mere employee and, conversely, almost always attaches to a senior executive. The job title is irrelevant; the job function and responsibility and the employer’s trust, confidence, reliance, and dependency on the employee are the keys to determining the existence of a fiduciary obligation. Often, the determination is not easy because the gradation of the criteria is subtle. This is the highest level of the two common law duties.

Finally, a contractual duty may be set out in an employment agreement. It can impose a very high duty. However, if the duty is so high as to be unreasonable, the duty is in restraint of trade and is unenforceable. Examples of unreasonableness are:

1.   The agreement contains a non-competition covenant rather than a non-solicitation covenant (e.g. for a dentist – do not compete; rather than do not solicit my clientele).

2.   The geographical area for non-competition is too wide (e.g. for a video store – do not compete anywhere in the country; rather than within two blocks of the employer’s store).

3.   The time for non-competition is too long (e.g. in the computer industry – do not compete for 5 years; rather than for 6 months to a year).

Like everything else in law, the difficulty lies in applying the facts to the legal principles.

Facts

The employee was an account executive for the employer, an information and management technology provider. The employee was responsible for the employer’s services to a government client, who was one of the employer’s largest clients.

In early 2001, the industry knew that the client was considering consolidating the servers it used in its technical infrastructure and would need someone to prepare the request for proposals (“RFP”) that would be sent to providers to bid the project. The principal of the employer alerted the employee to the potential opportunity. On August 27, 2001, the employee gave one month’s notice that he was leaving his employment and commencing work for a competitor. On September 10, 2001, while still with, and on behalf of, the employer, the employee and another of his cohorts met with the decision-maker of the client to discuss the upcoming RFP. They left the meeting very optimistic that the client would ask the employer to draft the RFP, a contract worth approximately $100,000.

Sometime before he left, the employee sent an email alerting all of his contacts that he was leaving his old employer, going to work for the named new employer, and giving the name of the principal of the old employer as the new contact. The email went to the decision-maker of the client, but to his home computer. The decision-maker never saw it.

The decision-maker sent the employee a statement of the intended work by email on September 18, 2001, requesting a September 24, 2001 response. The employee did not receive the email because he was no longer there. However, he bumped into the decision-maker on October 1, 2001 and, when the decision-maker asked why he did not respond, he told of his change in employment and gave his card. The decision-maker called him later that day, sent the statement of the intended work to him, and ultimately entered into a contract with his new employer.

On October 4, 2001, the principal of the employer discovered that no one from the employer had responded to the decision-maker’s September 18, 2001 email. He then called the decision-maker, found that the client had let the contract to the new employer, claimed the proceeds of the contract from the new employer, was rebuffed, and sued.

Covenant

The employee and the employer had a contract in which the employee had agreed that personally or on behalf of a new employer, he would not “attempt to solicit business from any (employer) client or prospect.”

The employer had a problem in enforcing this covenant. In a previous case involving the covenant, a judge had ruled that the covenant was insufficiently clear to be enforceable. For example, what is a potential client? The judge did not rule on this argument because he ruled against the employer on other grounds.

The judge ruled that there was no solicitation of the contract. Using a dictionary definition of solicitation, the judge ruled that the employee did not ask or try to obtain something from the client and did not try for, canvass, or appeal for the work. It was a chance meeting and the employee simply responded to the query of the decision-maker. The judge was also not impressed with the lack of initiative of the principal of the employer or the cohort who attended the meeting. They knew of the client’s deadline in giving out the work and did nothing to follow up once the employee left.

Fiduciary

The judge held that the employee was not a fiduciary. The employee was one of a number of account executives; was part of the sales force; was subject to reporting procedures; had no authority as to the management or direction of the employer corporation; and was not an officer, director, or shareholder of the employer corporation.

The trial judge made the obvious comment, given his previous finding, that even if the employee was a fiduciary, he did not breach his duties to the employer because he did not solicit the client’s work.

Confidential

The duty regarding confidential information is slightly different from a fiduciary duty, but the result was inevitable after the former findings of fact. The judge held that there was no direct and aggressive solicitation of the client and there was no evidence that the employee used confidential information. The law does not require that an employee reject an unsolicited offer.

Commentary

We dutifully reported the judge’s reasons in the order in which he dealt with them. Why he dealt with them from the highest to the lowest of the duties, rather than the reverse, is beyond us.

The judge dismissed the employer’s action because the employee did nothing wrong or unfair. The employer was the author of its own misfortune.