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"Stealth and deceit": Ontario Court of Appeal slams ex-employees who exploited confidential information

The Ontario Court of Appeal has handed down a decision that will be of some comfort to employers wary of the spectre of ex-employees using inside information to launch competing businesses. The judgment shows that, where the conduct of the employees is particularly blameworthy, the calculation of the employer's damages can be significantly affected.

McCormick Delisle & Thompson Inc. v. Ballantyne (May 14, 2001), concerned three employees of a management consulting firm who had tried to become equity partners with the owner of the firm, Michael Delisle. The three were unsuccessful in this attempt, and they agreed to set up a competing business.

The three left the firm on December 23, 1996. The next day, they incorporated their new company and delivered proposals to two of Delisle's most substantial customers. By January 6, 1997, the employees had secured the business of their former employer's customers.

TRIAL JUDGE: "SERENDIPITY CONSULTANTS INC."

At trial, the employees gave evidence that they were solicited by the customers. Referring to this evidence as "preposterous", "laughable" and contrary to logic and common sense, the trial judge remarked that, if one were to accept the employees' evidence, their new company should have been named "Serendipity Consultants Inc.".

Accordingly, the judge found that the employees had been actively soliciting the business of Delisle's clients while they had been in his employ. He further found that the employees had breached their duties to Delisle with "almost disastrous" consequences to the employer.

Delisle's victory was quickly tempered by the trial judge's method in calculating his damages. Accepting the employees' arguments, he restricted the period in respect of which damages should be considered to one year after the cause of action arose. Then, in calculating the net loss to Delisle during this period, he applied Delisle's normal profit margin to the income lost during the year. Finally, he deducted a further 25 per cent for contingencies. This resulted in an award of just over $30,000 in damages. Delisle appealed on the issue of damages.

COURT OF APPEAL: AN "EGREGIOUS BREACH"

The Court of Appeal unanimously held that the judge's approach to calculating Delisle's damages had been flawed. The reason was the seriousness of the employees' breach of their duties to their employer:

"This is not a case of three employees leaving their employment and failing to wait an appropriate grace period before approaching their employer's clientele. Rather, this is a case of three employees who, in egregious breach of their duties to their employer, secretly solicited contracts from the most attractive of their employer's clientele while they were still in its employ."

CONTRACTS "MISAPPROPRIATED" BY EMPLOYEES

Noting that the contracts taken over by the employees had come to an end after several years, the Court held that the judge had erred in restricting the period of lost sales to 12 months. Further, the fact that the employees had taken advantage of business relationships cultivated by Delisle in breach of their duties to him, meant that the judge should have treated the lost contracts as having been misappropriated.

Accordingly, the Court agreed with Delisle that he should have been awarded the value of the loss of sales for the fixed terms of the contracts that were misappropriated. Further, the Court held, the only deductions from this sum should be those expenses reasonably incurred to earn the income lost.

In this regard, the Court rejected the suggestion that Delisle's overall administrative costs should be deducted from his damages. These costs had continued without significant change during the period covered by the lost contracts, and to deduct them from his award would be to penalize Delisle twice.

Last, the Court rejected the trial judge's deduction of 25 per cent for contingencies. There could be no such "arbitrary" deduction in circumstances where valuable contracts had been misappropriated.

Summing up its attitude to the employees, the Court concluded its judgment in the following terms:

"It must be remembered that the respondent employees acted with stealth and deceit to solicit these businesses, while leaving a paper trail of post dated contracts ... in an effort to disguise this fact. Moreover, they continued this attempted cover-up at trial. The fact that they were unsuccessful in their concealment does not excuse their conduct. In the circumstances, once exposed, it hardly lies in the [employees'] mouths to quibble about overhead and discounts, given that their reward for duplicity far surpassed [Delisle's] damages award at trial."

In the result, the Court substituted an award of $260,000, the figure Delisle had argued for at trial.

In Our View

One of the interesting features of this judgment is the Court's suggestion that even if the employees had waited until a decent interval had elapsed before negotiating the contracts with Delisle's former clients, this would not have been sufficient to clear them of liability. Where it is determined that, as here, the employee has made use of confidential information particular to the employer, thereby breaching the employee's duty of loyalty to the employer, it may not matter that the employee waited a year or more before using this information to go into competition against the former employer.

For further information, please contact André Champagne at (613) 563-7660, Extension 229.