Manager, employee hit with damages for “unfair” use of confidential information

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Two employees who joined a competitor have recently been ordered, along with their new employer, to pay $450,000 in damages to their former employer for losses sustained following their departure. In Clayburn Industries Ltd. v. Piper (December 3, 1998), the British Columbia Supreme Court held that both employees had breached fiduciary duties owed to their employer through unfair use of confidential business information.

Clayburn was in the business of installing and maintaining heat-resistant materials in industries where high-temperature processes were used. The employees, Schoen and Piper, resigned from Clayburn and accepted positions with Recor Services, which then went into competition with Clayburn. The latter soon lost virtually all of its business, much of it to Recor. Clayburn sued Schoen, Piper and Recor, alleging that the former employees had reached an agreement with Recor before resigning from Clayburn, and that they had used confidential information about bids they had prepared for Clayburn to give Recor a competitive advantage.

ACCESS TO CONFIDENTIAL INFORMATION

The court considered the nature of the information to which Schoen and Piper had access while employed by Clayburn. It included key information about customers, such as who actually made decisions in the customer’s organization, how the customers felt about previously installed products, clients’ budgets for repairs or new construction in the coming year, and the construction workers they preferred.

This information, the court held, was confidential in nature and could not be used by the defendants. It supported this conclusion by reference to another decision in which certain types of customer information were held to be confidential:

“The reasoning in the cases on the issue is this: information about customers from whom repeat business can be expected, developed over time at the employer’s expense, is confidential information and forms part of the goodwill of the employer. Access to this information puts the employee in a position to seriously injure the business of their employer, for it gives the employee a springboard for activities detrimental to the employer.”

The court also held that other information known to the defendants, concerning projects that would require bids and those that would not, Clayburn’s product costs, technical product information and standard markups for labour and materials, was also confidential, and therefore could not be used by Schoen and Piper once they went to work for Recor.

The court noted that there was no requirement that physical information in the form of customer lists or other documents be removed to find a breach of confidentiality. Memorization of such information is tantamount to its physical removal.

BREACH OF DUTY

Having determined that the information in question was confidential in nature, the court went on to hold that Schoen’s and Piper’s use of this information once they went to work for Recor breached their duty to Clayburn, particularly given the small customer base for the services involved:

“Both Messrs. Schoen and Piper admitted that all of the information they had obtained about potential customers came as a result of their employment with the plaintiffs. By any standard, their use of this information after they became employees of Recor was “unfair”. … In a small market, they had a unique window into the limited number of customers that were available for any company wishing to operate in the refractory business. …

The use [by Schoen] of his unique knowledge of the markup rates, of the profit margins of the plaintiffs and of the customers of the plaintiffs breached his fiduciary duties owed to the plaintiffs when he used that information to undercut the bids that were made on work that went to Recor rather than the plaintiffs.”

“TOP MANAGEMENT” OR “MERE EMPLOYEE”

Another noteworthy aspect of the decision involved the judge’s discussion of the nature of the duties owed to Clayburn by Schoen and Piper. Schoen had been Regional Manager for B.C. and, based on the description of his responsibilities at trial, the court found that he was “top management”, despite the fact that he owned no shares and was not a member of the firm’s Operating Committee.

Piper had served as Construction Manager. The court found that he was a “mere employee”, albeit an important one by virtue of his close contact with customers. The distinction is significant because previous court decisions have held that senior managers owe a fiduciary duty to their employer, while mere employees owe a similar, but less exacting, duty.

However, the court noted, Piper had participated jointly with Schoen in building Recor’s success to the detriment of Clayburn. As a result, because Schoen had breached his fiduciary duty owed to Clayburn, Piper “was fixed with the same fiduciary duty”. Recor was held vicariously liable for Schoen’s and Piper’s activities: it had knowledge of those activities and, more important, had derived benefits from them. (For more recent developments, see “Employee making unfair use of confidential information must pay share of damages” on our Publications page.)

In Our View

As noted in our article on employment contracts and restrictive covenants (see “The effective employment contract” on our Publications page), when determining whether or not information may be characterized as confidential, it is important to distinguish between skills and knowledge on the one hand, and information specific to the employer on the other. To the extent information can be said to be peculiar to the employer, rather than generally available, a court is more likely to find that it is confidential. However, this distinction may not always be easy to make, and each case will depend on its facts.

For further information, please contact Colleen Dunlop at (613) 563-7660, Extension 222 or J.D. Sharp at (613) 563-7660, Extension 233.