Employee negotiating for “opportunity of a lifetime” breaches fiduciary duty to employer

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All employees owe a duty of fidelity to their employers, but those in senior management positions owe even more. Canadian courts have stated that people in this group have a fiduciary obligation to act with good faith, honesty, and loyalty, and to avoid placing their own interest above that of the employer. The nature of this fiduciary obligation has recently been considered by the Ontario Court of Appeal in Felker v. Cunningham, issued on August 29, 2000.

Felker worked as a Sales Manager for Cunningham, a sole owner of a successful manufacturers representative business in the electronic components field. Felker and Cunningham had known each other casually. Some months before Felker was hired, he had mentioned to Cunningham that one day he hoped to own and operate his own manufacturers representative business.

Three months after commencing employment with Cunningham, Felker got wind of the fact that a company called Microchip had just terminated its contract with its Canadian representative. Picking up this business, Felker said, was “the opportunity of a lifetime”. Accordingly, he and two partners put together a proposal to seize this opportunity.

Shortly before the proposal was presented to Microchip, Cunningham learned of Felker’s plans. A few days later, he terminated Felker without notice. Despite his short tenure, Felker’s contract called for eight months’ notice of termination. Felker went to court.

TRIAL JUDGE: “ANY EMPLOYEE WORTH HIS SALT”

Noting the long line of case law holding that a breach of the duty of loyalty can be grounds for dismissal, the trial judge held that this law did not apply to Felker’s case. What distinguished Felker’s situation from others were the specific expectations of employees in this field of business and the fact that these expectations had been made known to Cunningham before Felker was hired:

“[Both Felker] and Cunningham knew that any employee of a manufacturers representative in the electronics industry who was worth his salt would aspire to and, with any degree of luck succeed in achieving, his own manufacturers representative company. Not only did Mr. Felker and Mr. Cunningham know this, … but Mr. Felker had told Mr. Cunningham of this fact even before Cunningham had approached him about coming to work for [his company].”

Cunningham, the judge concluded, may have been offended that Felker had made his proposal to Microchip in secret, but this is exactly what he knew Felker would do if given the chance. While he may have been justifiably upset about Felker’s actions, they were not cause for dismissal. The judge awarded Felker $96,000 in damages, and Cunningham appealed.

COURT OF APPEAL: CASUAL COMMENTS NO RELIEF FROM DUTY TO DISCLOSE

The Ontario Court of Appeal expressed the view that, although the judge had made no explicit finding that Felker was in the category of employees who owed a higher, fiduciary duty to their employers, his reasons made it clear that he had been operating under that assumption. The issue, therefore, was whether Felker’s comments to Cunningham about wanting his own business, made some time before he was hired, excused him from his fiduciary obligation not to place his interests above Cunningham’s without the latter’s knowledge and consent.

The Court stated that fiduciary employees cannot pursue their personal interests in conflict with anything the employer does, or realistically may do, without making full disclosure and obtaining the employer’s consent. Further, the fact that the opportunity being pursued was one the employer was incapable of exploiting did not relieve the employee of his or her obligations.

As a “valuable and trusted key employee”, one hired to “run the company”, Felker was required to avoid placing his own or other commercial interests above those of his employer or pursuing those interests in a manner that detracted from his ability to work fully and completely for Cunningham’s benefit. Accordingly, he was required to make full disclosure of his plans to Cunningham.

Felker had made no such disclosure, so the question was whether the fact that he had revealed his long-term intentions to Cunningham before being hired excuse him from his obligation to disclose his activities. The Court held it did not:

“[T]he trial judge erred in elevating Felker’s comments made when he was not an employee … to the fulfillment of his duty of full disclosure which he acquired after he had become an employee. On his essential duty of integrity to his employer, Felker’s conduct must stand impeached. …

The casual comments which Felker made about his future plans to own his own business months before he became a fiduciary employee cannot serve as justification for his closet attempt to obtain the Microchip opportunity after he became a fiduciary employee.”

In the result, the Court held Cunningham had just cause to dismiss Felker.

In Our View

Despite the Court’s holding that Felker’s “casual comments” did not excuse him from disclosing his plans to Cunningham, it noted that a more specific disclosure, before he was hired, of plans to pursue an opportunity that was expected to arise might have sufficed to relieve him of his duty to disclose.

It should also be noted that the judge and the Court of Appeal took a somewhat different view of the extent to which Felker’s efforts to prepare the Microchip proposal encroached on his working hours. The trial judge found that there was no evidence to counter Felker’s assertion that he had worked on the proposal in the evening and on weekends. By contrast, the Court of Appeal stated that Felker had admitted to not devoting his full time and attention to his duties as an employee while preparing the proposal. This divergent view of the effect the proposal had on Felker’s duties as an employee may have played some role in the contradictory results.

For further information, please contact Jacques A. Emond at (613) 563-7660, Extension 224.