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Protecting Business Interests When Employees Leave
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Establishing and maintaining a successful business is not a simple thing. It requires the coordination of many components, involving matters of great value and importance to the business. That often includes confidential product and customer information, proprietary business practices and plans, unique intellectual property, and more. These matters are critical to the survival of the business.
So too is earning a living critical to an employee. It provides a means of survival for the employee as well as a source of self-worth and identity. When all is well, the interests of a business and an employee complement each other nicely. The employee contributes to the success of the business and the employment provides both income and a sense of contribution.
However, the interests of a business and an employee can also come into conflict with each other, typically when the employment relationship ends and the employee accepts work or starts a business elsewhere. A recent B.C. Court of Appeal decision, GEA Refrigeration Canada Inc. v. Chang[1], graphically illustrates this scenario, offering a stark warning to departing employees and their new employers.
In this newsletter we will review this case in which the former employer successfully protected its business interests against departing employees, and then in contrast discuss some circumstances in which employers have not been successful in protecting themselves.
The GEA Refrigeration Case
The issue in GEA Refrigeration revolved around the use of confidential information. GEA had spent years developing a form of industrial hygienic freezer. Hygenic freezers have unique design features which prevent bacterial growth. GEA had designed its own system, which included a special welding process for the manufacturing of its hygenic freezers. GEA consequently became one of two dominant players in the hygenic freezer market.
In 2010 two former employees of GEA incorporated a competing company, FPS Food Process Solutions. They were shortly joined by another former employee of GEA who brought GEA drawings. These drawings were used by FPS to manufacture industrial hygienic freezers and compete with GEA. GEA sued FPS and the former employees for wrongful use of its confidential information.
In 2016, after a 59-day trial, the BC Supreme Court found in favour of GEA. The court awarded GEA over $7 million in damages on the basis that FPS had wrongfully used GEA’s confidential information to develop its competing product. The court found that wrongful act had allowed FPS to short circuit, or “springboard”, its development of the competing freezers by four years. The damages ordered by the court were equivalent to FPS’ profits in that four-year period.
In 2020, the Court of Appeal upheld that decision, including the lower court’s damage award and its use of the springboard doctrine to support the award. In addition, the Court of Appeal commented that the defendants may have been guilty of wrongful use of GEA’s confidential information even if they had only used their memories of GEA’s manufacturing process rather than the actual drawings belonging to GEA.
While all of that is significant, the basic determination in the case is also very important. The stricture is clear; employees and their new employers must be careful if those employees come from a competitor.
The Broader Context
GEA Refrigeration is a powerful, instructive decision in which the employer successfully protected its business interests in the context of the wrongful use of confidential information by former employees. Other examples where an employer may successfully protect its interests include the duty of loyalty owed by an employee to their current employer, or where the employee is in the special circumstance of being a fiduciary. As well, greater restrictions on principals of a business are at times allowed in the purchase and sale of a business.
However, it would be incorrect to conclude that this area of law generally favours employers’ interests. The courts are sympathetic to an individual’s need to earn a living. As a result, in general, absent fiduciary status or the misuse of confidential information, an individual is entitled to compete with their former employer.
In response to this, employers often attempt to protect their interests through restrictive covenants in written employment agreements with employees. Restrictive covenants are contractual provisions which attempt to limit the post-employment conduct of the employee. They can take a number of forms, ranging from general non-competition clauses to more specific restrictions prohibiting the solicitation of the employer’s customers or use of its confidential information.
These clauses, however, usually attract close scrutiny from the courts in recognition of the power imbalance between employers and employees and the individual’s need to earn a living. This results in an exacting approach to the review of restrictive covenants by the courts in the following ways:
1. The courts require that restrictive covenants be no more restrictive than necessary to protect the employer’s legitimate business interests. In this regard, restrictive covenants are closely analysed for their:
a. geographical scope;
b. duration;
c. activities restricted;
d. ambiguity (an ambiguous restrictive covenant will be unenforceable); and
e. the availability of less onerous restrictions (for example, a clause prohibiting solicitation of the employer’s existing customers versus a broader non-competition clause which applies beyond the employer’s own existing customers);
2. If a restrictive covenant is found to be overly broad, the courts generally declare the covenant to be unenforceable rather than amend or narrowly interpret the offending portions of a restrictive covenant; and
3. Even if a restrictive covenant survives scrutiny, an employer may still face challenges in obtaining an injunction to restrain a former employee’s conduct on the court’s view of “the balance of convenience” between the parties or on the basis that damages awarded at trial would be an adequate remedy without need of an injunction. This may then result in a lengthy and expensive trial if the employer is to continue to seek to protect its interests.
Significance of these matters
1. The GEA Refrigeration case demonstrates that employees and their new employers must be careful not to wrongfully use the former employer’s confidential information, particularly where the new employer is a competitor the former employer.
2. If this situation does develop, seeking a remedy can result in costly, lengthy and uncertain proceedings. For example, in GEA Refrigeration it was 10 years from the time the events commenced in 2010 to the Court of Appeal’s decision in 2020 and entailed a 59-day trial and 2-day appeal.
3. As a result, it is wise to take steps to avoid this kind of scenario. That can be accomplished through carefully crafted restrictive covenants to proscribe post-employment conduct which would harm the employer’s business. However, as is noted above, restrictive covenants are interpreted and applied warily by the courts for the very reason that they seek to limit an employee’s post-employment conduct and thus their ability to earn a living. As a consequence, such clauses must be drafted carefully and circumspectly if they are to be enforceable. It is a tricky business and best done with professional advice tailored to the employer’s unique interests and circumstances.
[1] 2020 BCCA 361 (“GEA Refrigeration”)
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We are delighted to announce that Ms. Roza Milani has joined our firm as an articled student. Roza is a graduate of the English Common Law Program at the University of Ottawa. She holds a BA in Psychology from Simon Fraser University. During law school, Roza volunteered for Pro Bono Ontario as the Triage Coordinator and participated in the Summer Fellowship at the University of Ottawa Pro Bono COVID-19 Employment Law Clinic. Prior to law school, Roza was a swim coach with the Canadian Dolphin Swim Club and employed as a lifeguard and swim instructor at Harry Jerome Recreational Centre in North Vancouver, BC. As an articled student, Roza will work with all the lawyers and assist in the advice and representation of our clients. Her experience as an articled student will provide her with the foundation to enjoy a successful career in the practice of law.
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Accommodating 2021: Burnout, vaccinations, and managing your workforce in challenging times
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Join Preston Parsons and The ReFrame Group for a discussion around some of the challenges leaders face in managing the workforce in 2021.
Over a year into a worldwide pandemic, employers are still grappling with issues around the interconnected employment, privacy and human rights implications of wearing masks, vaccinating their workforces, and managing burnout, all while dealing with a volatile labour market. It’s a clear recipe for mental strain and mental health challenges that no one in the business is immune from, including your human resources staff themselves.
This talk will highlight several of these topics and engage the audience in a Q&A to further explore the same themes.
Some of the topics Preston will cover include:
- Employee termination during probation periods: are there any limits on it?
- Law around addressing mental health & disabilities
- Duty to inquire
- Duty to accommodate
- How to proceed when you notice something out of the norm
- Vaccinations and masks in the workplace
- Employers capacity to mandate these safeguards for employees and new hires
Date and Time
Tuesday, June 8
9:00 to 10:00 a.m.
Registration
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