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Ontario Court of Appeal Upholds $20 Million Damage Award Against Former Employees Setting up Competitive Business

The Ontario Court of Appeal decision in GasTOPS Ltd. v. Forsyth and the trial decision that preceded it have found that “key employees” with considerable responsibility have duties and obligations to their employer when they depart from their employment.  Both courts determined that these types of employees are restricted from making use of the employer’s confidential information and that doing so can expose employees to significant damages.

Facts

GasTOPS develops software for engine condition-based maintenance, usage and life tracking of engine parts.  The technology products and services they provide are implemented in the commercial aviation, industrial systems and

military aviation markets servicing clients such as the Canadian Armed Forces and Dofasco.

In 1996, four GasTOPS employees resigned over a three day period with each employee giving two weeks’ notice.  The employees were the former manager of product development and the current head of the industrial systems group, the head of the aerospace business unit (the largest business unit in the company), the chief software developer / key product development person and an individual with many roles including project manager for Dofasco’s products.  These four individuals were found by the Court to be the designers of the “core programs within the family of GasTOPS technology products.”

One week after the first of the four employees submitted his resignation, these individuals formed MxI, a new corporation in direct competition with GasTOPS.  In fact, virtually every existing and potential GasTOPS customer was pursued by MxI including the Canadian Armed Forces and the U.S Navy, the former being a relationship GasTOPS had been actively and strategically pursuing over some time. The four employees not only actively solicited customers of GasTOPS but they also solicited 12 of their former coworkers which ultimately resigned from GasTOPS and joined MxI.  MxI ultimately acquired the much coveted U.S. Navy contract, worth over 10 million dollars over 10 years, while long term GasTOPS customers were also forced to re-evaluate their long-term business relationship with the company.  Essentially, MxI offered GasTOPS customers a seamless transition to their services and even marketed what it called “the fourth iteration of GasTOPS technology”.

Outcome

After considering the totality of the facts the Courts found that all four employees were responsible for developing a significant part of GasTOPS business, were privy to sensitive technological information as well as customers’ and potential customers’ requirements.   These employees were deemed “key employees” that intended to destroy GasTOPS technology business using information obtained through their former employer.  Stated differently, the four employees were deemed fiduciaries at GasTOPS and breached their obligations when they resigned to open a competing business.

In addition to finding a breach of the employees’ fiduciary duties the Courts found that there was also a breach of their duty of confidence, both “equitable remedies that are always subject to the discretion of the court.”

Moreover, the damages were deemed immediate, significant and long lasting.  As such, the court found it appropriate to disgorge profits earned by MxI over a ten (10) year period.  The Court of Appeal upheld the trial court’s ten (10) year accounting period and the employees were found jointly and severably liable for nearly $20 million with approximately $12.2 million related to the discouragement of profits, $3 million for pre-judgment interest and $4.2 million for costs.

It is also noteworthy that while the Ontario Court of Appeal did not deal with the issue of reasonable notice for a resignation, the trial court did state that two weeks’ notice of resignation is not always acceptable.  The trial court found that in some instances a more lengthy reasonable notice period for resignation may be required where the employer will have difficulty finding a suitable replacement.   As such, the trial court commented that in this instance ten to twelve months would have been a more appropriate notice period for resignation rather than the 2 weeks offered by the employees.

Lessons for Employers

This case affirms that key and/or senior personnel have a duty not to use confidential information to compete with their employer and that an employer may be justified in insisting on longer notice periods when these types of employees resign.

More importantly, however, this case stresses the need to implement well drafted employment agreements that include restrictive covenants (non-solicit and/or non-competes where appropriate) and confidentiality provisions.  The length and subsequent cost of litigation to remedy the employer’s damages alone adequately illustrates this point. Specifically, the events that led to this litigation occurred fifteen years ago with a trial that took over 295 days to complete.

CCP will keep you up to date on any developments in this case in the event that the employees seek leave to appeal to the Supreme Court of Canada.  Nevertheless, we encourage employers to put in place customized employment agreements, particularly for key and/or senior employees in your business that are privy to valuable confidential/proprietary information.

The lawyers at CCP have considerable experience assisting employers with the negotiation of employment terms, drafting enforceable employment agreements and in revising existing agreements.  Consider contacting CCP if

you are considering implementing employment agreements or have any questions regarding this decision.

Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.