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December 2007 Newsletter

Keep Your Secrets Safe
Clarence Bennett

In Imperial Sheet Metal Ltd. et al (“Imperial”) v. Landry and Gray Metal Products Inc. (“Gray Metal”), 2007 NBCA 51, a decision released on June 21, 2007, the New Brunswick Court of Appeal considered an application whereby Imperial sought an injunction against a former employee to prevent him from disclosing “confidential information” to his new employer (a competitor). Specifically, the Court was asked to determine what is “confidential information” and what is the appropriate test in order to determine if an employee is a “fiduciary”.

Facts
Joseph Landry (“Landry”) had worked for Imperial for over 18 years serving as Imperial’s Vice-President of Sales and Marketing when his employment was terminated. After being terminated, Landry found employment in a similar capacity with one of Imperial’s competitors, Gray Metal. Gray Metal sold the same products and was marketing the same customers as Imperial. Having served as Vice-President of Sales and Marketing with Imperial, Landry was very familiar with Imperial’s marketing operations, including its customers and pricing. Imperial was concerned that Landry was using the information he possessed to help Gray Metal identify clients, underbid Imperial and ultimately steal Imperial’s customers. Imperial therefore sought an injunction preventing Landry from continuing his employment relationship with Gray Metal on the basis that Landry allegedly owed a duty to Imperial not to disclose the company’s “confidential information” that he had obtained in the course of his employment, or, alternatively, a finding that Landry, by virtue of the senior position he had held with Imperial, was a fiduciary and thus bound to act in the company’s best interests, precluding him from competing against his former employer. It must be noted that there did not exist an enforceable non-compete agreement between Landry and Imperial at the time of his termination.

The Queen’s Bench Decision
Landry and Gray Metal were successful at the Queen’s Bench level. With respect to the test for granting an injunction, the Court found that it was appropriate in the employment context to impose the high standard of proving a prima facie case on the party seeking the injunction (i.e. Imperial was asked to establish that, at first glance, their case against the Defendant would be likely to succeed at trial). This was a significant finding, as in many other areas of law the standard for the granting of an injunction is lower, (ie. the applicant simply has to establish that there is a serious issue to be tried), but the Court reasoned that in the employment context, where so much is at stake for the employee if an injunction preventing them from working is granted, a higher standard is appropriate. The Court went on to find that Imperial had not made out a prima facie case that Landry was a fiduciary of Imperial, due to the circumstances of his employment (while he had the title of Vice-President, he was not a “key employee” who was intimately involved in the top-level decision making processes of Imperial, and there were layers of management between Landry and those at the top); the Court also found that there would be no irreparable harm to Imperial should an injunction not be granted (any damages could be remedied with money), and that the balance of convenience in the circumstances mitigated against issuing an injunction. Thus, the Court refused to grant an injunction against Landry.

The Court of Appeal Decision
At the Court of Appeal, Imperial argued that Landry was under a duty at common law as a former employee of Imperial not to disclose any “confidential information” of his previous employer’s that he had knowledge of due to his previous employment; Imperial also urged the Court to find that the Court of Queen’s Bench erred in finding that Landry was not a fiduciary of Imperial.

With respect to the issue of the proper application of the test for the granting of an injunction, the Court found that the proper test was that there be a “serious issue” to be tried – a significantly lower standard than that adopted by the Court of Queen’s Bench. Essentially, the Court held that, if a Plaintiff can show that there is a “serious issue” at stake in the proceedings, then an injunction may be granted – while the Plaintiff does not have to prove a prima facie case, the Plaintiff must at least demonstrate that the is a serious issue to be tried as a condition precedent to an injunction being issued. Having found that the appropriate threshold test was that of the existence of a “serious issue,” the Court went on to examine whether or not either of the arguments advanced by Imperial disclosed a “serious issue” to be tried.

Regarding the existence of a common law duty of employees and former employees not to disclose their employer’s “confidential information,” the Court held that an employee’s duty of non-disclosure continues to exist after the employment relationship ceases. However, the Court found that:

… confidential information does not include the general skills and knowledge acquired by the employee while working for the former employer. This is true so long as the skill and knowledge is committed to memory and not dependant on the employer’s documentation.

The Court went on to find that it is settled law that, absent a non-compete agreement, there is nothing stopping a former employee from competing with their former employer, nor is there anything to stop them from trying to recruit their former employer’s employees (unless they are attempting to induce a breach of contract). The Court determined that knowledge of the former employer’s customers was clearly knowledge that Landry carried around in his head from his dealings with them, and thus not covered by the duty. However, Imperial alleged Landry may have had in his possession documentation relating to product costs, pricing, profit margins, etc., which the Court did consider to be confidential information. The Court thus determined that there was a serious issue to be tried.

The Court noted that prior to this decision, there had been some debate over whether the correct test for determining whether an employee should be classified as a fiduciary of their employer or not was whether the employee was a “key employee” within the employer’s organization, or whether the employer was “vulnerable” due to the nature of business and the knowledge and skills of the departing employee. In its decision, the Court of Appeal held that the correct test was the “key employee” test, as the “vulnerability” test was too broad and could impose fiduciary duties on even humble employees. The Court then considered the question of “what makes an employee a “key” employee?” The Court decided that:

A “key” employee is: (1) an integral and indispensable component of the management team that is responsible for guiding the business affairs of the employer; (2) necessarily involved in the decision-making process; and (3), therefore, has broad access to confidential information that if disclosed would significantly impair the competitive advantages that the former employer enjoyed. These employees fall within the categories: “top management”, “senior management” or “key management”.

The Court decided that, in the circumstances of the present case, Landry was not a “key employee” and refused to grant an injunction preventing Landry from working for Gray Metal and competing with his former employer.

What This Means for Employers
This decision has significant practical effects from an employer’s perspective. Former employees, in the absence of a signed non-compete agreement, may use the knowledge and skills that they have acquired in the context of their previous employment for the benefit of their new employer, provided those knowledge and skills are carried around with the employee in their head, and are not reliant on any of their former employer’s documentation. The exception to this rule is that, if an employee can be classified as a “key employee” of their former employer, then they may be found to be a fiduciary of their former employer, and bound to act in their former employer’s best interests; this would necessarily preclude the employee from competing against their former employer.

Following this decision, it is strongly advised that employers seek to secure non-compete agreements with any employees whose personal knowledge of the employer’s operations could become a liability to the employer should the employee depart to work for a competitor, as the Court has shown that it will be very difficult for an employer to get an injunction preventing a former employee from using this knowledge against their former employer with a non-compete. It is especially important that employers operating in niche markets take steps to protect themselves in the event that employees depart, as they may be especially vulnerable to competitors seeking to exploit the knowledge possessed by former employees.