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The Ontario Court of Appeal recently upheld a trial decision which held four key employees
who resigned in rapid succession and started a competing business
responsible to account for ten years' profits and damages
arising from the combined effects of a breach of fiduciary duties,
breach of confidence, and a failure to provide reasonable notice of
resignation.
Facts and Judicial History:
In GasTOPS Ltd. v. Forsyth, the plaintiff GasTOPS Ltd.
was in the niche business of developing software related to the
maintenance of jet engines sold to military, commercial, and
industrial customers worldwide. The events that gave rise to
the lawsuit occurred in 1996, when GasTOPS was in the process of
securing a lucrative contract with U.S. Navy. In October
1996, two senior business managers involved in this project,
Bradley Forsyth and Douglas Brouse, resigned with only two
weeks' notice and signed letters assuring GasTOPS they would
not solicit GasTOPS' business, use its confidential information
or property, or solicit its employees. However, about a week later,
Forsyth and Brouse formed a new company, MxI Technologies Ltd.,
targeting the specialized software development and partnerships
that GasTOPS was in the process of securing. Shortly thereafter,
two senior specialized software developers essential to GasTOPS
also resigned with only two weeks' notice and immediately began
employment at MxI, which succeeded in securing the same customers
as GasTOPS.
GasTOPS sued the four former employees as well as MxI for breach
of fiduciary duty, breach of confidence and failure to provide
reasonable notice of resignation. After a lengthy trial, Justice
Granger found that the four former employees were indeed
fiduciaries, who had breached their duties by resigning with
inadequate notice and starting a competing business using
confidential knowledge obtained from GasTOPS. Their company, MxI,
was also held liable for breach of confidence.
GasTOPS was awarded damages disgorging MxI of profits earned
from its military contracts in its first ten years of operation,
which amounted to over $12 million, in addition to pre-judgment
interest and costs. The damage award considered, among other
things, that the period of reasonable notice of resignation that
should have been given by the four employees to GasTOPS was 10-12
months. If such notice had been given, GasTOPS would have had an
opportunity to replace the departing key employees and the effect
of their breaches duty would have been mitigated.
The Decision of the Court of Appeal:
The former employees appealed several of the Justice
Granger's findings, the most notable of which was Justice
Granger's ten (10) year time frame for disgorgement of
profits. In a unanimous decision, the Court of Appeal upheld
the trial judge's damage award and emphasised that the ten year
accounting period for damages was an equitable, fact-driven remedy
that considered the amount of time it took to develop software in a
"highly technical and specialized business" with a
"small number of very large customers." While the former
employees argued that Justice Granger's choice of a ten year
period was disproportional in light of the fact that he had pegged
the proper notice of resignation period at only 10-12 months, the
Court of Appeal found that Justice Granger's reasonable notice
determination played no part in his calculation of the accounting
period. There was also no reason to doubt Justice
Granger's finding that MxI deliberately targeted the military
marketplace using information acquired during the departing
employees' employment at GasTOPS.
A second ground of appeal related to Justice Granger's
finding that the two specialized software developers who followed
Forsyth and Brouse to MxI were fiduciaries. The Court of
Appeal concurred with Justice Granger that these developers were
equivalent to senior management in light of their responsibility to
develop a "significant commercial component" of
GasTOPS' business.
Our Views:
While at first glance the Court of Appeal's affirmation of
Justice Granger's decision may be seen as a benchmark for the
damages that can be awarded against departing fiduciaries, the
fact-dependent nature of these cases cannot be understated.
Significantly, in this case, Justice Granger had found that the
former employees had deliberately intended to destroy GasTOPS'
business.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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