Canada: Former Employees Ordered To Pay Significant Damages For Breach Of Confidential Information

Last Updated: December 17 2012
Article by Heather Hettiarachchi

The recent decision of the BC Supreme Court, Service Corporation International (Canada) Ltd. (Graham Funeral Home Ltd.) v. Nunes-Pottinger Funeral Services & Crematorium Ltd., is the latest case in which the BC Supreme Court has confirmed that employees who misuse confidential information of their previous employer will be punished.

The plaintiff operated Graham Funeral Home ("GFH"), the only funeral home in Oliver, BC. John Nunes was the Manager of GFH and Daryn Pottinger was its funeral director. Nunes and Pottinger were the only full-time employees of GFH. Over the course of several months, Nunes and Pottinger tried to buy the business, but their offers were not accepted. They then resigned and, a couple of weeks later, started a competing business, Nunes-Pottinger Funeral Service & Crematorium ("NP"). All of the part-time employees of GFH also resigned and joined the competing business.

For several months prior to leaving, one of the part-time employees had made copies of GFH's files, which included information about "pre-need" contracts i.e. funeral expense insurance policies where GFH had been named as the beneficiary. GFH had been named as a beneficiary of approximately 300 pre-need contracts, of which more than 200 were copied by the employee. The files also contained client names, addresses, phone numbers, dates of birth, and the insurance policy number. The evidence showed that in the seven months between the opening of NP and GFH demanding the return of its files, 208 of GFH's pre-need clients had transferred the beneficiary of the pre-need contract from GFH to NP. The evidence also showed that Nunes had delayed finalizing at least three pre-need contracts before he left GFH so that those clients could be referred to NP when NP commenced operations.

GFH sued NP for, amongst other things, losses caused by the use of confidential client files to solicit and obtain GFH's "pre-need" business, using stolen property to compete against GFH and directing business to NP while the defendants were still employed at GFH.

The Court agreed that some of the clients who went to NP could have obtained the policy number from their own copies or by contacting the insurer. The Court also found that some of GFH's clients may have moved their business to NP because Nunes had lived in Oliver for most of his life and was very active in the business community. However, the Court found that as a result of having copied GFH's files, NP was able to fill out the transfer forms and obtain client approvals, and that the mere possession of the files, particularly the policy numbers, gave NP an advantage that it would not have otherwise had.

The Court found that Nunes and Pottinger had clearly breached an employee's duty to not use the confidential information of their former employer when they copied file information in order to secure the transfer of the pre-need contracts. The Court further held that NP, the new employer, was also liable for GFH's losses on the principle that a new employer who benefits from the misuse of confidential information will be held liable for losses suffered by the former employer, even if the new employer did not have direct knowledge of the employee's breach.

For these losses, the Court awarded GFH $263,000. The Court also awarded $10,000 in punitive damages against Nunes personally on the basis of his conduct in stealing the files and other material while still employed by GFH, working for NP's benefit while still employed by GFH, and for refusing to admit to any wrongdoing until it was obvious that GFH had evidence against him.

This case confirms the following principles:

  • While employees may set up a competing business (subject to any enforceable restrictive covenants in individual employment agreements), employees may not use confidential information of a previous employer for this purpose.
  • Confidential information includes client names, addresses, phone numbers and other information that is "confidential" to the operation of the business; for example, the policy numbers of the pre-need contracts in the context of the funeral home business.
  • A new employer who benefits from the misuse of confidential information is liable for losses suffered by a former employer, even if the new employer did not have direct knowledge of the breach.
  • The Court may award punitive damages against an employee whose conduct is so outrageous that it merits the condemnation of the court; for example, theft of confidential information and engaging in conduct that would benefit a competing business while still employed by the previous employer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Heather Hettiarachchi
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