Canada: Alberta Court Of Appeal Clarifies Fiduciary Obligations Of Employees

The Alberta Court of Appeal (the Court) released its judgment in Evans v. The Sports Corporation on January 18, 2013. The unanimous Court held that a former employee was a fiduciary of his former employer and was liable for wrongfully soliciting that employer's clients after he left his employment. The Court's judgment affirms and clarifies that:

  • employees who are the "face" of their employer's business, or a specific segment of that business, may be fiduciaries of their employer, even if they have no managerial responsibilities;
  • wrongful dismissal of an employee who is a fiduciary may not necessarily relieve that employee of his or her fiduciary obligations; and
  • former employees who owe fiduciary or contractual obligations to not solicit clients of their former employer may be found liable for breach of those obligations, even if they do not personally conduct such solicitation or explicitly direct an intermediary to conduct that solicitation on their behalf.

In light of judicial trends to strike down non-solicitation and non-competition covenants binding former employees as unreasonable restraints of trade, many employers have expressed frustrations at their view that the courts appear to favour the rights of departing employees over the protection of their business interests. The Court's decision in Evans serves as a reminder that the courts can and will protect employers from unfair competition of their former employees.

Background

The plaintiff, Richard Evans (Evans), was employed for six years by the defendant, The Sports Corporation (TSC), as a sports agent pursuant to a fixed-term employment agreement where he was responsible for managing current and prospective NHL hockey players coming from the Czech Republic and Slovakia. His employment agreement contained a non-solicitation clause which prohibited him from soliciting employees and clients of TSC throughout his employment and for two years after his employment with TSC ceased.

As his fixed-term employment agreement neared its expiration, Evans decided that he was going to leave TSC and conduct business on his own account. Evans asked two employees of TSC, Jaromir Henys (Henys) and Peter Kadlecek (Kadlecek) – who were responsible for recruiting hockey players in the Czech Republic and Slovakia – if they would join him after he left TSC, to which they agreed. Five days before his employment agreement expired, Evans announced that he would be leaving TSC and TSC immediately terminated his employment and refused to pay him for the remaining five-day balance of his employment agreement. While there was no evidence indicating that Evans was personally soliciting TSC's clients after his departure from TSC, Henys and Kadlecek began directing TSC clients to Evans, who began representing those clients.

Evans brought an action against TSC for, among other things, unpaid wages and bonuses, and TSC counterclaimed, alleging breach of his contractual non-solicitation covenants and breach of his fiduciary duties. At trial, Graesser J. upheld Evans' claim in part, awarding him approximately C$32,000 in damages. However, Graesser J. also upheld TSC's counterclaim, holding that Evans had wrongfully solicited TSC's clients in breach of his contractual and fiduciary duties, awarding TSC damages of over C$200,000. Evans appealed that finding.

The Alberta Court of Appeal's Decision

The Court addressed three grounds advanced by Evans:

  • that the trial judge erred in finding the restrictive covenant in his employment agreement with TSC enforceable;
  • that the trial judge erred in finding him a fiduciary; and
  • that the trial judge erred in finding that he had solicited TSC's clients.

Non-Solicitation Covenant

Relying on Globex Foreign Exchange v. Kelcher, the leading Alberta decision considering the enforceability of restrictive covenants of employees – discussed in our November 2011 Blakes Bulletin – the Court held that the non-solicitation covenant in Evans' employment agreement, which prohibited the solicitation of any client of TSC, was unenforceable because it was not reasonable to restrain Evans from soliciting past clients of TSC who had already left the company. The Court noted, however, that the unenforceability of Evans' contractual non-solicitation obligations were not decisive as Graesser J. had also found liability on Evans' fiduciary obligation to not solicit clients of TSC after his employment ceased.

Fiduciary Employee

The Court confirmed that Evans was a fiduciary of TSC. Rejecting Evans' submissions that he was only a "minor cog" in TSC's overall operations, the Court noted that Evan's was "the face and voice of TSC " for Czech and Slovak clients who had been recruited for TSC by Henys and Kadlecek. While Evans was neither a director nor shareholder of TSC and had no managerial powers to hire or promote any employees, the Court held that Evans had been entrusted with primary responsibility for TSC's Eastern European operations and, because he had power and influence over TSC's clients on account of the personal relationships developed in the course of business, he was a fiduciary of TSC.

The Court rejected Evans' further submissions that he was relieved of his fiduciary obligations because TSC had wrongfully dismissed him when it prematurely terminated his fixed-term employment agreement and refused to pay him for his outstanding five-day balance. In that regard, Evans cited the recent 2012 Alberta Court of Queen's Bench decision of ADM Measurements Ltd. v. Bullet Electric Ltd. which held that fiduciary obligations end when an employee is wrongfully dismissed. The Court rejected that proposition, holding that termination of employment does not automatically relieve a former employee of ongoing fiduciary obligations. The Court held that in any event, TSC's failure to pay Evans for those five days was only a minor breach which did not amount to repudiation of his employment agreement or a wrongful dismissal.

Indirect Solicitation

The Court confirmed that even though Evans had not directly solicited clients of TSC, he had indirectly solicited those clients through Henys and Kadlecek. At trial, Graesser J. held that there was no evidence that Evans personally solicited TSC's clients and further held that there was no evidence that Evans directly asked either Henys or Kadlecek to solicit clients on his behalf. The Court confirmed that there was sufficient evidence indicating that Evans was aware that by employing Henys and Kadlecek, both he and they would have understood that they were to turn their Czech and Slovak clients currently signed with TSC to Evans' new company. As Evans, Henys and Kadlecek would have implicitly had this understanding, the Court confirmed that Evans was liable for wrongfully soliciting TSC's clients, through Henys and Kadlecek, in breach of his fiduciary obligations.

Conclusion

The Court's decision is important in three main ways:

  • It confirms that employees who are the "face" of their employer's business, or a specific segment of that business, may be fiduciaries of their employer, even if they have no managerial responsibilities. The decision of the Alberta Court of Queen's bench in ADM, which interpreted the Supreme Court of Canada's 2011 decision in Elder Advocates of Alberta Society v. Alberta as requiring employees to be integrally involved in an employer's decision-making processes before being found fiduciaries, appears to be rejected by the Court of Appeal as Evans did not have managerial-type responsibilities.
  • It indicates that a wrongfully dismissed employee may not necessarily be relieved of fiduciary obligations owed to his or her former employer and that a court will look at the extent to which an employer breached that employee's employment agreement when deciding whether to uphold such fiduciary obligations.
  • It confirms that a former employee may be liable for indirectly soliciting a former employer's clients through an intermediary, even if that employee does not directly ask that intermediary to solicit such clients: liability for wrongful solicitation may be found if the former employee and the intermediary reasonably understand that the intermediary is, and will be, soliciting a former employer's clients for the former employee's benefit.

The Evans decision clarifies when employees may be regarded as fiduciaries of their employer and confirms the obligations of those employees upon the cessation of their employment. The decision also serves as a reminder from Alberta's highest court that the courts can and will protect employers from unfair competition on account of their former employees.

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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