Privacy Rights, Damage Assessments and the Importance of Pleadings

Author: Dean Crawford, KC

May 30, 2023 Topics: Blog, Breach of Fiduciary Duty, Confidential Documents, Damages, Disgorgement of Profits, Non-Compete Enforceability, Non-Solicit Enforceability, Restrictive Covenants, Sale of a Business

Several recent decisions are of interest to those advising on, and litigating, employee competition cases. First, the Alberta privacy commissioner finds that employers, in some circumstances, may disclose their former employees’ restrictive covenants to third parties. Two Alberta Courts provide analysis on assessing damages in successful actions for unlawful competition. Lastly, an Ontario Court’s decision striking from a claim several allegations of improper competition is a stark reminder of the importance of careful pleading.

Can You Disclose Your Former Employee’s Restrictive Covenants to a Current or Prospective Employer?

Advanced Upstream Ltd. (Re), 2023CanLII 18084 (AB OIPC)

The Complainant alleged that his former employer breached his privacy rights under Alberta’s Personal Information Protection Act (PIPA) by disclosing, through its legal counsel, a complete copy of his employment agreement to a competitor that it reasonably apprehended may contract with him for his services.

The employment agreement contained information relevant to potential competition after departure, i.e. non-competition, non-solicitation and non-disclosure clauses. When combined with his name, the clauses constituted information “about” him and hence was “personal information” under PIPA.

The Office of the Information and Privacy Commissioner held that disclosure of these clauses was authorized on the basis of a clause in his contract in which he provided written consent to disclose personal information as part of the employer’s ongoing operations. In the view of the Commissioner’s office:

…informing a prospective or new employer of the Complainant’s enduring non-competition, non-solicitation, and non-disclosure obligations involves the Organization’s ongoing operations. Assuming there was a reasonable apprehension that these obligations might be violated (a question that I discuss further in the next section), taking steps to ensure that those obligations were not violated is part of the Organization’s ongoing operations, which would include protecting the Organization’s confidential information, relationship with its clients, and competitive position in the market.

The decision also left open the possibility that other sections of PIPA may permit disclosure of post-employment restrictions without consent.

However, disclosure of the entire employment agreement was not authorized by PIPA. The agreement contained the former employee’s marital status, name of his spouse, signature and compensation. None of this disclosure was necessary to assess enforceability of the restrictive covenants.

There Was Unlawful Competition. How Does the Court Assess Damages?

Quantification of damages when there has been unlawful competition can be difficult. Relying on well-known authority that in such cases the courts must do “the best they can”, courts have applied a flexible approach, as demonstrated in the next two Alberta decisions.

Ruel v Rebonne, 2023 ABCA 156

The appellant, a vendor of a home décor business, was found to have breached a non-competition clause included in the sale agreement. The trial judge awarded damages of $113,266.05.

The appellant argued that the trial judge erred by ordering disgorgement of profits from the new company he had incorporated. The Alberta Court of Appeal disagreed with this characterization of the trial judge’s order, noting the reasons for judgement did not refer to “disgorgement” at all.

Rather, the trial judgement appropriately found that the appropriate measure of damages was expectation damages, to put the purchaser of the business in the position it would have been had the contract been performed. Since there was no way to know how the respondent would have performed absent the breach by appellant, the trial judge correctly used the value of the orders filled by the vendor’s new business as an appropriate measure of expectation damages, then discounted the total to account for the cost of the goods.

However, the Court of Appeal found the trial judge did err in awarding the respondent damages for mental distress for breach of contract, finding he did not articulate the legal test or make findings of fact that would support such a finding.

Catch Engineering Partnership v. Mai, 2023 ABKB 279

The defendant, Mai, worked for Catch Engineering and was seconded to provide engineering services to Catch’s client. Following his resignation from Catch near the end of 2019, he approached the client to provide the same services, either through his own corporation or another corporation and ultimately did so through the latter. The Court held that he breached his non-solicitation clause, as he had approached Catch’s client to provide the same services it had been providing the client. The Court also found he had lied about his intentions when questioned by Catch.

The Court determined that, but for Mai’s solicitation and deception, there was no reason the client would have discontinued its engagement with Catch, given the parties had a strong relationship spanning several years.

While quantification of damages was difficult, the Court cited well-known law to the effect that it must do “the best it can”.  It also noted that the plaintiff was not required to prove its losses with “mathematical precision” in order to recover.

In assessing damages, the Court took the total amount the client paid Catch for Mai’s services in 2019. From there, it deducted his salary, benefits and his share of overhead to arrive at a figure for its 2019 profit relating to its contract with the client. It then used this figure to assess damages for 2020.

While the non-solicit clause would have expired by early 2021, the Court also awarded damages for that year and for 2022, finding that Catch’s relationship, if not for Mai’s actions, would have stabilized by that time. However, given the possibility that other contingent factors may have come into play, it applied a 25% discount on profits for 2021 and 50% for 2022. The Court declined to award damages beyond the end of 2022 as too speculative.

Pay Attention to the Pleadings!

RH20 North America v Bergmann, 2023 ONSC 2378

The plaintiff, Unit Precast, was subcontracted to its co-plaintiff, RH20, to provide maintenance and other services for wastewater treatment systems sold by RH20. RH20 licensed the technology from the “Bergman Group”, comprising various corporations and individuals.

Unit Precast joined RH20 in advancing several causes of actions against the Bergman Group, alleging a scheme to prematurely terminate the licensing agreement and misuse of confidential information to solicit the employees of Unit Precast and RH20. The pleading included claims against “the Departing Employees”, which included two employees that had formerly worked for Unit Precast, then RH20, but who no longer worked for either entity.

On an application by the defendants, the Court struck several of Unit Precast’s claims as disclosing no reasonable cause of action. These included the claims for breach of contract against the Departing Employees, inducing breach of contract, breach of fiduciary duty, inducing breach of fiduciary duty and knowing assistance in breach of fiduciary.

Amongst other things, the Court found that:

  • The statement of claim failed to allege any contract between Unit Precast and the Departing Employees that may give rise to a breach of contract;
  • Unit Precast failed to plead material facts to establish a contractual relationship between itself and a third party (as relating to the inducing breach of contract claim);
  • The necessary elements of a fiduciary relationship between any of the defendants and Unit Precast was not set out;
  • The claim did not adequately describe the confidential information allegedly belonging to Unit Precast. In a warning of which counsel should take heed, it held that “such descriptions as the plaintiffs’ “business development activities”, “project information”, “employee lists”, “business plans” and “strategic direction” are too vague and general to meet the minimum requirements of a breach of confidence pleading”; and
  • The pleading failed to set out the circumstances of how the alleged confidential information came into the possession of each defendant and how each misused that information.

The Court did not grant leave to amend. The motion to strike had been outstanding for two and one-half years before argument, and in such circumstances there was no reason to believe Unit Precast’s case could be approved by an amendment.