THE CANADIAN EMPLOYEE COMPETITION BLOG

Skycope Technologies Inc. v. Jia, 2023 BCSC 1288

The law provides for a broad range of remedies to address breach of confidence. In a recent decision where the plaintiff had not established any financial loss, the B.C. Supreme Court opted for disgorgement of a large sale by the defendants as an appropriate remedy.  

The B.C. Supreme Court’s recent disgorgement of an $800,000 sale in a breach of confidence case, where the evidence did not establish any financial loss suffered by the plaintiff, demonstrates the remedial flexibility available to address such claims. The decision in Skycope Technologies Inc. v. Liu also highlights that, in cases involving confidential business information, misuse can rarely be proven by direct evidence, with plaintiffs having to rely on strong circumstantial evidence. 

The litigation arose from the breakdown of the friendship between “Eric” Liu, the principal of the plaintiff, Skycope Technologies and “Jack” Jia, the principal of the defendant, Bluevec Technologies. In 2016, Liu incorporated Skycope to develop anti-drone wireless technology. Jia left his employment elsewhere to join the fledgling venture. Skycope hired several other employees who, in addition to Jia and Bluevec, were later named as defendants in the proceedings.

Liu terminated Jia’s employment at the end of 2017 without notice and without cause, which, Jia testified, came as a shock to him. About three months later, he incorporated Bluevec to develop wireless security products, with the foremost being wireless anti-drone technology. Over the course of next several months, the other individual defendants left Skycope for Bluevec.

Skycope soon thereafter hired a private investigator, who posed as a potential customer for Bluevec’s anti-drone technology and obtained from it a presentation on its product offering.

Convinced Jia had taken its confidential information, including its software code for its anti-drone technology, Skycope filed claims for breach of confidence and misuse of confidential information against all the defendants, breach of fiduciary duty by Jia and wrongful receipt of confidential information by Bluevec.  Skycope also alleged breach of non-solicitation and non-competition covenants by the individual defendants. Jia filed various counterclaims, including wrongful dismissal and a claim that he owned a 30% interest in Skycope.

Focusing on the breach of confidence allegations, Justice Nitya Iyer noted that credibility is often a crucial issue in such cases, citing the following passage from the Quebec Superior Court in Matrox Electronic Systems v. Gaurdreau: 

In cases involving confidential business information, misuse can rarely be proved by convincing direct evidence. In most cases, employers must construct a web of perhaps ambiguous circumstantial evidence from which the Court may draw inferences which convinced it that it is more probable than not that what employers alleged happened did in fact take place. Against this often delicate construct of circumstantial evidence, there frequently must be balanced the testimony of the employees and their witnesses who directly deny everything.

(at para. 94)

“This,” Justice Iyer observed, “is an apt description of the evidence in the present case.” The Court found neither Liu nor Jia to be credible. Unless their evidence was contrary to their own interest or corroborated, the Court did not rely on it.  Further, as the Court noted, despite the plaintiff having an “onerous evidentiary burden in breach of confidence claims, the B.C. Court of Appeal has held that strong circumstantial evidence can be sufficient to establish possession and misuse.”

Jia, following his dismissal, did not return a company laptop computer he had taken with him on a business trip to China. The laptop had a copy of Skycope’s software code on its hard drive. Two other defendants had access to the Skycope code following dismissal. The Court did not find their denials of using the code for the benefit of the defendants to be credible.

Both Skycope and the defendants led expert evidence on the Skycope code and Bluevec code. After a careful examination, the Court relied on Skycope’s expert’s opinion that “the only reasonable explanation for the similarities between the segments of Skycope and Bluevec source code…is that Bluevec used an electronic copy of the Skycope Code.” 

Ultimately, the Court held that Jia and a second individual defendant had breached confidence. Given Jia was Bluevec’s directing mind, Bluevec was liable for knowingly receiving and misusing Skycope’s confidential information.  The Court further found Jia to have been a fiduciary and to have breached his fiduciary obligation to Skycope by using confidential information to compete.

From here, however, Skycope ran into problems, some of which appear to be of its own doing. Given the breach of confidence and Jia’s breach of fiduciary duty, the plaintiff normally would have the option of electing an accounting of profits or damages. Skycope, argued, however, that it had not been able to elect the most appropriate remedy, because the defendants “obscured their theft of confidential information and have made inadequate document disclosure.” Relying on two prior decisions of the B.C. Supreme Court, Skycope sought a post-trial accounting, with a subsequent right to elect between disgorgement of profits and general damages once an accounting was complete.

Justice Iyer rejected the argument, finding that in both of the cited cases the plaintiffs had made extensive efforts, pre-trial, to discover documents. By contrast, Skycope had failed to make a document production application during the proceedings. The Court found Skycope effectively was seeking post-trial discovery and declined to grant it.

Skycope thus was left with a claim for damages. After rejecting several approaches it proposed to measure its financial loss, the Court observed that what Skycope really had “lost as a result of the defendants’ wrongdoing was its competitive advantage. The evidence shows the Bluevec was able to bring its product to market faster than it could have without the head start that it got from using the Skycope Code.” (at para. 285)

The Court concluded that Bluevec’s misuse of the Skycope code gave it a head start – or a “springboard”  – of nine months. However, the real difficulty in the case concerned quantification, as there was no evidence that Skycope suffered any financial loss at all.

Relying on GEA Refrigeration Canada Inc. v. Chang, 2020 BCCA 361, Justice Iyer held that “the court has wide discretion to craft an appropriate remedy” where there is a breach of confidence. As the Court of Appeal held in GEA:

[161]   The trial judge recognized that the law allows for a broad range of remedies for breach of confidence:

[665]   A broad range of remedies is available for a breach of confidence, including damages, injunctive relief, an equitable accounting of profits, and the imposition of a constructive trust. Unfettered by strict doctrinal considerations, the court will adopt a flexible approach in fashioning a remedy, with a careful eye on the specific facts of the case: Cadbury at para. 61.

[666]   While the court’s discretion to grant a remedy is not limited by whether the breach of confidence has a contractual, tortious, proprietary or trust flavour, that factor may nonetheless inform the appropriateness of the remedy in a given case: Cadbury at para. 26; Lac Minerals at 615 per Sopinka J. Another informing consideration finds expression in the common sense notion that not all confidential information has an equal degree of importance. The law recognizes a continuum of specialness with respect to confidentiality, and the placement of confidential information on that spectrum may also affect the nature of the remedy or the quantum awarded for a breach, or both: Cadbury at paras. 75-76.

[162]   As I read Cadbury, a court should carefully consider the circumstances of a case before choosing the remedy. Disgorgement focuses on the benefits obtained by the wrongdoer by reason of its breach of confidence, rather than on the damage suffered by the party whose confidential information has been misused. Such a remedy may be particularly appropriate where a fiduciary is guilty of a breach of trust. As Binnie J. noted for a unanimous Court at para. 29 of Cadbury, “[t]he law takes a hard line against faithless fiduciaries” such that sales of products by a fiduciary who has been guilty of a breach of confidence may justifiably be treated as if they belonged to the wronged party. An example of a case in which a disgorgement remedy was applied in a fiduciary context is GasTOPS Ltd. v. Forsyth, 2012 ONCA 134.

Adopting this remedial flexibility, Justice Iyer ordered disgorgement of one of Bluevec’s sales, despite already having denied the plaintiff’s application for a potential accounting of profits and disgorgement after post-trial discovery of evidence. The Court did so on the basis of the only evidence it did have of a gain realized by Bluevec, that being its sale of technology developed by Skycope to a related party for $800,000. Accordingly, the Court ordered Bluevec, Jia and another defendant jointly and severally liable for $800,000.

In arriving at its remedy, the Court noted that a decision to disgorge is “particularly appropriate where there has been a breach of fiduciary duty.” Having concluded Jia had breached his fiduciary duty, Justice Iyer disgorged the $800,000 sale. Given the absence of evidence of financial losses suffered by the plaintiff, disgorgement provided redress for a wrong that otherwise would have escaped a financial remedy.