THE CANADIAN EMPLOYEE COMPETITION BLOG

Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19

The Supreme Court of Canada has reined in novel uses of the disgorgement remedy in ways that will narrow its availability in employee competition cases. The Court held that disgorgement is not available as a remedy for “waiver of tort”, as the latter does not exist as a cause of action in Canadian law. The Court also restricted disgorgement as an available remedy for breach of contract to “exceptional” cases. 

Plaintiffs in employee competition cases often will claim disgorgement of the defendants’ profits based on causes of action for which this remedy historically has been available. In the main, these are breach of fiduciary duty and breach of confidence. Over the past decade, however, pleas for disgorgement have been advanced in novel ways, both for apparent tactical reasons and as a way to claim disgorgement in the absence of more common causes of action that support that remedy.

In “waiver of tort” cases, plaintiffs have pursued disgorgement in cases akin to torts such as conspiracy or inducing breach of contract, but have opted not to prove, or indeed could not prove, damages arising from the tort. Supported by case law and scholarly articles suggesting the existence of “waiver of tort” as an independent cause of action, plaintiffs would give up the right to sue in tort and elect to recover the gain and profit defendants allegedly received from their wrongdoing. In employee competition cases, doing so could shield plaintiffs from having to produce documents going to their own damages, such as sensitive financial statements, since they did not claim damages at all.

For instance, in Authentic T-Shirt Company ULC v. King, 2016 BCCA 59, the BC Court of Appeal held that a plaintiff corporation was not required to produce documents relating to its financial losses in its claim against a group of departed employees and their new employer. The plaintiff’s pleading of waiver of tort and decision to claim disgorgement but not damages shielded it from producing its financial documents.

Another novel use of the disgorgement remedy in employee competition cases emerged in claims for breach of contract. Relying on the House of Lords’ decision in Attorney General v. Blake, [2001] 1 A.C. 268, plaintiffs would seek disgorgement in place of damages for breach of contract. Indeed, in Zoic Studios B.C. Inc. v. Gannon, 2015 BCCA 334, the BC Court of Appeal agreed with the appellant employer that disgorgement might be available for the defendants’ breach of their contractual duty of fidelity and loyalty.

A recent Supreme Court of Canada decision significantly circumscribes the use of the disgorgement remedy  in the ways advanced by employers in these cases.  In Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, the Court held that “waiver of tort” does not exist as a cause of action in Canadian law and should be abandoned. It further held that disgorgement for breach of contract should be awarded only in exceptional cases.

The plaintiffs sought certification of a class action for all residents of Newfoundland and Labrador who paid to play video lottery terminal games. Relying on three causes of action – waiver of tort, breach of contract and unjust enrichment – the plaintiffs sought a gain-based award, based on disgorgement of the profit realized by the defendant.

Waiver of Tort Abandoned as a Cause of Action in Canada

The plaintiffs alleged the defendant breached a duty to warn of the inherent dangers associated with video lottery terminals. They pleaded waiver of tort as an independent cause of action, allowing for a gain-based remedy.

Writing for a 5-4 majority, Justice Brown acknowledged that disgorgement is available as a remedy for some forms of wrongdoing without proof of damage, such as breach of fiduciary duty. “But it is a far leap to find that disgorgement without proof of damage is available as a general proposition in response to a defendant’s negligent conduct.”

A defendant’s negligent conduct is wrongful, the majority emphasized, only in respect of damage caused to the plaintiff. Thus, “granting disgorgement for negligence without proof of damage would result in a remedy ‘arising out of legal nothingness’…It would be a radical and uncharted development, ‘[giving] birth to a new tort over night’”.

Disgorgement for Breach of Contract Available Only in Exceptional Cases

The Court then turned to the claim for disgorgement for breach of contract, noting that the ordinary form of monetary relief is an award of damages. Disgorgement of the defendant’s profits normally has not been an available remedy for breach of contract.

More recently, however, “courts have accepted that disgorgement may be available for breach of contract in certain exceptional circumstances.” The Court cited the House of Lords decision in Attorney General v. Blake, [2001] 1 A.C. 268, where the Crown obtained disgorgement of profits realized by a former member of the British secret intelligence service who published his memoirs in violation of his confidentiality obligations in his employment agreement. The Crown had not suffered damages, but the House agreed that disgorgement was available where, at a minimum, the remedies of damages, specific performance, and injunction are inadequate.

The Supreme Court in Atlantic Lottery expressly approved the “exceptional” standard in Blake, holding:

…disgorgement for breach of contract is available only where other remedies are inadequate and only where the circumstances warrant such an award. As to those circumstances, courts should in particular consider whether the plaintiff had a legitimate interest in preventing the defendant’s profit‑making activity.

As to what circumstances will create a legitimate interest in the defendant’s profit-making activity, the Court held that a coherent approach focused on the “structure of the breach” should be preferred. The Court drew on past decisions where plaintiffs were awarded gain-based remedies because a damages award or other form of relief would be inadequate.  For example:

• Damages have been quantified by the amount a defendant saved on deficient performance, even though the plaintiff would have been no better off had the contract been performed; or
• The grant of “negotiating damages” “to prevent a defendant from obtaining for free and advantage for which it did not bargain.”

“These cases,” the Court continued, “are indicative of the types of circumstances where a plaintiff is entitled to receive a monetary award that goes beyond the economic position that it would have occupied had its contract been performed…”.

Blake opened the door to employers seeking disgorgement for a departed employee’s breach of contract, particularly if the prospect of the court declaring the employee a fiduciary was doubtful. In light of the Court’s decision in Atlantic Lottery, it appears it truly will be an exceptional case where plaintiff employers succeed on these grounds.