Valuable Employee? Yes. Fiduciary Employee? Not So Much.

Author: Dean Crawford, KC

June 19, 2018 Topics: Blog, Breach of Fiduciary Duty

Jetco Heavy Duty Lighting v. Fonteyne, 2018 ABQB 345

The Alberta Court of Queen’s Bench cautions against conflating a valuable employee with a fiduciary employee, given the onerous obligations placed on fiduciaries. The decision underscores the importance of securing a reasonable restrictive covenant if an employer wishes to protect its clientele from departing employees, given the difficulties often encountered in affixing fiduciary status to even the most valuable employees.

In Jetco Heavy Duty Lighting v. Fonteyne, 2018 ABQB 345, a business owner who had abandoned the sales side of the company to an employee failed to establish the employee as a fiduciary, even though he had become “the face” of the business to the customers.

The decision offers an important reminder that the courts often will not deem a departed employee to be a fiduciary of the former employer, even where the employee was quite valuable to the enterprise. Attempts to protect clientele from the departed employee often will prove elusive if the employer has not taken the time to secure a non-competition or non-solicitation agreement from the employee.

Jetco, the plaintiff company, sued its former sales employee, Vincent Fonteyne, for breach of fiduciary duty. Jetco was an importer and distributer of heavy duty vehicle and industrial lighting. Fonteyne was the Vice-President of Sales and Marketing.

Fonteyne joined the company in 2000 as its primary sales and marketing representative. The Court found that the owner of the company “relinquished all customers and customer relationships to him”. At trial, the owner said he reposed significant confidence in Fonteyne and regarded him “like a son”.

Fonteyne had joined the company based on a handshake agreement and did not have a written employment contract. The owner’s son proposed a more formal employment agreement in 2007, but Fonteyne declined the contract and at trial stated it was because he felt the “non-compete” clause would prevent him from earning a living if he were to ever leave the company.

Fonteyne resigned once in 2008, but Jetco persuaded him to return. He resigned for good in 2009. At the time of his resignation, he had already started to set up a competing business and embarked on that business after he left Jetco.

Jetco commenced proceedings against Fonteyne as well as several other parties. Amongst other things, it alleged that Fonteyne stood as a fiduciary to Jetco and breached that duty by soliciting its clients.

The Decision – Importance of not conflating a Valuable Employee with a Fiduciary

The Court began by setting out the analytical framework for determining whether a fiduciary relationship exists. The test is described in Frame v. Smith, 1987 CanLII 74 (SCC), at para 136, was modified by Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24, at para 36, and consists of the following:

1. A fiduciary has scope for the exercise of discretion or power;

2. The fiduciary can unilaterally exercise that discretion or power so as to affect the beneficiary’s legal or practical interests;

3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power; and

4. The fiduciary has given an undertaking to act in the best interests of the beneficiary.

The Court noted there is a long line of cases which have held that fiduciary relationships may arise in the employment context:

The key concept in these cases is that the employer’s vulnerability is created by the employee’s ability to exercise unilateral power or discretion so as to affect the employer’s legal or practical interests. The critical question is whether the employee has “actual authority or control over the employer’s operation” (RBC at para 50) or “is imbued with discretion or control” (Firemaster at para 42).

(at para. 58)

In what should be a cautionary note to employers, the Court stated it is important “not to conflate a valuable employee with a fiduciary employee.” Given the onerous obligations held by a fiduciary, it is necessary to actually find that the employee is a “key employee” as opposed to merely being a good or valuable employee. (at para. 59)

The Court relied on a decision of Justice S.L. Martin (then of the Alberta Queen’s Bench and most recently appointed to the Supreme Court of Canada) in Flagworks Inc. v. Signcraft Digital (1978) Inc., 2007 ABQB 434. In that decision, Justice Martin said of the former production manager of the plaintiff:

That Ms. Holt was an exceptionally good employee and even essential to the efficient operation of Ms. Flock’s business does not however, make her into top or senior management. Her responsibilities would have some impact on the practical and legal status of the company but any vulnerability which existed was attributable to her diligence, not her discretion to affect Flagwork’s relevant financial or legal interests. That Flagworks needed Ms. Holt, or relied upon her to be the backbone of one of their profit center does not make her into a “key employee” for the purpose of affixing fiduciary duties.

(at para. 51 of Flagworks, emphasis added)

In respect of sales employees, the Court in Jetco noted it is important not to make findings of fiduciary status based entirely on relationships with clients. The assessment of fiduciary status involves a consideration of whether the employee has sufficient control and authority over the employer’s business. Client relationships are only one part of that context.

Turning to the specific circumstances of Fonteyne, the Court observed there was no question that he was the “face of Jetco” and that the owner had long abandoned the sales side of the business to him. Nonetheless, it held that he was not a fiduciary, finding amongst other things:

• He had no signing authority other than when it came to placing orders;
• He had no access to the corporate financial statements;
• He had no financial stake in the company’s performance; and
• There was no evidence that he was responsible for the strategic direction of the company.

The Court further noted that Fonteyne executed the strategies and relationships that were already in place at the company, while the owner maintained control over all aspects of the business and made all the important decisions.

Employment Likely Suitable for a Restrictive Covenant

The Court’s finding that Fonteyne was the “face of Jetco” to the customers and that the owner had essentially abandoned the sales side of the business to him likely would have justified a reasonable non-competition or non-solicitation covenant. It has been held that “when an employer introduces an employee to customers and facilitates a relationship between its customers and the employee, there is a proprietary interest entitled to protection.”

It also has been held that where the nature of the employment likely will cause customers to perceive “an individual as the personification of the company or employer, the employer has a proprietary interest in the preservation of those customers which merits protection against competition from that individual employee after his termination…”

In this case, the evidence was that Jetco had tried and failed to introduce a non-competition clause into the employment relationship in 2007. In light of the restraint exercised by the courts in affixing fiduciary status, employers that introduce their employees to existing customers are wise to make restrictive covenants a required element of the employment agreement from the outset.