BE CLEAR ON FIDUCIARY DUTIES BEFORE STARTING NEW EMPLOYMENT
A man we will call Andy worked as a general manager for the Toronto division of an elevator consulting company. He reported directly to the president of the company and oversaw the day-to-day operations. He had primary responsibility for all client contact and, so far as those clients were concerned, Andy was the face of the company. When they thought of the company, they thought of him.
Andy decided that he was so good at this he was going to quit and start his own business. He resigned and gave the employer four weeks notice. He did not, of course, advise it of his plans but he had no obligation to do so.
During that four weeks, he got a letter from the company's solicitor telling him that it was company's position that because he was the "face" of the company he had a fiduciary obligation not to compete unfairly with the company for a period of twelve months. This did not mean that he could not compete, just that he should not solicit the company's clients for twelve months and should not exploit confidential information in order to compete with the company.
Such letters to departing employees who might compete with the employer are standard. Just because the company says something is the law does not mean that is the case. These kinds of obligations only apply to people who hold very responsible positions in the company and who usually have significant client contact. Often, these letters are sent to everyone from the payroll clerk to the shipper when they are leaving their employment. The obligations outlined above, which are called fiduciary obligations, will seldom apply to payroll clerks and shippers. They are not the face of the company and have no significant client contact and are usually in no better a position than anyone off the street to compete with the employer.
While receiving such a letter telling you, you have fiduciary obligations does not mean that is in fact the case, in Andy's situation that turned out to be true. Despite the letter from the company, Andy promptly sent out a letter to many of the company's clients announcing that he had left the company's employ and was starting his own elevator consulting firm. The letter and enclosed brochure made it clear that Andy was going to be offering the same services as his old employer and asked recipients to call him if he could be of assistance. In 24 cases, this letter was hand-delivered by Andy to his old employer's customers.
Andy succeeded in taking many clients from his old employer including a very large contract he had been working on in his previous employment. The company brought a motion before a judge seeking an order prohibiting Andy from soliciting the company's clients and taking any more work from their clients.
Andy tried to argue that the letter he sent out was not really a solicitation but just a general announcement. This argument has been made before in many cases and is sometimes successful. It failed in this case. The judge found that Andy's letter constituted direct solicitation and not just a passive announcement.
The judge ordered that Andy was prohibited from any further solicitation of a list of the company's clients with whom Andy had had contact during his employment. Andy was still free to compete and advertised generally but could not solicit the list of the old company's clients and could not accept any work from those clients.
The judge made it clear that if Andy had not already breached his fiduciary obligations he would not have issued an order prohibiting Andy from accepting work from the company's clients. After all, if those clients had contacted Andy without any solicitation, that would usually not be a breach of Andy's fiduciary obligations. However, since Andy had already seriously breached his fiduciary obligations and damaged the company in ways from which it could never recover, the judge took the unusual step of prohibiting Andy from accepting any further work from the company's clients.
If one just looks at this case, it would seem that the law is fairly clear in the area of fiduciary duties. The problem is that I had a case where I was representing somebody like Andy just a few years ago who sent out a similar letter. The arbitrator in that case said that it was not a solicitation letter and that my client had not breached any fiduciary obligations he might have had.
Which brings us to the most important point in all of this. The law in this area is extremely murky. If you are thinking of leaving your employment and competing, before you do anything speak to an employment lawyer. Losing this motion probably cost Andy $30,000 to $40,000, crippled his business and endangered his family's financial well-being. Eventually, Andy will be back in court defending an action for the damages suffered by the company for the clients he took. It may mean that Andy will have spent a lot of time working on contracts that he took from his former employer for nothing. He may very well have to turn all his profits over to his former employer. Look before you leap.
As published in the Hamilton Spectator, January 20, 2003