Gastops offers lessons for employees and employers, Law Times, Vol. 23, No.19, at 7 (June 4, 2012)

Gastops offers lessons for employees and employers, Law Times, Vol. 23, No.19, at 7 (June 4, 2012)

By Nikolay Y. Chsherbinin

The law expects much of employees. Not only does it require them to serve their employer honestly and faithfully, it places an implied obligation upon them to act in the best interests of their employer, at all times, even if they’re not fiduciaries. The court may classify departing employees, who are in a position to affect substantive interests of their employer, as fiduciaries and find them liable for as much as $20 million in damages, as exemplified by the legal saga of GasTOPS Ltd. v. Forsyth. GasTOPS broadened the law of fiduciary duty to provide former employers with protection against disloyal “key employees” who are neither executives nor senior management.

The truncated version of facts of the case, which spanned 10 years of litigation, was tried over 295 days, amassed 70,000 pages of exhibits, cost $4.2 million, and produced a 668-page judgment, are as follows: since 1979, GasTOPS has been an industry leader in the area of the condition-based maintenance of jet engines. It occupied a highly specialized niche with few clients that each generated significant revenues. In October 1996, four of its key employees resigned on two weeks’ notice to set up in competition. Shortly thereafter, they orchestrated the exodus of a number of other GasTOPS employees who joined their new company, MxI Technologies Ltd. Despite their written assurances to the contrary, the defendants pursued virtually every existing and potential GasTOPS’ customer. Using the “very special” confidential technical information they obtained while at GasTOPS, they offered customers a seamless transition to MxI and the next iteration of GasTOPS’ products. The harm to GasTOPS was immediate and significant.

At trial, the judge found the four personal defendants to be fiduciaries. He dismissed the two defendants’ claim that they were merely technical employees when he noted that “even highly skilled technical employees may be found to be fiduciary employees if they are crucial to the direction and guidance of the company.” In consideration that these two defendants were responsible for developing a significant commercial component of GasTOPS’ business, privy to its sales strategies and contractual relations between the company and its existing and potential customers, and performing their responsibilities with little supervision, the judge was of the opinion they were “key employees” and, as such, owed fiduciary duties to their employer.

In addition, the judge found the defendants had breached their employment contracts and fiduciary duties by giving two weeks’ notice of resignation, knowing the other employees would follow, with devastating effects on GasTOPS. The situation left the company unable to fulfil its existing contracts or continue to pursue the business opportunities it had been cultivating. In the judge’s opinion, the defendants were under an obligation to provide GasTOPS with “at least” 10 months’ notice.

After a very lengthy trial, the judge ordered MxI to disgorge the profits it earned over its first 10 years — about $12 million — and found the four personal defendants severally and jointly liable in the same amount. Finally, he ordered prejudgment interest of about $3 million and full indemnity costs of more than $4 million. Perhaps not surprisingly, the defendants appealed.

On appeal, the defendants challenged the 10-year disgorgement period. The Court of Appeal upheld the trial judge’s use of the 10-year accounting period as “entirely reasonable” because it “reflected the highly specialized nature of GasTOPS’ business, the time required to develop and evolve its suite of products, and the useful life of the confidential information taken from it.” In coming to its conclusion, it was “of importance” to the court that MxI engaged in “much more” than unfair competition within the small and highly specialized market. In addition, the court viewed the very commercial success the defendants enjoyed, which stemmed from the misuse of confidential information they appropriated, as supportive of the 10-year accounting period. Nevertheless, the court made it clear that the choice of an accounting period in cases of breach of confidence “depends very much on its particular facts.”

In dealing with the personal defendants’ failure to provide reasonable notice of resignation, the court found it unnecessary to consider the length of reasonable notice that should have sufficed because the trial judge didn’t assess separately and quantify the damage award. Instead, it stated: “Suffice it to say that we should not be taken to agree with the 10-12 months suggested by the trial judge or the factors he considered in reaching that period.”

The court’s passivity on this important issue may be viewed from two perspectives. First, it could be seen as reinforcing the notion of fairness by requiring “key employees” to reflect on the impact their hasty departure would have on their employer. This is consistent with the current law, which requires employees to give reasonable notice of termination of the employment relationship and restricts post-employment misuse of confidential information.

Alternatively, the court’s passivity could be seen as disapproving the imposition of a lengthy period of common law notice of resignation on departing employees. This is consistent with the Supreme Court of Canada decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., a case with similar facts to GasTOPS, in which virtually all of the investment advisers left their employer without notice. In RBC, the top court upheld the trial judge’s finding that 2-1/2 weeks’ notice of resignation should have sufficed, which the judge calculated by taking into account “the effect on RBC of the simultaneous departure of virtually the entire staff of the branch” and the culture of the industry. Contrasting the 2-1/2 weeks’ notice with the remarkably unusual 10 months recommended in GasTOPS, it becomes clear that the small size and highly specialized nature of the industry was key to the court’s preference over the common law industry standard.

In light of GasTOPS, employers and employees should beware of the following practical considerations:

Although there is no single litmus test for assessing a fiduciary relationship, the job function and the responsibilities are more determinant of the issue than the title an employee holds.
Employees terminating their employment may be liable for the failure to give reasonable notice and for breach of specific residual duties. In the absence of a contractual provision regarding notice, prudent employees should act reasonably and offer their employer an option to discuss the possibility of extending their effective date of resignation. Such a proactive approach to resignation may shield departing employees from liability and provide a defence to their employer’s claim that notice of termination of employment was insufficient.
Post-employment use of confidential information misappropriated from the previous employer as a springboard to commercial success can be a costly gamble for both former employees and their new employers.

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