When employees cross the street, Canadian Corporate Counsel Magazine at 17-18 (May 24, 2011)

When employees cross the street, Canadian Corporate Counsel Magazine at 17-18 (May 24, 2011)

By Nikolay Y. Chsherbinin

In today’s competitive marketplace, it’s not uncommon for organizations to induce skilled professionals to defect from corporate rivals. Obviously, it is not automatically improper to poach employees from rivals, but defections can cause organizations to suffer economic loss or other harm; for example, when the “brains” of a business is induced to join a competitor and others follow. This article discusses some of the contractual, equitable and common law devices available to the “old” employer, with emphasis on the frequently confused economic torts of inducing breach of contract (inducement tort) and intentional interference with contractual relations (interference tort) and causing loss by unlawful means (tort of causing loss).

Complex and confusing

If a rival persuades an employee to breach her existing employment contract with her current employer, it commits the inducement tort. This tort, which is fundamentally about persuading a contractor to defect, gets consistently confused with the interference tort and the tort of causing loss. Though all of these economic torts have strict requirements of intention, what the defendant intends is different in each tort. Where the inducement tort is alleged, the “old” employer must prove that the rival intended to and actually procured a breach of the employee’s contract. Under the interference tort the rival must intend to injure a complainant, while the tort of causing loss requires the rival to intend to cause loss.

While these economic torts enable old employers to effectively attack the real cause of their economic harm, it is imperative that both in-house and outside counsel learn to clearly distinguish between their scope, elements and rationales. Arguably, the complexity of this branch of the law stems largely from the fact that trial judges continue to confuse these seemingly similar, yet fundamentally distinct economic torts. For example, in Drouillard v. Cogeco Cable Inc., 2007 ONCA 322, the Ontario Court of Appeal reversed the trial judge’s decision which mistakenly awarded damages under the interference tort, as opposed to the inducement tort it considered. In O’Dwyer v. Ontario (Racing Commission), 2008 ONCA 446, the same court found that the trial judge erred in imposing liability under the inducement tort, when there was no valid contract. In SAR Petroleum Inc. v. Peace Hills Trust Co., 2009 Carswell NB 307, the New Brunswick Court of Queen’s Bench found that the motion judge mistakenly identified “an intention to cause loss” as one of the essential elements of the inducement tort, despite it being the key element of the tort of causing loss. More recently, in Alleslev-Krofchak v. Valcom Limited, 2010 ONCA 557, the Ontario Court of Appeal found that the trial judge erred in finding that “frustrating [of]…contract could satisfy the requirement of the inducement tort,” which it cannot. Finally, in Johnson v. BFI Canada, 2010 MBCA, the Manitoba Court of Appeal found that the trial judge mischaracterized the cause of action, since he described and dealt with the interference tort rather than the inducement tort.

Equity: Injunctive Relief

An award of damages at the end of a lengthy lawsuit is often insufficient to protect the old employers or remedy their actual economic loss. Faced with unlawful competition or the misappropriation of their confidential information, employers need immediate relief. This has led to the remedy of injunctive relief, which bars ex-employees and their new employers from continuing their improper behaviour. Injunction is a potentially powerful legal weapon, which facilitates speedy interim relief and may be extended to restrain third parties if the effectiveness of the remedy requires it.

However, because it is a discretionary remedy, the courts need to see fairly strong evidence of the old employer’s case before granting an injunction against the departing employee and his new employer. To succeed, the employer must show that it will suffer harm that cannot be adequately compensated in damages. I note parenthetically that information that is found to be confidential in one case may not be found as such in another. What is important is the nature of the information in relation to the particular business and how that information is treated by the employer.

The injunction is a double-edged sword. It may serve to protect or defeat employers’ objective to avoid economic loss. A case in point is Allstate Insurance Co. of Canada v. Larocque (2008), 64 C.C.E.L. (3d) 119 (Ont. S.C.J.), where the employer intending to protect its business interests introduced drastic changes to the employee’s contract and thereafter sought to enjoin him from soliciting customers for a 24-month period.

The court refused to grant the employer injunctive relief, because it was concerned that the changes were fundamental enough to amount to a constructive dismissal, thereby rendering the non-solicitation clause void. This case illustrates that in a situation where the employee’s actions appear to be the result of changes first initiated by the employer, the chances of success on the injunction are remote.

Minimizing liability

When recruiting rivals’ employees away to join their companies, employers can take proactive steps to avoid or, at least, minimize their liability based on the inducement factor. For example, what happens when a rival persuades an employee to leave previous secure employment to join the rival’s firm by offering him various enticements, but thereafter dismisses the employee? Employers may defeat the employees’ claims to additional compensation, based on the inducement factor, by making them sign an employment contract that includes a lawful termination clause and a probationary employment clause. Employers who insist upon such clauses in written employment contacts not only limit exposure to increased damages but are treating the respective employee in a fair and reasonable manner. Conversely, defecting employees should undergo thorough exit interviews, during which employers should remind them of their ex post employment contractual obligations.

This article demonstrates that there is an armoury of legal devices available to old employers to prevent and remedy their economic loss caused by defecting employees or competitors. It illustrates that there is an obvious need for the courts to exercise caution when relying on the doctrine of stare decisis and apply more analytical approach to the economic torts.

Finally, it reminds employers about the benefits of injunctions and well-written employment contracts.

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