Post-Employment Breach of Confidentiality Results in Significant Award

02. February 2021 0

A recent British Columbia Court of Appeal decision highlights why employers should exercise care when recruiting employees from their competitors.  

Facts

The plaintiff in GEA Refrigeration Canada Inc. v. Chang et al., 2020 BCCA 361 was a company that designed manufactured industrial hygienic freezers (“GEA”). GEA’s freezers had several unique design features, and GEA kept details of the manufacturing process confidential.

In 2010, two former employees of GEA, Mr. Chang and Mr. Lai, incorporated a new company, FPS Food Process Solutions (“FPS”). Shortly thereafter, another former employee of GEA, Mr. Chen, joined FPS and brought confidential engineering drawings relating to the design of GEA’s hygienic freezers with him. Two more former employees of GEA, Ms. Wu and Mr. Xu, also joined FPS.

M. Chang, Mr. Lai, Mr. Chen, Ms. Wu and Mr. Xu (collectively the “Former Employees”) all had written agreements with GEA requiring them to maintain confidentiality over GEA’s information, including its engineering drawings. Mr. Lai’s written agreement with GEA also included a non-solicitation provision that prevented him from recruiting employees of GEA for one year after the end of his employment with them.

In 2011, GEA became aware that FPS had entered the hygienic freezer market and wrote a letter to the FPS demanding they refrain from doing so. FPS ignored this demand and continued to market and sell hygienic freezers. GEA then sued FPS and the Former Employees for breach of confidence.

Trial Decision and Appeal

At trial, the judge considered whether the actions of FPS and the Former Employees met the legal test for breach of confidence, as set out in Lac Minerals Ltd. v International Corona Resources Ltd., [1989] 2 SCR 574. That test required GEA to prove that: (1) the information conveyed to FPS was confidential; (2) the information was communicated in confidence; and (3) the information was used for an improper purpose.

The trial judge found that all three components of Lac Minerals test were satisfied and that FPS and the Former Employees had improperly used GEA’s confidential information (including the engineering drawings) to design freezers for sale by FPS and compete with GEA. The trial judge further found that Mr. Lai breached his duties to GEA by working to form FPS while still employed by GEA and that Mr. Chang had breached the non-solicitation provision in contract by recruiting former GEA employees to work for FPS.

The trial judge held that FPS profited by competing in the hygienic freezer market much earlier than it would have if it had designed freezers legitimately, and awarded damages of $7,131,087 against FPS, based on disgorgement of approximately 4 years of profit, starting from the time that the defendants began marketing the freezers. The Former Employees were all held jointly and severally liable with FPS for a further $3,630,000, and Mr. Chang and Mr. Lai were ordered to pay an additional $75,000 each in punitive damages.

FPS appealed the trial judge’s decision. On appeal, the BC Court of Appeal upheld the trial judge’s decision, and held that evidence supported finding that the defendants had improperly used confidential information to design a competing product. The Court of Appeal also upheld the trial judge’s award of damages, finding that a 4-year period for disgorgement was not out of line based on evidence in front of the trial judge.

Implications for Employers

This case reinforces the value of employers having written agreements to confirm terms of confidentiality and other post-employment obligations with its employees.   

This case also underscores how employers, particularly those operating in the areas of technology, science and engineering, should be cautious when recruiting employees who have previously worked for competitors, as those employees may have post-employment obligations to their former employers.  In these cases, employers should exercise care in making sure they do not inadvertently allow their employees to use confidential intellectual property that belongs to the former employer, as they could also be held liable for the employee’s breach of confidence.  Employers in sales or marketing may also want to consider whether potential recruits are subject to a non-solicitation agreement that prevents them from recruiting clients or employees from their former employer.

This update was authored by Neal Parker. Questions? Comments? Concerns? Contact Neal at nparker@harpergrey.com or anyone else listed on the authors page.